FDF - Federal Department of Finance of the Swiss Confederation

04/23/2024 | Press release | Distributed by Public on 04/23/2024 05:06

Fiscal sustainability: How ageing and climate protection affect public finances

Fiscal sustainability: How ageing and climate protection affect public finances

Federal Department of Finance

Bern, 23.04.2024 - How will the finances of the Confederation, cantons, communes and social insurance funds develop in the long term? The "2024 fiscal sustainability report for Switzerland" shows that public finances will come under increasing pressure until 2060. It focuses on the effects of demographic change. For the first time, the report also estimates the long-term financial impact of climate protection measures aimed at achieving the net-zero target.

The Confederation is facing structural deficits of up to CHF 4 billion in the coming years. In such challenging times, it is particularly important to prepare financial policy decisions with a view to potential long-term developments. The "2024 fiscal sustainability report for Switzerland" provides a basis for this. Based on various assumptions, it projects the long-term development of public finances at all levels of government up to 2060. Two key structural developments, ageing and climate change, are the main topics. Both policy areas will pose major challenges for public finances in the medium to long term, whereby the projections are based on wideranging assumptions and are inevitably associated with uncertainties.

Demographic change impacts public finances

If the economy and demographics develop as assumed, the projections show that demographic-related expenditure will increase from 17.2% of gross domestic product (GDP) to 19.8% of GDP by 2060. If no reforms are made, public debt would rise from the current 27% to 48% of GDP. The need for reform is particularly pronounced at federal (including social security) and cantonal level. While AHV expenditure in particular poses a challenge for the Confederation, especially after the adoption of the popular initiative for a 13th AHV pension payment, cantonal finances are coming under greater pressure, particularly in terms of healthcare expenditure.

First quantitative estimate of the impact of climate protection measures

With the Federal Act on Climate Protection Targets, Innovation and Strengthening Energy Security (CIA), Switzerland made a legal commitment to reduce its greenhouse gas emissions to net zero by 2050. A pilot study as part of the current edition of the fiscal sustainability report projects for the first time the additional burden of extending climate protection measures on public finances. The costs of climate change itself and those of adaptation measures could not be quantified due to insufficient data. The benefits of climate protection in terms of climate-related damage averted and the associated cost savings have therefore not yet been taken into account. For now, the analysis is therefore limited to the costs of climate policy.

Under the assumptions made, the projections show that the path to net zero will primarily place a financial burden on the federal government and the social security funds. This is because climate protection measures dampen economic growth and thus also the growth in public receipts. The electrification of the transport sector will also lead to a loss of revenue from mineral oil tax and the performance-related heavy vehicle charge (LSVA). However, the study assumes that these can be offset by replacement levies. Greater use of subsidies in the climate policy will further increase the pressure on public finances. In 2060, depending on the policy scenario, the general government debt ratio would be 8% to 11% higher than without climate protection measures. Although no robust international or Swiss estimates are yet available, scientists agree that the costs of climate change for public finances will be significantly higher than the costs of climate protection measures.

Projections, not forecasts
The first report on the long-term sustainability of public finances (fiscal sustainability) appeared in 2008. Published each year, they contain calculations and statements based on "if-then" scenarios and are projections, not forecasts. The methodology for analysing the effects of ageing on public finances is based on the approach used by the European Commission, the OECD and the International Monetary Fund. As demographic and economic developments are subject to significant uncertainties, various scenarios are used. It is also assumed that the fiscal rules, including the federal debt brake, do not apply. This is to emphasise the need for action in terms of fiscal policy.
The analysis of the impact of climate protection measures to achieve the net-zero target on public finances is a pilot initiative. Switzerland is one of the first countries in the world to undertake this type of estimate. There is therefore no internationally established procedure as yet.

Address for enquiries

Federal Finance Administration, Philipp Rohr,
Tel. +41 58 465 16 06, [email protected]


Publisher

Federal Department of Finance
https://www.efd.admin.ch/efd/en/home.html

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