Original Article
Fiscal Rules Cause Lower Debt: Evidence from Switzerland’s Federal Debt Containment Rule
Michele Salvi,
Christoph A. Schaltegger,
Lukas Schmid,
Corresponding Author
Michele Salvi
Faculty of Economics and Management, University of Lucerne, P.O. Box 4466, Lucerne, CH-6002 Switzerland
Search for more papers by this authorChristoph A. Schaltegger
Faculty of Economics and Management, University of Lucerne, P.O. Box 4466, Lucerne, CH-6002 Switzerland
Search for more papers by this authorLukas Schmid
Faculty of Economics and Management, University of Lucerne, P.O. Box 4466, Lucerne, CH-6002 Switzerland
Salvi, Schaltegger (corresponding author), and Schmid: University of Lucerne, Faculty of Economics and Management, P.O. Box 4466, CH-6002 Lucerne, Switzerland. E-mail: michele.salvi@unilu.ch, christoph.schaltegger@unilu.ch, lukasdavid.schmid@unilu.ch
Search for more papers by this authorMichele Salvi,
Christoph A. Schaltegger,
Lukas Schmid,
Corresponding Author
Michele Salvi
Faculty of Economics and Management, University of Lucerne, P.O. Box 4466, Lucerne, CH-6002 Switzerland
Search for more papers by this authorChristoph A. Schaltegger
Faculty of Economics and Management, University of Lucerne, P.O. Box 4466, Lucerne, CH-6002 Switzerland
Search for more papers by this authorLukas Schmid
Faculty of Economics and Management, University of Lucerne, P.O. Box 4466, Lucerne, CH-6002 Switzerland
Salvi, Schaltegger (corresponding author), and Schmid: University of Lucerne, Faculty of Economics and Management, P.O. Box 4466, CH-6002 Lucerne, Switzerland. E-mail: michele.salvi@unilu.ch, christoph.schaltegger@unilu.ch, lukasdavid.schmid@unilu.ch
Search for more papers by this authorSUMMARY
This paper studies the effect of the Swiss federal debt containment rule on public debt. Using the synthetic control method, we provide evidence that the introduction of the federal rule in 2003 has reduced public debt ratio in Switzerland by 2.5 percentage points on average until 2010. By exploiting possible mechanisms, we find no evidence that the reduction in debt ratio was driven by a debt relocation to sub-government levels or cutbacks in investment expenditure. On one hand, we argue that the positive impact of the fiscal rule is based on its design features, namely its precise but cyclically adjusted target, the comprehensive scope to prevent budget loopholes, and the strict sanction mechanism. On the other hand, we also discuss the generalizability of our findings to other countries and contend that its direct democratic authorization has contributed to its political enforcement and viability.
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