Cantons count cost of reduced SNB handouts

The SNB will be giving cantons less funding this year AFP

Faced with shrinking corporate tax revenues and higher costs, Swiss cantons must now also cope with a reduction – or even the total loss – of central bank funding.

Earlier this week, the Swiss National Bank (SNB) announced that the excess profits it hands out to central government and cantons would shrink by at least two thirds next year and evaporate completely in the worst case scenario.

The SFr2.5 billion ($2.7 billion) handout that has been distributed among the 26 cantons since 2002 is a small, yet still significant, part of their annual budget. On average, the payment equates to just over two per cent of a canton’s expenditure and 4.6 per cent of income from direct taxes.

In times of economic prosperity, a cut in this income would present less of a problem. But some cantons, such as Zurich, are currently experiencing a sharp drop in corporate tax revenue as company profits fall.

In addition, changes to the health insurance legislation will soon increase the financial burden on cantons to fund hospitals.

Late timing

Christian Wanner, President of the Conference of Cantonal Finance Directors, said the news had come at the worst possible moment. “Of course the lower, and possibly even lost payments will be very painful for cantons,” he told swissinfo.ch.

The central bank had issued a warning earlier this year, but the deal to pay a maximum SFr1 billion was only declared on Monday.

“This poses serious problems for the cantons for the already difficult exercise of setting budgets,” Pascal Broulis, finance chief of canton Vaud, told swissinfo.ch. “The lateness of this decision has only compounded the problem.”

Cantons are subject to strict legal limits on the amount of debt they can rack up. Several will reduce spending next year while at least one is contemplating a tax hike.

Those that ignored the warning signs and committed SNB payments to financing infrastructure projects have the most to fear from the cuts, says Bernard Dafflon, professor of public finance at the Fribourg University.

“Crazy” system

Dafflon said that some cantons had become overly reliant on this volatile source of income. It should have been used instead to reduce debt as a buffer against times of hardship, he insisted.

“The cantons are up in arms at the central bank, but many only have themselves to blame,” he told swissinfo.ch. “The cantons should have treated the SNB payments as a bonus windfall, but some of them used it as regular income in their budgets.”

Dafflon was also critical of the whole system of SNB payments that has raised false expectations.

“This is a crazy system that has created an indirect link between Swiss monetary policy and the cantonal budgetary system,” he said. “Cantons claim they are independent but this has made them partially reliant on an institution that never had a core mandate to enrich them.”

Squeezing francs from stone

This is not the first time that the cantons have fallen out with the central bank over payments. Created in 1907, the SNB is partially owned by the cantons that can claim an annual dividend on profits.

Furthermore, the SNB is obliged to hand over two-thirds of its surplus profit each year to cantons, with the other third going to central government.

While the franc was backed by gold, the SNB generated little profit as its gold reserves did not yield income.

But the currency’s break with gold in 1971, coupled with a switch to floating exchange rates in 1973, saw the bank change strategy to dabbling in the volatile currency markets – that could produce huge swings in profit and loss.

In 1992 the SNB finally caved in to growing pressure and agreed to hand out a regular amount of excess profits to the central government and the cantons. Initially set at a maximum of SFr600 million ($652 million) per year, the payments were raised to SFr1.5 billion in 1998 and SFr2.5 billion in 2002.

No blame game

A massive sell-off of gold saw this figure swell to a one-off windfall payment of SFr24 billion in 2005, but the “normal” annual handout of SFr2.5 billion was reaffirmed in a 2008 agreement.

The system fell apart when the SNB was forced to intervene in the currency markets in 2009 and 2010 to stem the rising value of the franc. Driven by a desire to stave off deflation and to protect exporters, the central bank racked up losses of SFr21.5 billion last year.

But Wanner refused to criticise the SNB’s actions that have left a SFr5 billion hole in its cantonal distribution fund.

“The Conference does not question the decisions of the SNB and supports its management of the current extraordinary monetary situation,” he said, exercising diplomacy in deference to the SNB’s independence and legal protection from political interference.

Slim pickings

The SNB paid out SFr2.5 billion ($2.7 billion) to the 26 cantons this year despite a SFr5 billion hole in its distribution reserve.

The following list shows how much each canton received and what it can hope to get next year in the best case scenario (in brackets).

Zurich: SFr292 million (SFr116.6 million)

Bern: SFr209.3m (SFr83.3m)

Vaud: SFr150.6m (SFr60m)

Aargau: SFr127.5m (SFr51m)

St Gallen: SFr101.3m (SFr40m)

Geneva: SFr96.9m (SFr38.6m)

Lucerne: SFr79.2m (SFr31.3m)

Ticino: SFr71.3m (SFr28m)

Valais: SFr65.2m (SFr26m)

Fribourg: SFr58.5m (SFr23.2m)

Basel Country: SFr57.9m (SFr22.6m)

Solothurn: SFr53.9m (SFr21.3m)

Thurgau: SFr52.1m (SFr16.7m)

Graubünden: SFr41.6m (SFr16.6m)

Basel City: SFr41m (SFr16.4m)

Neuchâtel: SFr36.8m (SFr14.7m)

Schwyz: SFr30.7m (SFr12m)

Zug: SFr23.7m (SFr9.3m)

Schaffhausen: SFr16.2m (SFr6.5m)

Jura: SFr14.7m (SFr5.9m)

Appenzell Outer Rhodes: SFr11.3m (SFr4.5m)

Nidwalden: SFr8.6m (SFr3.3m)

Glarus: SFr8.2m (SFr3.3m)

Uri: SFr7.4m (SFr2.9m)

Obwalden: SFr7.4m (SFr2.9m)

Appenzell Inner Rhodes: SFr3.3m (SFr1.3m)