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)
Walter Moser, Economist, Conference of Cantonal Governments, Berne

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 from the bottom up

3. The three political levels
The Confederation
The 26 cantons
2‘721 communes

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

8. Public sector revenue 2005

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 Weak 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

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

16. Effects of resource equalization

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