Walter Moser, Economist, Conference of Cantonal Governments, Berne

1

The Principles of Fiscal Federalism in Switzerland

illustrated by the Reform of Financial Equalization and Task Allocation between the Confederation and

the cantons (RET)

2

Switzerland

A small multi-ethnic, multilingual and multi-confessional nation shaped by the will of its people

a federal state since 1848

constituted by the people and the cantons

a federation built fromthe bottom up

3

The three political levels

The Confederation

2‘721 communes

The 26 cantons

4

Core functions of federalism

• Competition between the cantons induces innovative ideas and leads to better solutions

• Fiscal competition keeps taxes at a lower level

• Federalism distributes political power to the three levels and leads to a decentralization

• Federalism gives more organizational power to minorities and regions

5

Three guiding principles of Swiss federalism

• Subsidiarity– a new expression for an old principle– „Every task shall be accomplished on the lowest possible

level“

• Fiscal Equivalence– „Who takes profit pays, who pays decides“

• Direct democracy– Elections– Voting– People‘s initiatives– Referendums– Petitions

6

Subsidiarity as a guideline for task allocation

• between the public and private sector– State quota 2005: 36.4 % of GDP

(including social security)– with a growing tendency

• between the three levels of the federal state– Regional and local problems have to be

solved at the cantonal or communal level– National concerns need national solutions

7

Public sector expenditure 2005

0%

20%

40%

60%

80%

100%

Federal Government Cantons Communes

Interest on Debt, Transver Payments etc.

Other

Agriculture and Food Supply

Environment

Transport

Social Welfare

Health Care

Culture and Leisure

Education

Foreign Relations

Defense

Justice, Police, Security

General Administration

8

Public sector revenue 2005

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Federal Government Cantons Communes

other revenues

transfer payments

user fees

other fiscal revenues

consumer taxes

direct taxes

9

Fiscal equivalence

• Links cost to benefit

• Leads to congruence between deciding on expenditure and financing

• Prevents free riding

10

Direct democracy in public spending

• On the federal level– Tax sources and maximum tax rates fixed in the

federal constitution– „brake to debt“ forces parliament to restrict

spending– No budget and specific financial referendum

• On the state level– Different forms of budget and financial referenda

• On the communal level– Fixation of the tax rates and the user charges by

the citizens– Mandatory budget referendum in most communes

11

Former situation

• Strong points– Relatively low tax

burden– Good identity of the

citizens with their cantons

– Strong fiscal competition between the cantons

– Differences in the service level

• Weak points– Slow political system– Tax burden between

the cantons differs to much

– Many inefficiencies, due to wrong incentives in the transfer system

– Creeping centralization– Differences in the

service level

12

Reform of financial equalization and task allocation (RET / NFA)

• A project of renovation for Swiss federalism• Elaborated in partnership between the

Confederation and the Cantons• Complex project

– Amendments to the federal Constitution– New laws both on the federal and the

cantonal levels– Changes in the financial flows

13

Two starting points, five pillars

• Financial equalization– Equalization of resources– Cost compensation

• Reallocation of tasks between Confederation and cantons– Disentanglement of tasks and financial flows– New forms of cooperation between Confederation

and cantons– Strengthening the inter-cantonal cooperation

14

Concept of financial equalization

no compensation

cost compensation

threshold value

resource equalization

public goods and services

Inter-cantonal cooperation with cost compensation

Additional goods and services

basic goods and services

excessive cost

Spillovers

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Financial equalization

• Equalization of resources– Deficiencies of the former system– Resource indicator– Minimal funds for all cantons– Financed by the Confederation and the financially

strong cantons

• Cost Compensation– Geographic and topographic cost compensation– Socio-demographic cost compensation– Financed by the Confederation

16

Effects of resource equalization

17

Reallocation of tasks between the Confederation and the cantons

• Disentanglement of tasks and financial flows– Principle of subsidiarity

• New forms of cooperation between Confederation and cantons– Cooperation instead of ordering by decree

• Inter-cantonal cooperation with cost compensation– Can be declared mandatory in 9 specified

domains

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Concluding remarks

• Favoring federalism means accepting differences

• The principle of subsidiarity moves political decisions closer to the citizens

• Fiscal equivalence ensures that those who decide have to bear the financial consequences of their decisions

• Direct democracy guarantees direct government accountability to citizens