The debts of others do not make our debt brake more necessary

We are witnessing several coinciding potential indicators and triggers of a financial crisis. The prevailing US stock market conditions, for example, are reminiscent of those that immediately preceded the bursting of the dot-com bubble in the noughties. Constantly soaring prices of shares from companies that are making no profit whatsoever. This time it is – of course – about artificial intelligence. Within the space of a year, the share value of 10 AI companies, all loss-making, has risen by 1000 billion, which is more than Switzerland's GDP. 

For her part, current IMF Director Kristalina Georgiewa is causing "non-bank financial institutions" (NBFIs) sleepless nights. NBFI is the technocratic acronym for shadow banks; these encompass hedge funds, private equity firms and institutional investors, which in part do the same things as banks but are not regulated and monitored in the same way. Inflated by debt, the high-risk shadow banking system is now larger than the regulated financial system and is also intertwined with it in various ways. This magnifies risk and makes it unpredictable. 

Then there are those who have always viewed burgeoning public debt as the most dangerous thing, and who must be dreading Trump’s fiscal and financial policies. It is this scenario with runaway public debt that is being adduced as an argument for the debt brake at the silliest possible juncture (more on this below). It comes in two variants, one clumsy, the other less so. Both are wrong. 

Clumsy – nip it in the bud

The argument is roughly that only the debt brake can prevent debt from assuming dangerous proportions even here in Switzerland. No public debt threshold can be scientifically identified beyond which it becomes dangerous. At a ratio of 17.2%, however, Switzerland's debt is in any case so very low that it is more of a problem. In 2017, a federal expert group (which favoured the debt brake, by the way) said the following: "A very low debt level could ultimately prove problematic for financial markets. Should the market for Swiss federal bonds contract sharply and become largely illiquid, this could negatively impact the functioning of financial markets."

But let us assume that Switzerland's debt grew very quickly and substantially. High government debt can indeed become a problem if new debt can only be contracted at much higher interest rates. Since governments do not repay their debts from State coffers, but by contracting new debts to settle old ones, it is of course problematic when this mechanism falters. It is even worse if creditors no longer wish to purchase any government debt securities. A sharp devaluation of the national currency is just as undesirable, as it increases the cost of foreign currency debt servicing. Countries in the Global South regularly experience such public debt crises. 
This is completely unrealistic for Switzerland. Swiss Confederation bonds (called "Eidgenossen") are highly sought after, and more than ever in times of crisis. We can therefore rule out an interest rate shock, just as we can a creditors' strike. Similarly, the Swiss franc is deemed a safe haven currency and therefore tends to appreciate in times of crisis (which could become problematic for the real economy, but surely not in connection with debt).

A look at history also makes clear that higher government debt poses no problem for Switzerland. Following the two world wars, the Swiss Confederation's debt level was nine billion francs, or about 50% of GDP at the time. This did not at all hinder Switzerland from achieving high growth rates over the ensuing decades. And this is true also of the long term: between 1894 and 2014 in Switzerland, public debt did not negatively impact GDP growth or push up long-term interest rates. The average debt ratio was 49.2% over this period.

Less clumsy – safety margin

Finance Minister Karen Keller-Sutter used the fear of a global debt crisis (which she evidently shares) to craft a more subtle argument in favour of the debt brake. Still under the impression caused by a temporary stock market downswing in early August, she told the Blick newspaper that “Indebtedness in the USA and Europe poses a risk to international financial stability and a risk to Switzerland.” The debt brake was a tool with which Switzerland could help itself.

For the first time, Alliance Sud has worked out the financial leeway that Switzerland would have, in the event it reforms the debt brake. In the process, Alliance Sud also looked at a financial crisis scenario, and can confidently give the all clear. 

No austerity package needed

But let us begin with a scenario in which the debt brake is taken literally. It was sold to the electorate in 2003 specifically as what the name says – as a brake on any further debt increase. That was the assumption made during the voting; it was Parliament that first offered us an implementation which, instead of curbing the increase in debt, is steadily reducing it. 

Alliance Sud calculations show that raising the debt-to-GDP ratio to the level prevailing when the 2003 debt brake was introduced (24.9%, gross, by the Maastricht definition) would make a total of 153 billion francs available up to 2035. That would be 15.3 billion per annum. Measured by the situation prevailing in 2024, Switzerland would then still have Europe's third lowest debt ratio. Only Bulgaria and Estonia would be lower.

This is why arguments based on panic over debt are being brought forward in Switzerland at the silliest time: in the 2025 winter session, Parliament began deliberations on the "2027 Relief Package", which is in fact a burdensome cost-cutting package that also strongly impacts international cooperation. Between 2027 and 2029, it is expected to produce savings of 5.4 billion francs. The cuts will adversely impact equal opportunities in education, refugee integration and climate action, and are therefore beyond unnecessary. The figures alone show that Switzerland has enormous upside potential for further borrowing to invest in the future, or – if really deemed necessary – to upgrade militarily more quickly than envisaged in the normal budget. Similarly, extraordinary expenditure, whether on a one-off basis or for a limited time period such as spending to support Ukraine, could be funded through debt contracted outside the debt brake framework.

Room also for a financial and Covid-19 crisis

But was it not made clear by the Covid-19 pandemic that the debt brake had generated savings for hard times? Although this was the picture often painted during the Covid-19 crisis, it is not true. The debt brake does not mean that in good years, money is saved for bad years. Parliament's implementation stipulates that government account surpluses (i.e., unspent budget funds) must go entirely towards debt reduction. Covid-19 assistance was therefore funded with new borrowing. And considering the still very low debt level, that would also have been possible even if the debt had not been previously reduced. The debt brake was simply irrelevant to managing the Covid-19 pandemic. 

Switzerland has the option of increasing its debt also in the event of a financial crisis. The biggest risk facing Switzerland is the UBS, irrespective of the specific trigger of a financial crisis. Let us assume that Switzerland had to spend 200 billion francs to bail out the UBS. And let us further assume that this took place during a pandemic, which costs a further 100 billion francs. Both crises are indeed possible, even though it is not particularly realistic that both would coincide. That would all occur in the wake of investments worth 153 billion, with the debt ratio consequently rising to the 2003 level. Even this mental game involving a worst-case scenario shows that there is enormous room for manoeuvre. If the debt ratio were raised to 60%, there would be 536 billion francs available over the next 10 years compared to today. A debt ratio of 60% would then simply place Switzerland in the lower middle range in Europe.

On the other hand, the additional debt reduction that will inevitably accompany the savings package is harmful. The fact is that debt reduction does not come free of cost, as determined by the aforementioned expert group. They stated that it was important to bear in mind that debt reduction also generates economic costs and that the lower the debt level falls, the more the marginal benefit from further debt reduction diminishes. Besides, even the International Monetary Fund, itself a kind of global debt watchdog, already advised Switzerland in 2019: A less conservative implementation of the DB rule would make room for additional spending, including to deal with long-term economic trends.