Pandemic debt mountain casts shadow over growing inequality

Are the chips stacking up too much in favour of the wealthy in Switzerland? © Keystone / Gaetan Bally

Pandemic debts are piling up as tax revenues slow to a trickle and wealth inequality widens. How will Switzerland negotiate debt repayment whilst maintaining social cohesion?

The numbers are eye-wateringExternal link: the state spent CHF17 billion ($18.3 billion) on containing coronavirus in 2020 and is forecast to part with another CHF23 billion this year. The state is also gauranteeing billions in emergency loans to companies.

This will take at least a decade to clear, and probably more, according to Christian Keuschnigg, a professor of economics at the University of St Gallen. “This cannot be paid off within a couple of years without triggering big disruptions in society,” he told swissinfo.ch.

The question is: how to do this fairly? It is the same question being faced by most countries around the world. Britain, for example, has frozen income tax exemption thresholds to capture more revenues in the coming years.

One of the features of this crisis is the disproportionately severe impact for lower income earners. Households bringing in less than CHF4,000 a month have seen a 20% fall in incomes during the pandemic, compared to an 8% drop for those on more than CHF16,000. This is a finding of a survey conducted by the KOF Swiss Economic Institute. The strain on savings and job security is also more acute for the less well-off.

At the same time, the wealthy have been getting richer. Between 2004 and 2017, people worth more than CHF10 million (around 0.3% of all taxpayers) have increased their share of total Swiss wealth from 19.5% to 32%, Swiss public broadcaster SRF calculates, using data from the tax authorities and the economics magazine Bilanz.

This has led to calls for tax changes to redistribute wealth and the burden of paying off the pandemic debt. KOF head Jan Egbert Sturm has suggested a Covid-19 solidarity tax, levied on businesses, such as online stores and pharmaceutical firms, that have seen revenues grow during the crisis.  “We could think about raising profit tax for the crisis winners and using this money to support the losers,” he told the Blick newspaper. Generating more revenues would be preferable to cutting state spending just as the economy is crying out for stimulation, he added.

Other mooted options include raising wealth tax or introducing a federal inheritance tax in Switzerland. “Swiss wealth tax does not result in a big redistribution of wealth,” Zurich university economics professor Florian Scheuer told SRF. “We have a relatively low top rate of 1% at most and a low threshold, which means it is not just targeted at millionaires or billionaires.”

“Inheritance tax is an obvious instrument for reducing wealth inequality in the long run.”

But such changes might run into opposition, and not just from business lobby groups that reject Sturm’s solidarity corporate tax idea. Swiss voters have consistently turned down such schemes at the ballot box. A people’s initiative to introduce a federal inheritance tax was rejected in 2015. The previous year, a suggested minimum wage was also kicked out. And despite some cantons, notably Zurich, ditching special tax perks for ultra-rich immigrants, a 2014 vote to ban the practice nationwide also failed.

Christian Keuschnigg is sceptical of radical changes to the tax code. Instead, he advocates a general overhaul of social welfare, an over-complicated taxation system and a creaking pension scheme. Raising the age of retirement is now unavoidable, he says. The government has proposed raising the retirement age of women by one year to 65, the same as men.

Switzerland is better placed than most countries, thanks in part to a “debt brake” mechanism, introduced in 2003, that pays off debts in good times to keep levels manageable over a long period. “In most countries there is a danger of big tax increases, which will stall growth” he said. “Switzerland is in a better position to pay back its debts in a more balanced way, by restraining expenditure growth and with moderate tax increases.”

For Keuschnigg, the key to maintaining a stable economy and society is to protect as many jobs as possible and keep unemployment rates low.

Inequality in Switzerland

Research by BAK Economic Intelligence and Bank ClerExternal link suggests that the gap between rich and poor in Switzerland barely moved between 2007 and 2017 – a period that encompasses the financial crisis.

Researchers trawled through tax records to calculate the Swiss Gini coefficient. This is a statistical tool to determine income distribution on a scale of 0 (perfect equality) to 1 (total inequality). Switzerland’s score was 0.47 in 2007 and 0.48 a decade later.

However, the authors warned that the Covid-19 pandemic would most likely result in far greater inequality than the 2007/8 financial crisis.