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Fiscal Rules Cause Lower Debt: Evidence from Switzerland’s Federal Debt Containment Rule

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  • Michele Salvi
  • Christoph A. Schaltegger
  • Lukas Schmid

Abstract

This paper studies the effect of the Swiss federal debt containment rule on public debt. Using the synthetic control method, we provide evidence that the introduction of the federal rule in 2003 has reduced public debt ratio in Switzerland by 2.5 percentage points on average until 2010. By exploiting possible mechanisms, we find no evidence that the reduction in debt ratio was driven by a debt relocation to sub‐government levels or cutbacks in investment expenditure. On one hand, we argue that the positive impact of the fiscal rule is based on its design features, namely its precise but cyclically adjusted target, the comprehensive scope to prevent budget loopholes, and the strict sanction mechanism. On the other hand, we also discuss the generalizability of our findings to other countries and contend that its direct democratic authorization has contributed to its political enforcement and viability.

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  • Michele Salvi & Christoph A. Schaltegger & Lukas Schmid, 2020. "Fiscal Rules Cause Lower Debt: Evidence from Switzerland’s Federal Debt Containment Rule," Kyklos, Wiley Blackwell, vol. 73(4), pages 605-642, November.
    • Handle: RePEc:bla:kyklos:v:73:y:2020:i:4:p:605-642
    DOI: 10.1111/kykl.12251
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    2. Brändle, Thomas & Elsener, Marc, 2023. "Do fiscal rules matter? A survey on recent evidence," Working papers 2023/07, Faculty of Business and Economics - University of Basel.
    3. Potrafke Niklas & Schaltegger Christoph A., 2022. "Fiscal Rules: Anchors of Stability," The Economists' Voice, De Gruyter, vol. 19(1), pages 59-62, June.
    4. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    5. Kovács, Olivér, 2023. "Fiskális politika az öröklétnek - államadósság: ördög vagy messiás?* Olivier Blanchard: Fiscal Policy Under Low Interest Rates. MIT Press, 2023, 192 o [Fiscal policy for eternity - public dept: dev," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 103-110.
    6. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Schwächen Fiskalregeln öffentliche Investitionen?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 76(06), pages 22-28, June.
    7. Michele Salvi & Christoph A. Schaltegger, 2023. "Tax more or spend less? Historical evidence from Switzerland’s federal budget plans," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 678-705, June.
    8. Ludger Schuknecht & Christoph A. Schaltegger & Michele Salvi & Jan Schnellenbach & Thomas Lenk & Christian Bender & Mario Hesse & Gert G. Wagner & Stefan Korioth & Klaus Gründler & Philipp Heil & Nikl, 2021. "Debt Brake as a Bone of Contention: A Proven Instrument Even in Times of Crisis?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 74(04), pages 03-30, April.
    9. Ablam Estel Apeti & Bao-We-Wal Bambe & Jean-Louis Combes & Eyah Denise Edoh, 2023. "Original Sin: Fiscal Rules and Government Debt in Foreign Currency in Developing Countries," Working Papers hal-04130477, HAL.
    10. Martin Werding & Klaus Gründler & Benjamin Läpple & Robert Lehmann & Martin Mosler & Niklas Potrafke, 2020. "Sustainability of Public Finances: Does It Still Play a Role?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 73(09), pages 53-58, September.
    11. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence," ifo Working Paper Series 393, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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