How Sweden and Switzerland handle debt, taxes and spending

Heading for Taxmaggedon

by Keith Chrostowski

It’s just never-ending, this standoff in America over taxes, spending and deficits.

For three decades, we’ve stood firm on our particular ideological ramparts, seeing any solution that tilts even slightly toward the opposing philosophy as total surrender.

But other countries have picked their budgetary deadlocks. And they didn’t go all in on austerity or continue bottomless spending that pushed their countries off the debt cliff.

In sensible Switzerland, 85 percent of voters in 2001 approved a “debt brake.” It requires that spending by the central government grow no faster than trendline revenue.

Daniel J. Mitchell of the Cato Institute wrote in The Wall Street Journal that before the law went into effect in 2003, government spending was rising about 4.3 percent a year. Now it’s growing at 2.6 percent.

The debt brake doesn’t apply to long-term social insurance programs. But in Switzerland, the private sector handles a large share of health and pension expenses.

And critically, it doesn’t require a balanced budget. The Swiss recognized that tax revenue soars in good times while in tough times it falls. So tough times might require deficit spending, to prevent the evisceration of safety net programs and to stimulate the economy.

The debt brake does, however, smooth the ups and downs in spending by holding spending growth to average revenue increases over a multiyear period.

Mitchell notes that the debt brake “appeals to Keynesians. … But it (also) appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash.”

The Swiss also have gotten taxes under control. Maximum tax rates — an 11.5 percent income tax, an 8 percent value added tax and an 8.5 percent corporate tax — are constitutionally set and hard to raise.

Government spending in Switzerland is now about 34 percent of GDP, down from 36 percent when the debt brake was first applied. Debt has dropped to 36.5 percent of GDP from 53 percent, far below the average eurozone level.

The U.S. has been going in the reverse direction. Federal government spending, Mitchell points out, has doubled from $1.86 trillion in fiscal 2001 to $3.8 trillion this year. Total government spending as a share of GDP has risen to 41 percent from 36 percent. Federal debt is now 100 percent of GDP.

There is an American counterpart to the Swiss debt brake. A bill by GOP Rep. Kevin Brady of Texas, called the Maximizing America’s Prosperity Act, would put caps on government spending linked to “potential GDP.” The Congressional Budget Office would base potential GDP on a projection of economic output assuming full employment and no inflation.

Brady’s bill will go nowhere, of course, because our politicians will never surrender their spending powers.

The U.S. might learn more, however, from how Sweden faced budgetary reality. Its reforms stemmed from a 1992 economic crisis.

In response, voters and politicians agreed on the goals of low inflation and balanced budgets. And because of the tough choices they made, the Swedish economy sailed through the recent recession relatively unscathed. Government debt as a share of the economy is even lower than Germany’s.

Economist Robert J. Samuelson, writing in The Washington Post, found it intriguing that Sweden, socialist to the core, turned to a set of solutions that “will please and discomfort American liberals and conservatives alike.”

Sweden broadened its income tax base and cut the top average marginal rate from 46 percent to 33 percent.

Spending was cut on old-age pensions, child allowances, jobless benefits and housing subsidies. Health care spending was curbed, in part by requiring higher patient co-payments. Union power over wages was crimped. Many parts of the economy, including banking, were deregulated.

But before liberals go all apoplectic, Sweden didn’t abandon its welfare state. Government spending is still about 50 percent of the economy. Cigarette and gasoline taxes were raised. And the rich took a hit as taxes on dividends and capital gains rose. Sweden also devalued its currency, the krona, to produce an export boom.

But by 1998, deficit reduction amounted to a staggering 12 percent of GDP.

Samuelson reports that Anders Borg, Sweden’s finance minister, said: 

“It’s possible to embrace conservative economics and liberal social policy at the same time. The aims were clear: to reward work by cutting income tax rates, to push people back into the labor market by reducing some government benefits, and to promote productivity by increasing competition.”

Of course, Switzerland and Sweden differ from the U.S. in key ways. They are smaller and more homogenous and don’t support huge militaries. But they show that budgetary consensus can be reached.

Instead, after the election the United States is headed for Taxmaggedon.