walter moser, economist, conference of cantonal governments, berne 1 the principles of fiscal...
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Walter Moser, Economist, Conference of Cantonal Governments, Berne
1
The Principles of Fiscal Federalism in Switzerland
illustrated by the Reform of Financial Equalization and Task Allocation between the Confederation and
the cantons (RET)
2
Switzerland
A small multi-ethnic, multilingual and multi-confessional nation shaped by the will of its people
a federal state since 1848
constituted by the people and the cantons
a federation built fromthe bottom up
4
Core functions of federalism
• Competition between the cantons induces innovative ideas and leads to better solutions
• Fiscal competition keeps taxes at a lower level
• Federalism distributes political power to the three levels and leads to a decentralization
• Federalism gives more organizational power to minorities and regions
5
Three guiding principles of Swiss federalism
• Subsidiarity– a new expression for an old principle– „Every task shall be accomplished on the lowest possible
level“
• Fiscal Equivalence– „Who takes profit pays, who pays decides“
• Direct democracy– Elections– Voting– People‘s initiatives– Referendums– Petitions
6
Subsidiarity as a guideline for task allocation
• between the public and private sector– State quota 2005: 36.4 % of GDP
(including social security)– with a growing tendency
• between the three levels of the federal state– Regional and local problems have to be
solved at the cantonal or communal level– National concerns need national solutions
7
Public sector expenditure 2005
0%
20%
40%
60%
80%
100%
Federal Government Cantons Communes
Interest on Debt, Transver Payments etc.
Other
Agriculture and Food Supply
Environment
Transport
Social Welfare
Health Care
Culture and Leisure
Education
Foreign Relations
Defense
Justice, Police, Security
General Administration
8
Public sector revenue 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Federal Government Cantons Communes
other revenues
transfer payments
user fees
other fiscal revenues
consumer taxes
direct taxes
9
Fiscal equivalence
• Links cost to benefit
• Leads to congruence between deciding on expenditure and financing
• Prevents free riding
10
Direct democracy in public spending
• On the federal level– Tax sources and maximum tax rates fixed in the
federal constitution– „brake to debt“ forces parliament to restrict
spending– No budget and specific financial referendum
• On the state level– Different forms of budget and financial referenda
• On the communal level– Fixation of the tax rates and the user charges by
the citizens– Mandatory budget referendum in most communes
11
Former situation
• Strong points– Relatively low tax
burden– Good identity of the
citizens with their cantons
– Strong fiscal competition between the cantons
– Differences in the service level
• Weak points– Slow political system– Tax burden between
the cantons differs to much
– Many inefficiencies, due to wrong incentives in the transfer system
– Creeping centralization– Differences in the
service level
12
Reform of financial equalization and task allocation (RET / NFA)
• A project of renovation for Swiss federalism• Elaborated in partnership between the
Confederation and the Cantons• Complex project
– Amendments to the federal Constitution– New laws both on the federal and the
cantonal levels– Changes in the financial flows
13
Two starting points, five pillars
• Financial equalization– Equalization of resources– Cost compensation
• Reallocation of tasks between Confederation and cantons– Disentanglement of tasks and financial flows– New forms of cooperation between Confederation
and cantons– Strengthening the inter-cantonal cooperation
14
Concept of financial equalization
no compensation
cost compensation
threshold value
resource equalization
public goods and services
Inter-cantonal cooperation with cost compensation
Additional goods and services
basic goods and services
excessive cost
Spillovers
15
Financial equalization
• Equalization of resources– Deficiencies of the former system– Resource indicator– Minimal funds for all cantons– Financed by the Confederation and the financially
strong cantons
• Cost Compensation– Geographic and topographic cost compensation– Socio-demographic cost compensation– Financed by the Confederation
17
Reallocation of tasks between the Confederation and the cantons
• Disentanglement of tasks and financial flows– Principle of subsidiarity
• New forms of cooperation between Confederation and cantons– Cooperation instead of ordering by decree
• Inter-cantonal cooperation with cost compensation– Can be declared mandatory in 9 specified
domains
18
Concluding remarks
• Favoring federalism means accepting differences
• The principle of subsidiarity moves political decisions closer to the citizens
• Fiscal equivalence ensures that those who decide have to bear the financial consequences of their decisions
• Direct democracy guarantees direct government accountability to citizens