Could Swiss Style Fiscal Rules Work in the United States?

During this election campaign, neither political party has proposed a viable solution to our debt crisis. Total federal debt now exceeds our national income and the Congressional Budget Office projects that debt will increase to more than double national income by midcentury. As the debt burden increases, the nation is increasingly exposed to debt default that would have a devastating impact on financial markets. Before we fall over this fiscal cliff we should learn from the experience of other countries, such as Switzerland, which have had success in solving their debt crises.

In the early 1990s, Switzerland experienced a debt crisis not unlike the debt crisis that we now face. Swiss citizens responded by incorporating a new fiscal rule, the debt brake, in their Constitution through referendum with support from 85 percent of voters. The debt brake requires the federal government to bring expenditures into balance with revenues in the near term and caps the rate of growth in federal spending at the long-run rate of growth in national income. Debt brakes have been incorporated in cantonal and municipal constitutions as well as the federal constitution. The debt brake has allowed the Swiss to stabilize and reduce debt relative to national income in the long term.

Governments at all levels in Switzerland have learned to live within the budget constraints imposed by debt brakes. The importance of the debt brake was revealed this year when the Swiss Parliament rejected a proposed budget that would have required suspension of the debt brake. The Swiss parliament also rejected legislation earmarking funds for the Ukraine war because the spending would have violated the debt brake rules.

A Swiss-style fiscal rule would fundamentally change the budget process in the United States just as it has in Switzerland. An effective cap on the growth in federal spending would require Congress to restore regular order in the budget process, setting priorities in allocating funds to all federal programs. This would require Congress to weigh tradeoffs, for example, between defense and nondefense spending consistent with the budget constraints imposed by the fiscal rules. Learning to live within this budget constraint would require constraining the growth in all federal departments and programs, including entitlements. 

Congress would have an administerial duty to enforce a constitutional fiscal rule. They could not just suspend or circumvent a constitutional fiscal rule as they do statutory fiscal rules now in place; that would trigger a legal challenge from citizens seeking recourse through the courts.

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Critics will argue that incorporating a Swiss-style fiscal rule in the U.S. Constitution is wishful thinking. Before we dismiss this option, it is important to note that Article V is a viable method of achieving this objective. In 1979, two thirds of the states had submitted applications for a fiscal responsibility amendment, but Congress failed to count these applications and call the convention. The states are now seeking a Declaratory Judgment from the Supreme Court that would require Congress to fulfill its administrative duty to count these applications and call the Convention.       

Incorporating a fiscal responsibility amendment in the Constitution would have a profound impact on our political institutions, comparable to that in Switzerland. The debt brake has strengthened institutions of direct democracy and fiscal federalism in Switzerland. Most tax and expenditure decisions are made at the municipal and cantonal level rather than the federal level. Major changes in taxes, spending, and debt require citizen approval through initiative and referendum.

The Swiss have, in effect, a no-bailout rule at all levels of government. Swiss courts have ruled that municipal governments that are in default cannot count on the cantonal government to bail them out. Elected officials know that if they violate their constitutional fiscal rules, they are open to legal challenges and sanctions through the courts.

Incorporating a fiscal responsibility amendment in the U.S. Constitution is now the most viable way to curb Congress and restore fiscal sustainability. Fiscal decisions would then reflect the will of the people rather than special interests. Governments at all levels would have to learn to live within the budget constraints imposed by the fiscal rules. This would strengthen the federalist system in the United States just as it has in Switzerland.

Barry Poulson ([email protected]) is a policy advisor with The Heartland Institute.