Switzerland

   

Economic Policies

#1
Key Findings
A broad set of strengths enable Switzerland to share the SGI 2018’s top position (rank 1) with regard to economic policy. Its score on this measure has improved by 0.1 point since 2014.

The country has experienced steady, moderate growth in recent years. Its intensive use of foreign labor has increased social tensions. The progressive shift to a highly export-oriented economy has undermined a once-corporatist structure of interest intermediation.

Unemployment rates are very low, and employment rates high, though about 45% of employed women engage in part-time work. Tax rates are moderate but generate sufficient public revenue. A corporate-tax reform is being redrafted following a referendum defeat. Despite low public debt levels and a 2016 budget surplus, the government is continuing to pursue moderate austerity programs.

Stalled negotiations with the EU over replacing the existing system of bilateral treaties are becoming increasingly urgent, as the EU is Switzerland’s main trading partner.

Economy

#8

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
8
The Swiss economy is highly competitive, ranking again at the top in the World Economic Forum’s 2017 competitiveness assessment. The country’s economic policy regime combines a variety of mechanisms. Common denominators, however, are the practice of muddling-through as standard operating procedure and heterodoxy as the primary philosophy underlying economic policymaking.

For example, regulation of the labor market is very liberal, particularly with regard to hiring and firing. In contrast, government policies were quite illiberal and politicized with regard to the flow of foreign labor and with regard to farming in the past. The policymaking process previously emphasized the integration of employers and trade unions, with employers enjoying considerable influence (“liberal corporatism”) and trade unions serving as junior partners. For trade unions, this corporatism made sense since it resulted in full employment (at least for Swiss citizens), high wages and generous employer-sponsored benefits. While this influence was strong in the past, in recent years the influence of both organized labor and capital has lessened.

Throughout the 20th century, Switzerland maintained a very protectionist policy regime, allowing for cartels and monopolies. The main beneficiaries were farmers, who were protected from global competition by high tariffs and strict non-tariff barriers, as well as small- and medium-sized businesses and service providers producing for the domestic market. Collusive pricing was tolerated, while competition between providers and producers was limited by the diversity of cantonal regulations.

This policy of protectionism has lessened considerably since the mid-2000s due to a deliberate strategy of market liberalization. At the same time, there has been continuous pushback to this liberalization. For example, an amendment to the law on cartels failed. It would have reduced the influence of major economic actors within the competition agency’s governing board. Similarly, in farmers were successful in being spared from austerity measures; they continue to enjoy a comparatively high level of protection. In 2017, under pressure from the WTO, the government presented a plan to abolish subsidies for certain exported agricultural products. At the same time, the administration suggested new subsidies for the agricultural sector, which would compensate farmers for losses incurred due to the new WTO-compatible regulation.

Between 1960 and 2005, Swiss real GDP growth rates have exceeded the average of the 23 advanced-democratic OECD nations in only nine of 44 years. Since 2005, Swiss economic growth rates have been above average – except in 2014 and 2015. Some economists have attributed the Swiss economy’s strong growth since about 2005 to its liberalizing reforms. Others note that most of the increase in domestic product is not due to higher productivity, but rather to the increasing volume of hours worked, which itself is at least partially a result of population growth (1% per year, mostly due to immigration). With very few exceptions, Switzerland’s current account balance has been positive since the 1970s, implying that exports exceed imports. Switzerland’s main export industries are the chemical, pharmaceutical and metal industries. A considerable share of recent economic growth is therefore export-driven, making Switzerland very dependent on export markets. The country’s increasingly rocky relationship with the European Union poses imminent dangers to the continued success of its export-oriented economy. However, Swiss economic growth is very robust. Although the Swiss franc appreciated considerably following the decision of the Swiss National Bank to abandon the peg to the euro in January 2015, while the effect on the national economy has been limited with few repercussions.

The government levies low taxes on both labor and capital, producing relatively small tax wedges. In addition, the state does not significantly intervene in the business cycle. Rather, it traditionally pursued a prudent and largely procyclical fiscal policy. In times of major economic challenges, such as in 2008 and 2009, fiscal stimulation packages have been implemented. However, for institutional and political reasons these packages have typically been very limited in size and proved difficult to implement swiftly. In fact, many of the resources contained in these fiscal programs have not been taken up by employers. Responsibility for price stability is left to the independent National Bank, which is tasked with maintaining price stability as a primary goal, and has the tools of monetary and interest-rate policy at its disposal.

Rather than actively influencing the structure of industry, the government has restricted itself to facilitating the modernization of industries by creating favorable conditions for economic activity. In the financial industry, Switzerland has improved its surveillance of banks and set prudential banking regulations since the onset of the “great recession” in 2008.

In general, decision makers have pursued a very pragmatic and heterodox economic policy and shown themselves willing to disregard liberal norms of policymaking if the need arises. This policy regime, which has been both liberal and protectionist, has come under pressure due to globalization and the increasing importance of international organizations such as the WTO. Given its reliance on the export of goods and services, Switzerland has had to acquiesce to liberalization.

Liberalization was accelerated by bilateral treaties with the European Union and practically all new economic policies have followed EU standards. As a consequence of globalization and Europeanization, most sectors increasingly liberalized, in particular in the period between the mid-1990s and 2005. Agriculture offers a major case in point, though Switzerland’s agriculture sector remains one of the most subsidized in Europe.

As a result of liberalization, one of the drivers of Switzerland’s postwar economic success – the complementarity of protected domestic-oriented industries and liberal export-oriented industries – has been weakened. The increase in tensions between the export- and domestic-oriented sectors have generally not resulted in open conflict. These developments have, however, increasingly undermined the country’s system of interest representation and the corporatist structure of interest intermediation. Interest organizations, in particular employers’ groups, have lost support and their members have increasingly turned to lobbying at the level of the individual firm.

Switzerland has not yet determined its long-term relationship with the European Union. In the current review period, the quest for politically and economically sustainable solutions became more pressing. Previous interventions entailed bilateral agreements with the European Union, which further liberalized the service and agriculture sectors. In addition, immigration policy has changed substantially. Switzerland has abstained from any further recruitment of foreign labor from outside the European Union, while liberalizing its immigration regime with EU countries. This policy has meant free movement of labor between Switzerland and the European Union, intensifying opposition to the recruitment of highly skilled employees from abroad.

This bilateral arrangement with the European Union faces major challenges. The European Union has requested new institutional structures to complement and support the bilateral relationship. It argues that the implementation and update of bilateral agreements has become too costly as a result of delays generated by domestic conflicts. Specifically, the European Union has insisted on the creation of independent authorities for the settlement of disputes as well as mechanisms for updating bilateral agreements without having to resort to full-scale renegotiations. As of fall 2017, no new institutional arrangements have been established and the domestic political opposition has gained strength. Given the country’s close integration with the EU market – accounting for 54% of Swiss exports and 72% of imports (2016) – Switzerland is highly dependent on a well-functioning relationship with this much larger economic partner. In contrast, the European Union is much less dependent on Switzerland.

Broadly perceived as a laggard in the development of its welfare state, Switzerland caught up in the postwar period. Today it has a mature and generous welfare state. In a time of demographic change, this welfare state will only remain sustainable through high rates of economic growth. It is far from clear whether these high rates of growth can be realized in the future, in particular if the inflow of foreign labor from and trade with the European Union is constrained.

Labor Markets

#1

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
9
Swiss labor-market policy is largely a success story. Labor-market flexibility in terms of hiring and firing is very high, trade unions and their representatives or allies on the firm level have no legal ability to interfere with employers’ human-resources decisions (in contrast to Germany), and there is no minimum wage (Swiss voters rejected the establishment of a minimum wage in 2014).

Although the “golden age” of containing unemployment by managing the flow of labor from other countries is past, the achievements of Swiss labor-market policy remain remarkable. In September 2017, the unemployment rate stood at 3.0%. Youth unemployment (among 15 to 24 year olds) is only nominally above the overall unemployment rate (3.2% in September 2017). The share of long-term (i.e., more than 12 months) unemployed persons in total unemployment is only 17%. The employment ratio (the working population as a percentage of the working-age population) is the second highest in Europe (behind Iceland). In addition, the overall employment rate of women has increased dramatically in recent decades. In 2016, Switzerland had the highest female employment rate (75%) in the OECD. A recent report on the effects of the free movement of labor between the European Union and Switzerland found that in general strong immigration from the European Union did not endanger the employment prospects of domestic workers. Most EU immigrants are highly skilled with 57% having finished tertiary education (Observatorium zum Freizügigkeitsabkommen Schweiz-EU 2017).

Nevertheless, several major challenges are evident. The high employment rate is due to a particularly high share of part-time work. In 2016, about 11% of employed men and 45% of employed women worked part time (i.e., less than 30 hours a week). Only the Netherlands has a higher rate of female part-time employment. Unemployment rates are highest among low-skilled foreign workers. Also, there remains considerable wage inequality between men and women. A 2016 report by the Federal Statistical Office shows that the median wage of female workers is 87% of their male counterparts, with 60% of this difference due to objective aspects such as education.

Highly skilled workers from EU countries pose few challenges for Swiss labor-market policy, particularly since these employees are quite likely to return to their native country after a period of employment in Switzerland (Cueni and Sheldon 2011). In contrast, low-skilled foreign workers tend to stay in the country even if they become unemployed. Also, the employment rate among older workers is very high in international comparison.

Citations:
CUENI, D. & SHELDON, G. 2011. Arbeitsmarktintegration von EU/EFTA-Bürgerinnen und Bürgern in der Schweiz. Schlussbericht zu einer Studie im Auftrag des Bundesamtes für Migration (BFM), Basel, FORSCHUNGSSTELLE FÜR ARBEITSMARKT – UND INDUSTRIEÖKONOMIK (FAI).

Observatorium zum Freizügigkeitsabkommen Schweiz-EU(2017): 13. Bericht des Observatoriums zum Freizügigkeitsabkommen Schweiz-EU. Auswirkungen der Personenfreizügigkeit auf den Schweizer Arbeitsmarkt, Bern: Schweizerische Eidgenossenschaft.

Taxes

#1

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
9
The Swiss tax ratio is significantly below the OECD average, and tax rates, particularly for business, are moderate. Taxation policies are competitive and generate sufficient public revenues. Fiscal federalism (the responsibility of the municipalities, the cantons and the federation to cover their expenses with their own revenue) and Swiss citizens’ right to decide on fiscal legislation have led to a lean state with relatively low levels of public – sector employment so far. Nonetheless, it is important to note that due to the principle of federalism, tax rates can differ substantially between regions, as individual cantons and local communities have the power to set regional tax levels.

However, it should be noted that Switzerland’s apparently small government revenue as a percent of GDP can be attributed in part to the way in which the statistics are calculated. Contributions to the occupational pension system (the so-called second pillar) and the health insurance program – which are non-state organizations – are excluded from government revenue calculations. The share of government revenue as a percent of GDP would be about 10 percentage points higher if contributions to these two programs were included. This would bring Switzerland up to the OECD average in terms of public revenue.

Tax policy does not impede competitiveness. Switzerland ranks at the top of competitiveness indexes, and given its low level of taxation is highly attractive for corporate and personal taxpayers both domestically and internationally. Tax policy has contributed to an excellent balance between revenues and expenditures. Switzerland has very low public debt (29% of GDP in 2016) and a positive financial balance – that is, the government’s revenues exceed spending.

The country’s tax policy has come under pressure from the OECD and European Union because it treats domestic and international firms differently on the cantonal level. The federal government has responded to these pressures, introducing a reform of corporate-taxation policy. This reform should have prohibited Swiss cantons from taxing the profits of domestic and international firms differently (so-called ring fencing). These international firms make a substantial contribution to Swiss tax revenue. In order to keep these firms in Switzerland, the government’s proposal aimed to lower taxes on all firms, regardless of whether they are domestic or international. The reform does accept variation in cantonal tax rates. The Social Democrats have triggered a popular vote on this reform effort, which took place in February 2017 and which rejected the reform proposal. There were two major reasons for the no-vote. First, about a third of respondents said they felt insufficiently informed and were uncertain, and therefore the opted against the reform. Second, another large share of voters thought that the reform was too biased in favor of large enterprises and “the rich.” The public’s rejection of the reform forced the government to find a new solution given pressure from international organizations. After February 2017, the government has developed a new reform, which includes many of the elements of the original draft, but with less generosity for foreign and domestic firms and – in order to increase the likelihood of winning a majority in the popular vote – additional child allowances.

Budgets

#2

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
10
Budgetary policy in Switzerland is fiscally sustainable. Gross public debt (general government) rose from a low 29% of GDP in 1990 to a peak of 52% in 1998, but receded to 29% by 2016. Structurally adjusted budgets were balanced even during the crisis of 2008 and 2009. Since the turn of the century, the federal budget was always in the black or at least balanced, with the government spending less than it received – with the exception of 2002 – 2004. In all likelihood, this positive balance will be maintained over the coming years.


This fiscal sustainability is mainly due to the political decision to have a low tax load and a lean state. In addition, keeping the public deficit and debt low has been a major concern of politicians at all levels of the political system. Various rules and structures have been developed to avoid the dynamics of expanding budgets. For example, on the federal level, there is the constitutional debt brake (Article 126, Article 159): “The maximum of the total expenditures which may be budgeted shall be determined by the expected receipts, taking into account the economic situation.” Recently, the government announced its intention to relax one element of this debt brake. In August 2017, though, an expert commission warned against such a move. Direct democracy offers another effective means of keeping the budget within limits. In popular votes, people have proven reluctant (compared in particular to members of parliaments when elections are drawing near) to support the expansion of state tasks with a corresponding rise in taxes and/or public debt.

Notwithstanding a very favorable fiscal position, the Federal Council pursues moderate austerity programs. Even taking into account the fact that some individual cantonal and municipal governments do pursue unsustainable budgetary policies, the total (i.e., general government) budgetary policy achievement arguably puts Switzerland in the OECD’s top group in terms of fiscally sustainable national policies.

Research and Innovation

#4

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
9
Switzerland’s achievement in terms of innovation is considerable. It spends 3% of its GDP (2013) on research. Standardized by the number of inhabitants, it is an international leader in patent applications, with strengths in health technologies and bio-technology. A total of 75% of research spending is corporate spending with the direct aim of economic innovation, an important factor in the country’s strong overall competitiveness. With a share of about 25%, public research funding plays a lesser role than in other European countries and depends on five main actors: the cantonal universities, the two federal institutes of technology, the National Science Foundation, the Federal Commission for Technology and Innovation, and the academies of sciences. These actors are independent of each other, but cooperate on the basis of complementarity and (although limited) competition. The various institutions are highly autonomous, and research policies and processes are driven by bottom-up operations. Thus, Swiss research policy is not centralized, but rather relies on a concept of decentralized innovation with periodic intervention by the federal government. The output of the research system is impressive. The Federal Institutes of Technology Zürich and Lausanne belong to the top-ranked universities in the world, and the universities of Basel, Bern, Geneva and Zürich regularly appear on the list of the 150 best universities worldwide.

Some deficits persist, however, such as coordination among universities and the new universities of applied sciences as well as the weakness in social science and humanities research relative to that conducted in the natural sciences and technologically.

In 2016, the federal government defined its research and innovation goals for the coming four years: increased support for (1) continuing education in vocational training, (2) young academics, (3) training in medicine and (4) innovation. The resources for education, research and innovation should grow by 2% annually.

Global Financial System

#8

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
8
Switzerland is one of the world’s most significant financial markets. Swiss banks such as UBS and Credit Suisse are global financial players. The post-2007 global crisis and the economic problems of UBS in Switzerland – which forced the Swiss government to intervene massively in order to avoid bankruptcy of this major bank in 2008 – triggered banking reforms within Switzerland. The federal government, bankers and international organizations such as the OECD claim that Swiss private and public actors have been active on the global level in reforming the international banking system, in particular in interaction with the regulatory bodies in the United Kingdom, the United States and the European Union.

After the financial crisis of 2007 and 2008, the government introduced measures to deal with the problem of banks being “too big to fail.” Though it remains unclear whether these new rules and institutions will be sufficient in the event of a major crisis, the Swiss approach numbers among the most sound and prudent systems of regulation worldwide.
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