Switzerland "Debt Brake" As Consensus Policy Option for America?

December 21, 2012

With members of Congress and senators heading home until after Christmas despite the looming fiscal cliff, Dan Mitchell writes today on Cato’s blog about Switzerland’s “debt brake.” In place since 2003, the brake limits spending to average revenue growth over a multi-year period. As Mitchell explained in a Wall Street Journal piece earlier this year:

This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren't able to boost spending when the economy is doing well and the Treasury is flush with cash.

Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

The IMF also reviewed the debt brake in 2002, concluding that would be effective while still permitting some level of fiscal policy “adjustments” (stimulus and so forth), and even fretting that more ambitious measures weren’t included to solve all long-term fiscal pressures.

Mitchell estimates that had the debt brake been implemented in 1998, the U.S. would this year be spending $2.6 trillion, $900 billion less than it actually did. The deficit would still exist, but would be just $157 billion, as opposed to $1.089 trillion. Spending would have grown at 2.5 percent over the time period: higher than with population and inflation targeting, and thus permitting some countercyclical fiscal policy, but lower than the status quo.

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