Federal-Cantonal Equalization in Switzerland: An Overview of the Reform in Progress

Abstract

Fiscal equalization in its present form in Switzerland is placed under strong criticism: for the last three decades, it has piled up ad hoc changes and new programs without a global vision; it mixes macroeconomics with taxation and approximate public expenditure estimation; it lacks transparency and visibility. in one sentence: it is time for change. Is this diagnosis too severe? What should and can be changed? Which reform is possible in the short or medium term? This paper tries to answer these questions in two parts. the first one describes the equalization programs currently in place and evaluates their policy performance. the second exposes the difficult pace of reform and explores the workings of the new system. Changes have been fiercely debated in the last three years and the final result will be submitted to national vote in the Fall of 2004. There are four issues of interest in this case study: (i) the combination of fiscal equalization with a re-assignment of functions between the federal and cantonal tiers; (ii) revenue and cost equalization as twins in the project; (iii) a shift in the measure of fiscal capacity of the constituent States from a predominantly macro to a Representative Tax System; (iv) the transition from the present to the new system as a purely political outcome. of course, the answers to the above questions are specific to Switzerland, but sharing this particular experience may help in understanding other equalization systems.