When I wrote yesterday about Germany, I could imagine readers shrugging their shoulders and thinking it was just another column about European decline. Indeed, I’ve written similar columns about other welfare states such as France, Italy, Spain, and the United Kingdom. Though not all European nations are the same. I wrote back in May, for instance, about Denmark moving in the right direction.
For purposes of today’s column, however, I want to look at Switzerland.
More specifically, I want to compare Switzerland’s prudence and Germany’s decline. Here’s a chart, based on the IMF’s database, comparing annual growth of overall government spending in the two nations. As you can see, Germany has increased the fiscal burden of government at a much faster rate than Switzerland since 2015.
From an economic perspective, the best way of measuring the burden of government is to see what share of a nation’s economic output is being consumed by the public sector.
Switzerland is much better than Germany in that regard, with 32.1 percent of GDP diverted to government compared to 49.9 percent of GDP going to government in Germany.
But trends also are important, and this next chart shows that the economic burden of government spending has dramatically increased in Germany (and fallen slightly in Switzerland).
I’m tempted to highlight the critical role of Switzerland’s spending cap and conclude this column. But since the majority of my readers are from the U.S., let’s expand today’s analysis by including data on what has happened to government spending in America over the same time period. Lo and behold, we see that politicians in the United States have been even worse than German politicians.
However, since the United States has enjoyed faster economic growth, the government/GDP ratio has not deteriorated as much. Here’s a chart showing how the burden of government spending has increased in the U.S., but fortunately not as much as it has expanded in Germany.
The should-be-obvious takeaway is that lawmakers should strive for both spending restraint and faster growth. That’s the recipe for shrinking the burden of government spending. At this point, I could wrap up with another endorsement of Switzerland’s spending cap. But I want to make one final point.
I recently saw on Twitter this analysis of interest rates in six key nations, including Germany, Switzerland, and the United States. Notice that interest rates are trending higher in every country other than Switzerland. Why? Because investors can look at Swiss fiscal policy and feel confident that there won’t be a future crisis.
Yes, Switzerland did make the mistake of spending more money during the pandemic, and that pushed up interest. But not nearly as much as spending increased and interest rates rose in the other five nations.
The moral of the story is that investors obviously are much less concerned about a potential default (or some other type of fiscal crisis) in Switzerland. And they obviously are much less worried about politicians using the printing press to finance budget deficits (which also would push up interest rates).
So now I’ll conclude by saying that the United States (as well as Germany, Australia, Canada, and the United Kingdom) should copy Switzerland’s spending cap.
You can click here to learn more about that much-needed reform.
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