The Swiss Put the Brakes on Debt. Why Didn’t We?

‘There is carnage in the bond market,” declared Saxo’s Neil Wilson amid this month’s global sell-off. British ministers keenly cite these “global factors” behind our rising yields. American interest rate rises and Middle Eastern oil shocks affect investors everywhere, they say. Listen carelessly and you might think Britain an innocent bystander to its predicament.

Unfortunately, such thinking has permeated Westminster for two decades. The financial crisis, pandemic and Ukraine war were all shocks emanating abroad, supposedly leaving successive chancellors little choice but to approve vast debt. Only the Truss mini-budget is cleanly admitted as our mistake, with other external forces driving yield spikes since.

Well, somebody forgot to tell Switzerland about these inescapable global forces. Its ten-year bonds yield 0.54 per cent, and our gilts yield ten times that. Over the past year, British yields have risen 0.8 points and Swiss yields 0.3. Since 2021, ours have climbed more than four points and theirs six-tenths of one.

This isn’t proof that Britain’s higher debts caused the recent yield moves. Swiss inflation, the franc and monetary policy differ markedly. But it raises the question: why are some governments better placed to absorb these global upheavals? One reason is that Britain has talked incessantly about fiscal discipline since 2010, whereas Switzerland delivered it, leaving its taxpayers less exposed to interest rate risk.

In 2001, nearly 85 per cent of Swiss voters approved a constitutional “debt brake” amid worries about deficits. This limits most annual spending, including investment, to expected tax receipts, adjusted for the economic cycle. In other words, annual spending is capped at the level of sustainable tax revenues.

Budgets do not need to be balanced every single year. If a downturn depresses receipts, spending can broadly continue, with borrowing covering the gap. In booms, however, governments must run surpluses. Over time, the budget balances. And this specific set-up disciplines politicians. If they want new permanent spending, they first must raise revenues, or wait until growth improves, to finance it. Issuing more bonds is not an option.

Unlike in Britain where our fiscal promises recede into the forecast horizon, the Swiss rules, with constitutional underpinning, have teeth. Governments cannot rewrite them on budget day when the numbers turn awkward. If forecast errors result in over-borrowing, the mistakes are chalked up in a compensation account, to be corrected through tighter future budgets.

Even emergency spending is constrained. The Swiss parliament can authorise extraordinary borrowing, as it did for the pandemic or for Ukrainian refugees. Yet they typically must pay this back within six subsequent years. Knowing those bills must be settled quickly makes politicians less likely to borrow vast sums during crises.

The results are astounding. In 2007, Britain and Switzerland had almost identical gross government debt burdens, at 43 and 44 per cent of GDP, respectively. Nearly two decades and several global crises later, Switzerland’s has fallen to 39 per cent, while ours has doubled to 102 per cent, according to the International Monetary Fund. And the gulf keeps widening. Last year the Swiss ran a budget surplus of 0.5 per cent of GDP, while Britain borrowed another 5.4 per cent.

Politicians were aware of the Swiss approach. In 2012, the Conservatives’ Free Enterprise Group, led (ironically) by Liz Truss and Kwasi Kwarteng, proposed a British debt brake rule modelled on Switzerland’s, arguing that George Osborne’s fiscal constraints were not demanding enough.

Instead, Britain adopted “rolling” deficit targets years away. On average, a recent Institute for Fiscal Studies analysis shows that chancellors since 2010 have aimed to borrow 1.1 per cent of GDP by year five of their forecast. Actual borrowing has averaged 3.8 per cent, even excluding 2020. We continually underestimate the red ink.

The point is not that Switzerland escaped global shocks, nor that debt alone sets bond yields. It is that governments choose how vulnerable we are when those yield shocks arrive. Our politicians chose badly.