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One of the reasons for the success of the Swiss debt brake is the provisions for a carefully designed emergency fund and escape clause that allows for spending in excess of that permitted by cyclically adjusted revenues (Geier 2011, 2012). The Swiss ‘extraordinary budget’ functions like a budget stabilization or ‘rainy day’ fund (Merrifield and Poulson 2017).

The Swiss debt brake has achieved a budget that is close to balance over the long term (Beljean, and Geier 2013; Bodmer 2006; Kraan and Ruffner 2005). A cyclical adjustment factor is used to offset deficits with surpluses over the business cycle. The extraordinary budget provides for deviations from this cyclically balanced budget rule. The Swiss recognize that emergencies, such as natural disasters, financial crises, and military expenditures, may result in sharp temporary increases in spending. The Swiss rules account for these expenditures in the extraordinary budget, separate from the primary budget. Any deficit in the extraordinary budget must be offset by surpluses in the primary budget in the short term.

Prior to the recent financial crisis the Swiss accumulated a surplus in the extraordinary budget. That surplus was expended during the financial crisis to stabilize expenditures around the revenue trend. The debt incurred in the extraordinary budget during the financial crisis was offset by surpluses in the primary budget. Over the course of that business cycle the Swiss did not increase debt, one of the few countries able to impose such fiscal discipline.
The experience of the Swiss, as well as other OECD countries has resulted in a consensus regarding emergency funds and escape clauses in the successful implementation of fiscal rules. Fall et al (2015) summarize this consensus as follows:

“Tail events happen, but they need not undermine credibility. Clear escape clauses should be set allowing the temporary suspension of fiscal rules. A temporary suspension should be conditional on exceptional events such as natural catastrophes or a sharp output contraction. However, the definition of these escape clauses must be clear to make sure they cannot be used in normal times. Determining the existence of exceptional circumstances can be delegated to a body outside the government or submitted to a validation by qualified majority in the parliament. To cope with tail events, a “rainy day” fund can underpin the respect of the rule over the cycle and would allow greater room for fiscal stabilization. Unexpected surpluses would be saved and used later to finance unexpected deficits and/or short-term stabilization policies (Fall et al. 2015 p.37-38).

DOWNLOAD: What Have we Learned from the European Experience with Emergency Funds and Escape Clauses

What Have we Learned from the European Experience with Emergency Funds and Escape Clauses

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