Switzerland’s fiscal policy: defence spending tug-of-war

The “Zytglogge” in Bern is lit up in the Ukrainian national colours to mark the anniversary of the outbreak of war, Friday, February 24, 2023. Keystone/Christian Beutler

“We live in unprecedent times” is a common refrain in speeches and the news. When it comes to Swiss fiscal policy, is it enough to justify extraordinary spending and overriding the country’s ‘Debt Brake’?

In 2022, the Swiss parliament decided to increase defence spending to 1% of gross domestic product (GDP) by 2030. This would mean an increase from CHF5.5 billion to CHF10 billion ($6 billion to $11 billion). However, Switzerland’s billion-franc deficit and its Debt Brake policy led parliament to later rethink this decision, even as the war in Ukraine has brought about a new era of rearmament throughout Europe.

Now the Centre Party has presented a bid for a new CHF15 billion package: some CHF10 billion of it on military spending and CHF5 billion on reconstruction aid for Ukraine.

Parliament’s Security Policy Committee has thus put two financing options on the table: boost the defence budget while maintaining the Debt Brake – by tightening spending in other areas – or provide the financing via extraordinary funding. However, the government has remained steadfast in its outlook – military spending is not an uncontrollable situation that requires special funding.

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Finances vs security

If security is not guaranteed, we can also forget about finances: this is the position of Centre Party parliamentarian Andrea Gmür and other politicians who support the use of extraordinary spending to fund the military and Ukraine.

Outside Switzerland, the willingness to fork out more for security is accelerating. NATO, to which even neutral Switzerland has recently moved closer, encourages its members to spend at least 2% of their GDP on defenceExternal link.

Despite budgetary problems and economic growth of only 0.8% expected this yearExternal link, British Prime Minister Rishi Sunak has vowed to increase UK defence spending to 2.5% by 2030. He has also pledged an additional £500 million (CHF571 million) for Ukraine, on top of £2.5 billion already allocated.

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In 2023, the UK spent 2.07% of its GDP on defence and estimates it will spend 2.3% this year. Sunak made the announcementExternal link during an official visit to Poland.

Poland shares a border with both Russia and Ukraine, making it especially sensitive to the conflict. And as the war continues, the country has been on alert; in 2023 it spent 3.9% of its GDP on defence – well beyond NATO’s recommendation.

NATO’s newest member, Sweden, is meanwhile not coming to the alliance “empty handed”, writes PoliticoExternal link. While Sweden spent $9.2 billion – 1.54% of its GDP – on military spending in 2023, the country has since announced a major budget increase to ensure that the country will reach NATO’s 2% targetExternal link this year.

All bark, no bite?

French President Emmanuel Macron has been a steadfast supporter of Ukraine. In March Macron told European nationsExternal link that now was not the time to be “cowardly” and that even sending troops to Ukraine should not be off the table.

France is set to meet the 2% target this year after also dramatically increasing its defence spending to €47.2 billion. It has stated that this number will eventually reach €69 billion. But after Macron signed a defence agreement in February, pledging up to €3 billion in support for Ukraine this year, it remains unclear how France will fund its commitments. The French government has announced measures to cut €10 billion in spending, and with a budgetary situation reported to be “unhealthy”External link, the country’s growth forecast for the year has dipped from 1.4% to 1%.

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Conflicts abroad – debate at home

Since 2022, Switzerland’s foreign policy and neutrality have been under scrutiny on the global stage. And still, the government will not budge on its steadfast assessment that Switzerland is to maintain its neutral position. Even as much of the world is actively arming itself, Switzerland’s large armament industry is taking a hit.External link The primary reason: strict export regulations, which forbid selling or reexporting arms to countries at war – like Ukraine.

Rheinmetall, a German automotive and arms manufacturer, is now producing far less weapons in Switzerland because of the country’s strict export rules. “Our European neighbours and our most important customers have lost confidence in Switzerland and are no longer placing orders with us. One example is the Netherlands: it has decided to stop procuring Swiss defence equipment as a matter of principle,” says Matthias Zoller from the SWISS ASD (Aeronautics, Security and Defence) group – an association of internationally active security and defence technology and aviation companies under the umbrella of Swissmem.

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The Swiss government failed to comply with the debt brake in 2023 for a second year in a row. And the finance ministry expects government debt to rise from CHF127 billion in 2023 to CHF129 billion next year. Then, if there are “no more nasty and expensive surprises around the corner, that debt mountain could start to reduce from 2026,” writes SWI swissinfo.ch journalist Matthew Allen.

But while it could seem that Switzerland was trying to “wait it out”, the conflict in Ukraine is not looking like it will end anytime soon. Parliament’s discussion of a CHF15 billion deal for reconstruction aid to Ukraine and military funding in Switzerland makes it clear that the issue can’t be avoided – the country will have to decide on how it will close ranks with its European allies.

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However, the funding package still needs to be approved by both chambers of parliament. And unclear political party positions present a challenge. Even within the Centre Party itself, which proposed the bill, not all are in agreement. Other parties on the left also reportedly face internal divisions regarding the proposalExternal link.

With the upcoming Ukraine peace conference set to take place in Switzerland in mid-June, the Swiss government might soon be forced to make a concession on its neutrality. And this could come at a cost to its budget.

Edited by Marc Leutenegger/dos