Institutions for Crisis Prevention: the Case of Switzerland

The Swiss economy’s comparatively robust performance in the current economic crisis is partly the result of its characteristics, but public institutions also made Switzerland resilient. We focus here on institutions that foster sound public finances. The Swiss federal debt brake played a key role in keeping the federal debt in check; along with fiscal rules, institutions such as direct democracy and federalism counteract the biases that tend to make elected representatives less fiscally conservative than citizens. This leads to more well-targeted public expenditure and greater public efficiency and helps to avoid excessively high taxes. These features are beneficial in ordinary times, and they increase the scope of action in times of crisis.

Fiscal rules such as a debt brake help to keep government expenditure in check.
Fiscal rules alone are not sufficient. Institutions matter.
The global coherence of the various institutions is essential since how an institution works depends on how it interacts with other institutions.
An institutional setup combining direct democracy, fiscal rules, federalism with fiscal autonomy and the integration of the main forces into government can foster sound public finances.