The debt brake provided a specific and workable expenditure rule, which takes account of the economic cycle, allows clearly defined exceptions and contains a predefined set of sanctions. The debt brake is enshrined in the Federal Constitution, and the exceptions and the sanctioning mechanism are defined in the Federal Act on the Federal Financial Budget. Under the sanctioning mechanism, if a stipulated limited is exceeded, the excess amount must be recouped within the next three years. Thus, the debt brake provides Switzerland with a rule at federal level which fulfils the requirements for a good fiscal rule. Stability is reflected in the level of sovereign debt, which is moderate by international standards. Should a need for fiscal policy action arise, fiscal policy’s room for manoeuvre would be unimpaired. In the most recent financial and economic crisis, fiscal policy in Switzerland has primarily relied on the effects of automatic stabilisers, and has been sparing in its use of discretionary stabilisation measures. Nevertheless, in view of the severity of the crisis, the Federal Council initiated targeted discretionary measures, in line with the debt brake requirements. However, as mentioned, the debt brake also allows for exceptions in certain unusual circumstances. This exceptions rule made it possible to provide UBS with temporary support in 2008, without jeopardising the Confederation’s ability to fulfil its normal mandate. 12 There is another reason for restraint in discretionary fiscal policy. The impact of a government economic stimulus programme in a small open economy such as Switzerland is slight.

2  BIS central bankers’ speeches  allocation of resources and capital is improved. Fiscal policy can benefit from this, because a steady economic cycle means more stable receipts and expenditure. Fiscal policy also facilitates the planning of economic decisions, when it is focused on stability. A balanced budget allows relatively constant taxation. But if a government is heavily in debt, there is a danger that households will save rather than consume, despite a low level of taxation, because they are expecting future tax increases (Ricardian equivalence). Economic policy stability reduces uncertainty and thereby creates favourable conditions for economic growth. In such an environment, the central bank is able to focus entirely on its mandate of maintaining price stability. So successful monetary policy is predicated on healthy fiscal policy, and vice versa. To achieve stability and prosperity in the long term, fiscal and monetary policy must both focus on sustainability. When that happens, tension can be avoided. Good rules limit discretionary freedom To achieve as tension-free an economic policy as possible, fiscal and monetary policy implementation thus has to focus on stability. But how can this be guaranteed? The freedom of action of a central bank, in particular, is considerable, given that it has the note-issuing privilege and implements monetary policy independently of political considerations. But in fiscal policy, too, the government and parliament enjoy a relatively large amount of discretion in the performance of their mandate.