This paper reviews the trade-offs in Switzerland, focusing on challenges for fiscal policy coordination. It reviews the benefits and costs of a highly decentralized government, describes the Swiss institutional architecture, and analyzes Switzerland’s fiscal performance. It also discusses the specific policy challenges related to population aging, reviews the Swiss National Bank works on government financial assets and liabilities, describes the Swiss, Dutch, and the U.K. pension systems, respectively, on the regulation and supervision of the occupational pension pillar, recent reforms, and policy implications.


This paper reviews the trade-offs in Switzerland, focusing on challenges for fiscal policy coordination. It reviews the benefits and costs of a highly decentralized government, describes the Swiss institutional architecture, and analyzes Switzerland’s fiscal performance. It also discusses the specific policy challenges related to population aging, reviews the Swiss National Bank works on government financial assets and liabilities, describes the Swiss, Dutch, and the U.K. pension systems, respectively, on the regulation and supervision of the occupational pension pillar, recent reforms, and policy implications.

II. An Indicative Public Sector Balance Sheet for Switzerland37

A. Introduction

66. Public sector balance sheets can provide a comprehensive view of the health of the public finances. Traditional fiscal accounts tend to focus on revenues and expenditures (the flow data), but this captures only part of the impact of policies on the public finances. Flow accounts can be usefully complemented by stock indicators. In the 2001 Government Finance Statistics Manual, the Fund is recommending that countries gradually shift to flow and stock accounting.38 Since the balance sheet includes financial and non-financial assets, debt, and it could include contingent and forward-looking liabilities, it presents a richer image of fiscal effects and brings out more policy options than flow accounts alone.

67. Capturing succinctly the impact of future fiscal balances provides additional information about the fiscal stance and the available policy options and tradeoffs. An intertemporal component in the balance sheet (the “dynamic” forward looking component) can bring out different policy options. Apart from possibly raising taxes or cutting expenditures, policy makers should also investigate options to improve asset management and obtain better investment returns. For instance, in the case of Switzerland, this brings out the importance of using well the proceeds from recent gold sales—either to retire debt or to reinvest these amounts into higher earning alternative assets. In addition, higher returns may be obtained from the public capital stock, by charging user fees or increasing them to cover economic costs. In some cases, the maintenance or construction of public capital stock can be outsourced or privatized. The Swiss authorities are exploring these options, and the balance sheet can help to assess tradeoffs and the impact of reforms that operate over the long run in a succinct way.

68. This paper builds on work done by the Swiss National Bank (SNB, 2005a), which publishes stock data on government financial assets and liabilities. It also reflects the 2005 Article IV Consultation with Switzerland (IMF, 2005a, b, c), which developed a baseline projection of the long-run challenges from aging in the public finances.

69. Moreover, the Ministry of Finance will start using the GFSM 2001 methodology to present a preliminary official public sector balance sheet in 2007. Several cantons will also publish their balance sheets during that year. On a parallel track, in 2007, the Confederation intends to present its long-run sustainability report, with official estimates and projections of the expected fiscal pressures from aging and how these may impact the different levels of government. This paper cannot be as comprehensive as the authorities’ efforts, but it is meant as a precursor to this important work.

70. The structure of the paper is as follows. Section B defines the various components of the balance sheet. Section C makes a preliminary first attempt to assign separately the main entries to the federal and subnational governments. Section D concludes.

B. Some Preliminary Findings

71. The SNB has begun to publish financial balance sheet data for the general and central government and the social security system. These show that financial liabilities exceed financial assets—the gap is growing slowly over time. The resulting financial net worth of the combined general government has moved from -23.6 percent of GDP in 1999 to -24.7 percent in 2003 (Table 1). A preliminary staff estimate suggests that the financial net worth was just over -25 percent of GDP by end-2004.

Table 1.

General Government Financial Assets and Liabilities

Source: Swiss National Bank and IMF staff calculations

72. However, financial net worth is only part of the balance sheet. The net debt may have been used to build public infrastructure to enhance the economy’s productive capacity and generate a bigger tax base to service these debts in the future. A complete balance sheet would thus also include the value of the public sector capital stock, as shown below.

73. In addition, future debts from commitments in the social security system, and others, also need to be considered. Estimating the implicit debt involves projecting a long-run path for overall fiscal balances. This can be done by constructing a baseline scenario under clearly-defined assumptions—including only the effect of policies already in place.39

74. The 2005 Article IV consultation with Switzerland presented such a baseline projection (50 years forward looking), including the effects of demographic change over time on potential output and on the fiscal accounts (IMF 2005a, b, c). Some key issues were:

  • On current policies, the fiscal deficit would be modest in the short run, but then worsen substantially over time as aging costs play out.40

  • Several policy options are being considered by the authorities, but these are not yet incorporated in the baseline because they have not yet been approved or implemented. These include the intent to seek public approval for some VAT increase to help finance the disability program.

  • In common with other advanced countries, the future deficits in Switzerland are largely emanating from the social security system, which has been running deficits that are projected to grow over time.

75. To incorporate the effects of projected future fiscal balances, such balances were discounted to determine their net present value. We projected overall balances of the general government for a forward looking period of 50 years (2002–2051, 2003–2052, and 2004-2053), using the above described assumptions and an updated macroeconomic scenario. This would result in a gradual deterioration in the public sector net worth (valuation changes were assumed to be zero in the forward looking exercise). The position of the public sector net worth at the end of the 50 year projection horizon then included the full cumulative impact of the baseline policies. This “terminal value” of the net worth was then discounted from its 50 year horizon to the present to see how much in NPV terms the baseline fiscal policies had worsened the net worth relative to its value today.41 Adding the NPV of the future fiscal balances to the balance sheet resulted in a net worth that captured the effects of past policies and of those that are projected on a 50-year forward looking basis—together these form the intertemporal balance sheet.

76. The NPV of future fiscal balances suggests a net liability of SwF 681 billion. This estimate is added to the public sector financial balance sheet to construct a preliminary, intertemporal financial public sector balance sheet (Table 2). Even though future liabilities have not been formally contracted, they correspond mostly to promises under the welfare state, and thus need to be taken into account. On this basis, the intertemporal financial position is substantially in deficit (SwF 793 billion, or 178 percent of GDP).

Table 2.

General Government Expanded Financial Assets and Liabilities

Source: Swiss National Bank and IMF staff calculations

77. To complete the balance sheet, four additional components need to be added:

  • Own capital in various publicly managed funds,

  • Equity holdings in state enterprises, not yet included,

  • The public sector nonfinancial capital stock and,

  • Some contingent liabilities from existent government guarantees.

78. Some publicly owned entities have a stock of own capital that has not yet been included. Examples of these are the Polytechnic Schools and the Alcohol Federal Society. According to recent data, their capital amounted to SwF 0.5 billion in 2003-04.

79. Switzerland also has some important enterprise equity holdings that need to be included. Examples are the equity holdings in public sector banks, the SNB, the Post Office, the Federal Railways (SBB), and the confederation’s equity participation in Swisscom (SNB 2005 b, 2004, etc.). The confederation, cantons and communes own additional public enterprises, but data on their net worth were not readily available and could not be included.

80. Importantly, the public sector capital stock is a large part of the balance sheet. It comprises the accumulated investments in public infrastructure, government buildings, and machinery and equipment, net of depreciation. In many countries, the public infrastructure is the most important counterpart on the asset side to the gross debt on the liability side. On a preliminary basis, this paper uses estimates by Kamps (2004) which suggest that the Swiss net public sector capital stock is equivalent to some 55 percent of GDP (roughly equal to the value of the gross debt in relation to GDP—consistent with an implicit golden rule).

81. Finally, some contingent liabilities are quantified and should be included as well. In this particular case, they comprise central government guarantees to underfunded second-pillar pension funds, valued at SwF 7 billion in 2004.

82. Putting together all components provides a preliminary figure for the comprehensive public sector balance sheet and net worth. Adding in the components just described makes an important difference to net worth. Nevertheless, the Swiss public sector still shows a negative net worth at end-2004 of about SwF 459 billion, or the equivalent of 103 percent of GDP (Table 3, details are in Table 6).

Table 3.

Public Sector Balance Sheet

Source: IMF staff calculations (see Table 6 at the end of the chapter).

83. The estimates are preliminary and are sensitive to underlying assumptions, especially those to calculate the intertemporal fiscal position. Data on financial asset holdings tend to be incomplete and may be underestimated. Those on real assets are also likely to be imprecise. Further, the NPV of future implicit liabilities are indicative and depend on key assumptions and developments. Nevertheless, it appears clear that policy adjustments are necessary to counteract the fiscal pressures from aging and to strengthen the comprehensive public sector net worth. The public sector balance sheet may help to understand better the sensitivities of net worth to different assumptions and policies—including structural reforms that have an impact on growth and fiscal outturns over the long run (such as a pension reform, which can be costly up-front, but becomes very beneficial over time). Since the public sector balance sheet attempts to capture all effects in an intertemporal way, it can help to communicate to the public why some of these difficult reforms are needed and how they are beneficial.

C. The Balance Sheet for the Two Main Levels of Government

84. The balance sheet so far consolidated the entire public sector. It is also interesting to assign balance sheets to the federal, and cantonal and communal levels, respectively. For financial assets and liabilities, the SNB has published the position at end 2003 for the general government, central government, and social security, respectively. We assumed that the residual, for both financial assets and liabilities, is represented by cantons and communes. The equivalent end-2004 financial assets and liabilities have been estimated for the two main levels of government based on 2003 stocks and respective estimated flows.

85. Future burdens of social programs were assigned as follows. First, it is assumed that the social security system will be running down its reserve assets. Thereafter, the state contributions will be increased, so that in the absence of any social security reform, as deficits materialize, they will be financed by the state. The share of distribution is as follows. It is assumed that the confederation will make transfers to partially cover the costs of health care premia for the poor. In turn, the cantons and communes are assumed to maintain hospitals in their jurisdictions, and contribute the rest to cover the health insurance premia for the poor. The rest of current transfers for old age pensions and disability insurance are assumed to be paid in the same shares by the federal and subfederal governments as is currently the case.

86. Pre-existing assets and liabilities from the detailed balance sheet have been allocated to the confederation and cantons and communes as follows. The special purpose funds, contingent liabilities, and net worth of the SNB were entirely assigned to the confederation. Capital of the cantonal banks was assigned to the cantons. As a working assumption, half of the public sector capital stock has been assigned to the federal government and half to the cantons and communes.

87. As a result, the separate preliminary balance sheets for the confederation and the cantons and communes are in Tables 4 and 5. The federal government is making efforts to eliminate a small structural deficit, but since it covers the bulk of transfer costs, future social security deficits due to population aging are nevertheless projected to put continued strains on its finances. The cantons and communes also see a weakening in their net worth. About 81 percent of the negative net worth would burden the confederation.42

Table 4.

Central Government

Source: IMF staff calculations.
Table 5.

Cantons and Communes

Source: IMF staff calculations.

D. Conclusions and Policy Relevance

88. A public sector balance sheet can provide a concise intertemporal view of fiscal challenges and can therefore be a useful complement to fiscal flow accounts. Baseline projections suggest that Switzerland faces a substantial financial challenge from aging under current policies. A balance sheet that reflects implicit future debts can help to show that the public finances are less healthy than they may appear based on current deficits or backward looking debt ratios. This can help to stimulate a debate in Switzerland’s popular democracy about the important concept of intertemporal fiscal consistency.

89. The public sector balance sheet can be used to analyze the value of fiscal and real structural reforms. Fiscal measures and structural reforms that the authorities are trying to implement should be quantified for their impact on the government’s net worth. This way, the public is in a better position to appreciate the value of such policies and may be more likely to support difficult adjustments.

90. The confederation may be in a good position to show the benefits of a multitude of structural real and fiscal reforms with this new communication instrument. The authorities are preparing an official balance sheet according to GFSM 2001, and a long run fiscal sustainability report, which they aim to publish in 2007. These reports should include the effects of a baseline scenario, but they may also benefit from including reform scenarios that can be used to build public consensus around difficult policy measures. For instance, the rationale behind the frequent recommendations to save the proceeds from the recent gold sales can be shown more easily with the help of a balance sheet than merely employing a budgetary flow presentation. Also, Switzerland has a large stock of important assets, some which could be privatized, or their management could be optimized to increase the returns on these assets. A balance sheet offers valuable insights that can enrich the discussion about fiscal sustainability, especially if it contains forward looking indicators, and is employed alongside the regular budgetary flow accounts.

Table 6.

Detailed Public Sector Balance Sheet

Source: Swiss National Bank, Federal Finance Administration and IMF staff calculations.

Staff projections of discounted fiscal balances over a period of 50 years. The discount rate reflects the implicit average interest rates on the public debt of each year, compounded to the terminal value discount rate at the end of the 50-year projection period. Projections based on structural and fiscal policies currently in place.

Dedicated funds administered by the Federal Government, not included elsewhere.

Market value of government held shares.

Estimates based on Kamps (2004), IMF Working paper no. 04/67.

Guarantees by the confederation to cover actuarial shortfalls in funded pension schemes.


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Prepared by Alina Carare. This paper has benefited from discussions with Messrs. Siegenthaler and Duperrut of the Ministry of Finance, and colleagues in the Swiss staff team.


See for instance the IMF Board paper ( “Using the GFSM 2001 Statistical Framework to Strengthen Fiscal Analysis in the Fund” (p. 14).


One could run sensitivity scenario’s around this baseline path.


The baseline calculations assume that the debt brake would not be robust to the pressures from aging.


In practical terms, the change in net worth (in NPV terms) was obtained directly by discounting each year’s fiscal balance (from the baseline projection) by the terminal value of the discount factor (at year 50). The discount factor each year was calculated using the average annual interest rate on the public debt.


The net worth of the two main levels of government does not add up exactly to the net worth of the public sector as a whole, because it leaves out some assets held by the social security system independently.