Sustainability of Fiscal Policy

The indicator for sustainable fiscal policy used in the BAK Taxation Index – i.e. the fiscal gap – measures the financial health of public budgets. The calculations are based on several key indicators which reflect the current status of public finances (debt level, primary balance) and allow for income and expenditure forecasts. The costs of the demographic change (keywords: “aging society”) are at the core of the observations for the fiscal outlook.

 

Sustainably financed locations (fiscal gap below zero with assumed target debt of 60% of GDP) have secured the current tax level for the long term; at unsustainably financed locations, there is a threat of tax increases. The combination of the BAK Taxation Index (current tax rates) and the indicator for sustainable fiscal policy provide a comprehensive picture of the tax attractiveness of a location.

 

Sustainability of Fiscal Policy and Tax Burden for Corporations

 

X axis: Effective average tax burden for corporations in the main locations (exception: Italy: Lombardy); X axis cuts the Y axis at the average tax rate of the countries under review. Y axis: Fiscal gap = Extent by which the primary balance ratio in the base year (2019) would have to be adjusted in order to achieve a gross debt ratio of 60% by 2032; positive values: achievement of target entails improvement of primary balance ratio; negative values: achievement of target ensured even if primary balance ratio deteriorates. Swiss cantons including communes and assigned federal share (including social insurance). Of the Swiss cantons, all project sponsors are shown in blue; the canton with the smallest fiscal gap (CH min = most sustainable canton) and the canton with the largest fiscal gap (CH max = least sustainable canton) are shown in orange 
 
Source: BAK Economics, ZEW

 

Sustainability of Fiscal Policy and Tax Burden for Highly Qualified Individuals

X axis: Effective average tax burden for highly qualified individuals (single, no children, income EUR 100,000) in the main locations (exception: Italy: Lombardy); X axis cuts the Y axis at the average tax rate of the countries under review. Y axis: Fiscal gap = Extent by which the primary balance ratio in the base year (2019) would have to be adjusted in order to achieve a gross debt ratio of 60% by 2032; positive values: achievement of target entails improvement of primary balance ratio; negative values: achievement of target ensured even if primary balance ratio deteriorates. Swiss cantons including communes and assigned federal share (including social insurance). Of the Swiss cantons, all project sponsors are shown in blue; the canton with the smallest fiscal gap (CH min = most sustainable canton) and the canton with the largest fiscal gap (CH max = least sustainable canton) are shown in orange.
 
Source: BAK Economics, ZEW

 

The most important results of the fiscal sustainability report are as follows:

  • By and large, the fiscal policy of the Swiss cantons is more sustainable than in the EU countries under review. At least in international comparison, the financial situation of most Swiss cantons is excellent. It should be noted that the calculations are based on the cantonal finances in the period 2012 to 2016.
  • The excellent performance of the majority of the Swiss cantons is particularly due to comparably low public debt. With respect to the initial budgetary situation, the picture is more nuanced: Most cantons achieve a surplus, some cantons a deficit. Moreover, demographic change will raise costs in all cantons.
  • In terms of locational competition, sustainable fiscal policies ensure that the Swiss cantons are in an excellent position to maintain their international tax attractiveness in the longer term. On top of this, they have more leeway for fiscal adjustments than most locations abroad.

 

Sustainability of fiscal policy


The evaluation of fiscal sustainability in the context of the BAK Taxation Index is based on an EU indicator used to monitor the financial sustainability of the member states (latest publication: ‘Debt Sustainability Monitor 2017’). In specific, this is the ‘fiscal gap indicator S1’ which has been designed to evaluate fiscal sustainability in the (medium-term) period 2019 (base year) to 2032.

 

The fiscal gap indicator depends on a country’s intertemporal budget constraint, which requires that the present value of the target debt plus all future revenue must cover the present value of the initial debt plus all future expenditure. The target debt is assumed to be a debt ratio (government debt as a percentage of GDP) of 60% for all locations. This figure is in line with the Maastricht criteria and ensures comparability of the results of different regional administrative bodies. The impact of demographic change is included in the future expenditure.  

 

The fiscal gap indicator that is derived from the intertemporal budget constrain is defined as the difference between the sustainable primary balance ratio and the primary balance ratio in the base year (the primary balance ratio is consistent with the primary balance – i.e. the difference between primary income and primary expenses – as a percentage of GDP). The sustainable primary balance ratio is the primary balance ratio that would have to be achieved every year starting from the base year (2019) in order to achieve a gross debt ratio of 60% at the end of the reference period (2032). Hence the fiscal gap indicates the extent by which the primary balance ratio in the base year would have to be adjusted to achieve the gross debt ratio of 60%. It should be noted that, according to the interpretation of the fiscal gap, negative values indicate sustainable fiscal policy and positive values non-sustainable fiscal policy.  

 

The following two examples illustrate the interpretation of the fiscal gap: In the BAK Taxation Sustainability Module, Belgium’s fiscal gap amounts to 2.9% and the country’s primary balance ratio in the base year (2019) to -0.9%. This means that, every year in the period 2020 to 2032, Belgium requires a primary balance ratio that exceeds the primary balance ratio in the base year by 2.9% percentage points, i.e. a primary surplus ratio of 2.0% (= sustainable primary balance ratio), in order to achieve a gross debt ratio of 60% in 2032. Conversely, the fiscal gap in the Canton of Lucerne amounts to –1.7% and the primary balance ratio in the base year (2019) to -0.4%. In theory, in the period 2020 to 2032, the Canton of Lucerne can therefore afford an annual primary balance ratio that is -1.7% percentage points lower than that in the base year, i.e. a primary deficit ratio of -2.1% (=sustainable primary balance ratio), and still achieve the target debt ratio of 60% in 2032.  

 

The cantonal data are processed such that the individual cantons include both their communes and a federal share (including social insurance) that is commensurate with their economic performance.

 

Hence, the total of all cantons represents the country as a whole.  

 

A separate methodology paper relating to this study provides a detailed overview of the approach and sources used.

 

Summary, methodology, press release

 

 

Sustainability of Fiscal Policy 2018

 

Methodology paper (German only)

 

Press release