The news media tends to focus on problems. Thus it’s refreshing to see an article that examines places where things have gone right. Veronique de Rugy has a piece in Reason magazine that looks at a variety of countries that have done well, including Switzerland:
After public referenda in 2001, the Swiss government in 2003 implemented a new constitutional requirement aimed at ensuring a balanced annual budget through a cyclically adjusted expenditure ceiling. The short story is that Swiss politicians are not allowed to increase spending faster than average revenues rise over a multiyear period (as calculated by the Swiss Federal Department of Finance). That basically confines spending growth to a rate no higher than the rate of inflation plus population growth. . . .
Annual spending growth fell from an average of 4.3 percent before the rule was implemented to 2.5 percent after. And in 10 out of the past 14 years, Switzerland has had budget surpluses. Deficits have remained rare and small, averaging 0.85 percent of GDP during this period. At the same time, Swiss debt has fallen from almost 60 percent of GDP in 2003 to around 42 percent in 2017. Switzerland now finds itself in an unusual place, with policy makers frequently debating what to do with all of their surplus revenue—a situation that seems a million miles away from the fiscal conditions in the United States.
That’s not to say that budget rules are magic bullets that will work everywhere. In countries with a culture of corruption it may be difficult to prevent governments from circumventing the rules. But a similar policy does seem to have been successful in Germany:
In 2010, Germany adopted a policy similar to the Swiss debt brake. The rules are parallel to each other in that each follows the “small-government Keynesianism” model that allows the government to spend in a recession but cuts expenditures in good times, creating surpluses for when the country needs them. While the German rule isn’t as strict as the Swiss one, it has successfully reduced Germany’s public debt from 80 percent of GDP in 2010 to 64 percent of GDP in 2017.
Veronique de Rugy also has a recent NYT piece on the trade war, which I highly recommend.
READER COMMENTS
Steve S
Oct 31 2019 at 4:46pm
Any thoughts on Colrorado’s TABOR Amendment that caps spending to inflation + population growth? People here rag on it all day long, but I think it has been a good thing. There are complaints about lower education and transportation spending. It seems like what is happening is the state is shifting where they fund certain programs, so they use the General Fund to put money into education/transportation because they are allowed to, while at the same time lowering how much of the rest of the budget contributes to those line items.
Scott Sumner
Oct 31 2019 at 6:19pm
I have not followed that very closely.
Walter Boggs
Nov 1 2019 at 9:09am
As you know, Steve, what drives our Colorado interest groups crazy is that revenues above the cap can’t be spent or retained; they must go back to the taxpayers. We did have a legitimate problem with the ratchet-down effect, but that’s been corrected. I agree that TABOR has been positive overall.
MJ
Oct 31 2019 at 5:25pm
I think the Democratic presidential candidates would be wise to advocate these sorts of budget rules as part of a post-Trump reform plan. This would tie the hands of Republicans and prevent them from repeatedly blowing up the deficit every time they take control of the White House and Congress (while disingenuously complaining about the deficit when not in power) as has been the pattern.
Thaomas
Oct 31 2019 at 8:43pm
Following an NPV rule would insure that debt/GDP falls over time (the NPV of marginal investment is zero but the supra-marginal ones are >O) and would be counterclockwise because the real discount rate falls and the margin of between price and MC of activity inputs > 0. In the real world something like a cyclically balanced budget is a pretty good approximation.
Maniel
Oct 31 2019 at 11:01pm
Prof Sumner,
In principle, the idea is excellent.
In practice, it’s very challenging for Americans to emigrate to Switzerland.
robc
Nov 1 2019 at 6:23am
I found it not hard at all. I moved to Switzerland in the early 90s. If I had wanted to stay forever, it would have been no problem. If I had wanted citizenship…problem.
Matthias Görgens
Nov 1 2019 at 6:29am
The Switzerland of Asia, Singapore, might be easier to get into.
We do have quite a bit of government debt here, but it’s not seen as a problem at all. Overall government spending as a proportion of GDP is fairly low.
Funny enough, one of the justifications for government debt they give here is to provide a reference ‘risk-free’ interest rate for the Singapore Dollar. Our central bank famously does not set interest rates, monetary policy is handled via the FX channel.
Phil H
Nov 1 2019 at 4:20am
It’s not quite the point of this piece, but I’d contest labelling a reduction in national debt as “success”.
I find this a weird bit of ideology – why should countries not be in debt? For many individuals/families these days, being in debt your entire working life is standard. For companies, debt financing is recommended in many situations as being a positive way of enforcing budget discipline. The technology of finance is always improving, so governments’ and central banks’ ability to manage debt is getting better. Why not use that technology?
I don’t necessarily think debt should always increase: there could well be periods of cyclical debt increase followed by decrease. But it’s the (moralistic?) characterisation of national debt as inherently bad that just flummoxes me.
On topic: *If* your goal is to reduce debt, then spending caps sound like a very good idea, even if they don’t work perfectly.
Matthias Görgens
Nov 1 2019 at 6:31am
Ignore the debt then, and just focus on the spending caps as being good ideas in themselves.
The proponents of Modern Monetary Theory are right that a country that issues its own currency can’t go bankrupt borrowing in that currency; but it’s still a good idea to leave most of the nominal GDP in private hands. The overall real GDP cake is bigger that way.
Debt reductions are just a neat side-effect of those spending caps. And the spending caps themselves force budget discipline.
Phil H
Nov 1 2019 at 12:30pm
Hi, Matthias. No, that doesn’t strike me as the right goal. The problem with spending caps is that they only work in one direction. Standard theory is that they only need to work in one direction, because the incentives for overspending (pork and happier constituents) are strong enough. But a decade ago the U.S. and many other developed economies experienced a financial shock and deep depression that many believe governments did not do enough to dig us out of. The upwards pressures on spending turned out to be not that powerful, after all.
Finance (otherwise known as debt) is a tool. I don’t see sufficient reason to restrict the government’s access to this tool.
Anonymous
Nov 3 2019 at 11:46pm
“But a decade ago the U.S. and many other developed economies experienced a financial shock and deep depression that many believe governments did not do enough to dig us out of.”
Scott disagrees. Spending can’t stimulate the economy with the Fed controlling the money supply.
Nick
Nov 1 2019 at 5:40am
If there is one place that should do a sovereign wealth fund based on debt it’s Switzerland. 50y goverment bonds have negative yields (slightly negative real i suspect as inflation seems to be about zero, over 50 years id expect it to be slightly positive), it has a proven track record of good governance and has proven it has amply ability to print it’s own currency when demanded so should not fear significant deflation. I think over a 50y horizon one should be able to generate a positive real return on capital in risky assets with a very high degree of certainty.
artifex
Nov 1 2019 at 1:53pm
The banks and people lending money to the Swiss government have the ability to “borrow” this money at rates *even lower* than the Swiss government—that is, 0% rate since they own that money already. They also do not have any less ability to invest their money in index funds than does the Swiss government.
[Of course, the Swiss government does not need to pay taxes on its returns. But people do need to pay taxes on their bond returns from lending to the Swiss government and will charge the Swiss government higher rates accordingly.]
The only reason the Swiss government is able to borrow at low rates is that it has the ability to tax its citizens. If the people lending money to the Swiss government expected it to just invest that money in a sovereign wealth fund and repay the debt with the returns, they’d charge rates higher than the expected returns and the Swiss government would be expected to lose out. If they’re not charging rates higher than the expected returns, that *means* they expect a certain chance the Swiss government will have to tax its citizens to repay the debt, and this expectation is the single reason they are charging lower rates.
In all the situations where the Swiss government can expect any revenue gain from this, it is from expecting to tax its citizens in the future, and it would be more efficient for it to just tax its citizens directly.
Nick
Nov 4 2019 at 5:15am
It is quite possible that the act of doing this would change the yields and make it non economic for the Swiss state.
However, I believe there are regulatory effects that do not apply to sovereign funds, that would make this a sensible strategy for a sovereign and not collectively for the individuals. I think it would be superior to get rid of those distortions, however Switzerland can not do that unilaterally, and so I think probably could take advantage of it at the sovereign level.
Matthias Görgens
Nov 1 2019 at 6:26am
I read some articles chastising the Germans for reining in their debt and telling them to spend more in an attempt to revive eurozone economies. (Readers of econlog will be familiar with monetary offset.)
Of course, the Maastricht criteria that countries in the euro zone are supposed to fulfil prescribe government debt to gdp ratios of 60% or less. Germany is still some way above.
Matthias Görgens
Nov 1 2019 at 6:42am
Scott, it’s interesting to compare the success of these spending caps with the American debt ceiling.
Wikipedia tells me that in Germany, they can exceed their spending cap with a majority in the lower house (Bundestag). That’s technically a lower barrier than what’s needed to raise the American debt ceiling, given how filibustering works in practice.
I also can’t help but compare to monetary targets: for monetary targets level targeting seems superior to growth targeting. Are debt targets different? Or is it the difference between monetary policy vs fiscal policy?
Btw, have you thought about the effects of moving to an automatic continuing resolutions policy for the US? Most proposals suggest to keep the nominal spending levels constant, unless the government manages to pass a budget. On the face of it, that’s better than shutting down the government. But your typical middle brow article tells you that this exact reduction in damage will lead to more brinksmanship and a real reduction in government spending. Both being portrayed as a bad thing.
But different people have different opinions on the desirability of the latter.
mobile
Nov 3 2019 at 4:25pm
America has plenty to learn from the America of one generation ago. The Gramm-Rudman-Hollings Act of 1985 and the Budget Enforcement Act of 1990 led to budget surpluses by the middle of the Clinton Administration. The BEA was extended in 1993 and 1997, but the Congress of 2002 had less appetite for spending control, the law was not renewed, and the U.S. has run a deficit ever since.
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