Switzerland: Selected Issues

Selected Issues


Selected Issues

Fiscal Federalism in Switzerland1

1. Switzerland is a highly decentralized country. Three political levels share power in Switzerland: the Confederation, 26 cantons and over 2,200 municipalities. Cantons have considerable autonomy in fiscal decisions. A revenue sharing arrangement from the confederation to the cantons and an elaborate transfer system between cantons as well as between the confederation and cantons mitigate financial differences between cantons. Cantons and municipalities raise close to 61 percent of general government tax revenue― the third highest among OECD countries—and account for a similar share of general government spending (Figure 1).

Figure 1.
Figure 1.

Expenditure and Tax Decentralization in OECD Countries, 2016

Citation: IMF Staff Country Reports 2019, 181; 10.5089/9781498321501.002.A004

Source: OECD Statistics.

A. The Fiscal Role of Cantons

Cantons Have Comprehensive Responsibilities and Set Their Own Fiscal Targets:


2. The assignment of expenditure and tax functions is specified in the Federal Constitution. The cantons have authority on a wide range of matters, including schools, hospitals, and policing. Consistent with the principle of subsidiarity, the federal government only takes on tasks which are assigned to it by the Constitution. These are generally tasks that the cantons and municipalities cannot perform on their own (e.g., public goods such as defense). The allocation of taxing rights between the different levels of government is largely in line with economic theory, whereby taxation of more-mobile activities—including VAT and other consumption taxes—is centralized, while cantons hold constitutional tax raising competences and levy taxes on immobile factors, such as real property, consistent with the principle that payers are beneficiaries. An exception to this principle is corporate income and wealth taxation (i.e., highly mobile tax bases), which is subject to tax competition among the cantons. Table 1 provides a compilation of task distribution among the confederation and cantons, as well as of the responsibilities shared between different levels of government.

Table 1.

Switzerland: Task Allocation Across Levels of Government

article image
Source: IMF staff.


3. Subnational borrowing is not subject to limits from the central government, but is governed by cantonal fiscal rules and market discipline. Cantonal and municipal debt is about 52 percent of general government debt (21.3 percent of GDP) (Figure 2). The canton of Geneva accounts for about a quarter of total cantonal debt, and its debt is equivalent to approximately one-third of Geneva’s GDP (Figure 3).2

Figure 2.
Figure 2.

Public Debt by Government Level

(Percent of Swiss GDP)

Citation: IMF Staff Country Reports 2019, 181; 10.5089/9781498321501.002.A004

Source: IMF GFS.
Figure 3.
Figure 3.

Cantonal Debt (Maastri cht Definition), 2016

Citation: IMF Staff Country Reports 2019, 181; 10.5089/9781498321501.002.A004

Sources: Federal Finance Administration; and IMF staff calculations.

Debt Brake Rules

4. There is considerable heterogeneity across cantonal debt brake rules. In addition to the federal debt brake rule, which applies only to the Confederation, all cantons have their own fiscal rules. Differences include: (i) whether or not the fiscal rule is in the canton’s constitution; (ii) fiscal balance requirements (e.g., each year or cumulative over a window of several years; headline or cyclically-adjusted); (iii) (a)symmetric treatment of over/under-performance; and (iv) the level of the fiscal balance target (e.g., Basel-Stadt targets 0.65 percent of Swiss GDP whereas Bern targets 12 percent of the canton’s GDP). Some of these rules can be viewed as more restrictive and procyclical than the federal debt break rule. For example, St. Gallen adopts a balanced budget rule, whereby a deficit must be automatically included in the following year’s budget and any budget deficit above 3 percent automatically triggers an increase in taxes as a penalty. While some cantons exceed their targets (e.g., Zurich and Basel Stadt), others (such as Bern) have less room for maneuver, but tend to preserve some space under the annual target to avoid hitting the limits of their fiscal rules.

Contingent Liabilities

5. Cantonal banks are a source of contingent liability for cantonal governments. These banks are largely owned by cantons. Explicit guarantees are provided for 21 of the 24 cantonal banks, while one cantonal bank (Geneva) has a limited guarantee, and two cantonal banks (Bern and Vaud) are without explicit guarantees. Some cantonal banks have significantly larger balance sheets than their cantons’ revenues (e.g., the balance sheet of Zurich Cantonal Bank is 11 times larger than Zurich’s revenues) and their cantonal GDPs. However, cantonal banks have very high credit ratings, although some have a lower rating on a standalone basis. Moreover, a relatively weak coverage ratio in some cantonal pension funds potentially poses a fiscal risk. For example, Geneva’s pension fund will be recapitalized with CHF 4.4 billion, increasing its coverage ratio from 58 to 75 percent, following a popular vote in May 2019.

B. Inter-Governmental Fiscal Transfers

6. The Swiss National Fiscal Equalization Scheme is an Intertwined System of Vertical and Horizontal Transfers:

  • Resource equalization scheme aims to reduce differences in resource capacity between cantons. In the first step, a revenue (or ‘resource’) potential index is computed, based on cantonal taxable income and assets, to identify financially strong and financially weak cantons. In the second step, vertical contributions from the confederation and horizontal contributions from financially strong cantons to financially weak cantons are determined based on a formula that aims to lift cantons with weak resource potential to a minimum of 85 percent of the average Swiss resource capacity index, although in practice, a higher percentage has consistently been achieved (Figure 4).

  • Cost compensation scheme provides a modest transfer from the federal budget to cantons with high expenditure needs due to geographical and socio-demographic factors (mountainous and urban regions).

  • Cohesion fund was introduced in 2008 to facilitate transition from a previous system of transfers, and amounts have been declining over time.

Figure 4.
Figure 4.

Resource Equalization, 2018

(Percentage of the Financial Capacity Index)

Citation: IMF Staff Country Reports 2019, 181; 10.5089/9781498321501.002.A004

Source: EFV (Federal Finance Administration) Statistics.

7. The total amount of fiscal transfers under the three schemes was about CHF 5.1 billion (0.8 percent of national GDP) in 2018. However, for some cantons the transfers are significant (Figure 4). For example, the index of financial resources in the canton of Jura was increased from 65.9 percent of the Swiss average to 88.3 percent through resource equalization transfers. Since 2008, six cantons (Zurich, Schwyz, Nidwalden, Zug, Basel-Stadt and Geneva) have consistently been net contributors, while the others have been recipients.

8. The Federal Council is proposing a partial revision of the Fiscal Equalization and Cost Compensation Act system. The core element of the reform is to raise the minimum threshold to 86.5 percent of the Swiss average for the financially weakest cantons. This minimum will be guaranteed, which is not the case in the current system. The reform is expected to only marginally raise the contribution of the confederation, and to decrease contributions by the financially-strong cantons collectively by about CHF 230 million annually. Parliament is expected to approve the reform in June 2019, and it would go into effect in 2020.


Prepared by Shafik Hebous (FAD). This paper has benefited from comments from the Swiss authorities.


These numbers are based on the Maastricht definition of debt as GFS-based public debt is not available for every canton.

Switzerland: Selected Issues
Author: International Monetary Fund. European Dept.