In 2001, Switzerland decided to impose limits on the amount of government debt and spending and hence prevent structural imbalances in federal government finances. It consists of four components:
Expenditure rule: Over an economic cycle, expenditure must not exceed income. The annual expenditure ceiling is linked to the level of income. Income is adjusted by a factor that takes account of the economic situation (cyclical factor). In phases of economic boom, the expenditure ceiling is lower than income, and the federal government generates a surplus. Conversely, the formula allows for a deficit in recessions. Over an entire economic cycle, the calculation is balanced. The rule works regardless of the size of the tax burden. It permits tax increases and tax reductions. According to the rule, a tax cut must be accompanied by a reduction in expenditure
Extraordinary expenditure: The basic rule of the debt brake binds the Federal Council and parliament. Parliament's budgetary sovereignty remains guaranteed within the framework of the expenditure ceilings set by the rule. In extraordinary situations - for example, severe recessions or natural disasters - the expenditure ceiling of the expenditure rule can be increased by a qualified majority of both chambers of parliament.
Compensation account for checking success: The requirements of the debt brake must be taken into account when drawing up the budget and later credit applications. As soon as the statement of account is available, compliance with the specifications will be checked: Based on the actual income generated and the revised economic forecasts, the maximum allowable expenditures are recalculated. If the actual expenditure exceeds the recalculated expenditure ceiling, this is debited to the so-called compensation account, and any shortfall is credited to it. Debits or credits to the adjustment account are also caused by estimation errors in income and economic growth. They result in expenditure ceilings that are too high or too low. The deficits accumulated in the adjustment account must be reduced in the following years. In the case of surpluses, this is not possible; they flow into debt reduction.
Amortisation account for the extraordinary budget: The extraordinary budget is also subject to the debt brake. The "supplementary rule" requires that the deficits of the extraordinary budget be compensated in the medium term through the ordinary budget. An amortisation account serves as a control variable. It records the extraordinary income and expenditure. Surpluses in expenditure are to be offset by surpluses in the ordinary budget during the following six financial years. If the deficit is foreseeable, the necessary savings can be made earlier.
Switzerland now ranks among the most debt-free countries in the world with a debt to GDP ratio of just 33 percent.