SWITZERLAND

The Swiss Confederation is a parliamentary federal state composed of 26 cantons. Swiss federalism is a bottom-up system where cantons enjoy far-reaching autonomy to the extent that their sovereignty is limited by the Federal Constitution. Both cantons and municipalities have a large degree of political, administrative and fiscal autonomy.

The 1848 and 1999 Swiss Constitutions define a system of direct democracy, also called half-direct or representative direct democracy. Therefore, Switzerland has a particularly developed direct democracy system beyond direct election voting, whose main components are the submission of laws by way of popular initiatives, and optional and mandatory referendums.

At the federal level, legislative power is vested in a bicameral parliament made up of the National Council (lower house) and the Council of States (upper house). Members of both houses, directly elected for four-year terms, represent the cantons: the 200 seats in the National Council are distributed in proportion to each canton’s population, whereas each canton has a determined number of seats, between one and two, in the Council of States (46 seats in total). The executive power is vested in the Federal Council, composed of seven members, elected by Swiss citizens for four-year terms, and headed by the President of the Federal Council, elected yearly by the Federal Assembly. Art. 175 of the Constitution specifies that the composition of the Federal Council shall reflect the regional and linguistic diversity of the country as Switzerland is composed of four linguistic regions (German, French, Italian and Romansh).

At the subnational level, the Constitution defines the federation and establishes the autonomy and sovereignty of the cantons (Art. 1 and 3) and grants them both organisational and financial autonomy (Art. 47) in the determination of their tasks based on the subsidiarity principle (Art. 5). Municipal autonomy is also enshrined in the Constitution (Art. 50).

At the regional level, the 26 cantons are subdivided into 20 cantons and six half-cantons but this subdivision is historical and has less significance today. The 26 cantons each have their own constitution, parliament, government and courts. Cantonal governments comprise five to seven members, directly elected by the people. Cantonal parliaments (the great council), named under various appellations depending on the canton, have a single chamber comprising between 50 to 180 members directly elected, whose mandate varies from one canton to another. They are presided by a president typically for one year, or for the entire legislative period (Vaud and Geneva). The executive body is the state council and is composed of members elected by the great council or by citizens. Its mandate differs from one canton to the next. The democratic functioning of the two cantons of Appenzell Rhôdes-Intérieures and Glaris is unique: once a year, the citizens of the canton as a whole gather in the cantonal capital and collectively elect, by a show of hands, the canton’s executive authorities, and discuss cantonal laws.

At the local level, two types of deliberative bodies govern the municipalities (communes): the municipal assembly and the municipal/general/local council. The first type is more common (80% of cases) and consists of a system of direct democracy as it is composed of citizens who have the right to vote; the second, the municipal council, is a parliament composed of representatives elected by the citizens via direct universal suffrage for a mandate that varies across cantons. Below 1 000 inhabitants, the choice between the two formulas is open but over 1 000 inhabitants it must be a municipal council. The executive power is called an administrative/municipal/local council and is composed of members elected either by direct universal suffrage or by the municipal council for a mandate varying from four to five years, depending on the canton. It is presided over by a mayor, syndic or president, also depending on the canton. Most communes hold an annual assembly where citizens can vote on issues put before them.

An important federalism reform, which entered into force in 2008 and was recently amended in 2020, improved the fiscal equalisation system and clarified the assignment of responsibilities between the federal government and the cantons (RPT). It also provided incentives and the mechanism for the formalisation of inter-cantonal cooperation agreements, in order to avoid fragmentation and unproductive “beggar-thy-neighbour” scenarios. The reform reaffirmed the principles of subsidiarity and fiscal equivalence. Since 2008, Switzerland has further clarified federal and cantonal roles in specific policy areas, and the federal parliament has also asked the Federal Council to undertake an assessment of the tasks shared between the Confederation and the cantons and note for each whether it should remain a joint task or whether it should be transferred in full to the federal or the state level.

There is no institutionalised vertical coordination (such as through a council or forum) between the Confederation and the Cantons. However, the federation may cooperate and participate in some inter-cantonal agreements and conferences. In addition, since 2001, the Tripartite Conference on Agglomerations (TCA) has served as a political forum to increase cooperation between the Confederation, cantons, towns and municipalities on the implementation of a joint policy for the Swiss agglomerations. In 2017, the TCA became the “Tripartite Conference” and its scope was extended to rural areas and mountainous regions, becoming a collaborative forum between the Confederation, the cantons and the municipalities focusing on different political issues.

The New Regional Policy (NPR), implemented in 2008 and which is now in its second phase (2016-2023), focuses in particular on strengthening the innovative capacity and competitiveness of peripheral regions (mountain regions, other rural regions and border regions of Switzerland), as well as the cohesion between cities and the countryside. The NPR 2022 Monitoring report shows that 1 614 projects were already implemented from 2016 to 2020, with an initial financial support from the Confederation of CHF 391 million, which triggered total investments of CHF 2.2 billion.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	STATE LEVEL	TOTAL NUMBER OF SNGs (2022)
2 148 municipalities (commune, gemeinden, comuni)		26 states (canton, kanton, cantone)
Average municipal size: 4 021 inhabitants
2 148		26	2 174

OVERALL DESCRIPTION: The Swiss Confederation has a two tier system of subnational governments composed of 26 cantons and 2 148 municipalities (as of January 1, 2022).

STATE LEVEL: Cantons play an important role in Switzerland’s decentralised government, as they define former states that gathered in 1848 to create the Confederation, devolving part of their sovereignty. The canton of Jura is the only exception as it was created in 1979 after its secession from the Berne canton. Their organisation varies across jurisdictions. The most populous canton as of 2020 is Zurich (1.5 million inhabitants), while the least populous is Appenzell Rhôdes-Intérieures (16 128 inhabitants), the cantonal average size being around 331 thousand inhabitants in 2020. Switzerland is also divided into 7 planning regions (grandes régions) for statistical purpose.

Regional economic disparities in Switzerland are among the lowest within the OECD at TL2 level, with Eastern Switzerland having a GDP per capita corresponding to 70% of Zurich in 2018. Disparities are more acute between cantons (TL3 level); the canton of Uri had a GDP per capita equivalent to 52% of Zurich’s GDP per capita in 2018.

MUNICIPAL LEVEL: Municipalities are governed by the constitution and legislation of the cantons to which they belong. As a result, municipal organisation differs from one canton to the next. Swiss municipalities are small on average, compared to the OECD average municipal size of 10 254 inhabitants. The median size is even much smaller (1 527 inhabitants). 82% of municipalities have fewer than 5 000 inhabitants and even 58% fewer than 2 000 inhabitants, while only 2% have more than 20 000 inhabitants.

To reduce municipal fragmentation, several cantons (Thurgovie, Fribourg, Vaud, Tessin, Grisons, etc.) have encouraged mergers through financial and political incentives. The number of municipalities has progressively decreased, resulting in a reduction of 30% of the number of municipalities between 2000 and 2017. Between 2017 and 2021, the number of municipalities continued to decrease, from 2 222 to 2 148.

HORIZONTAL COOPERATION: Horizontal cooperation occurs in Switzerland both at cantonal and municipal levels. The cantons institutionalised horizontal collaboration in various policy areas through so-called “cantonal conferences” and, since the 2004 fiscal federal reform, through the “house of the cantons”. The interests of Swiss municipalities are represented at the federal level by several associations, including the Association of Swiss Municipalities and Union of Swiss Cities, which represents the interests of mainly Swiss urban municipalities.

In addition, Inter-municipal cooperation is another way of reducing fragmentation that has been chosen by certain cantons. In fact, inter-municipal arrangements are becoming increasingly popular, and the large majority of Swiss municipalities are members of an inter-municipal cooperation arrangement, mostly used in water distribution, sewage treatment, waste treatment, fire service, primary education, and public safety. These may take many different legal structures (e.g. administrative contracts, inter-municipal agreements, municipal associations, etc.).

According to the principle of subsidiarity, which is enshrined in the Constitution, competences are vested at the cantonal level and can only be transferred to the Confederation when the lower level is no longer able to provide a service "efficiently" (Art. 5). Only very few policy areas fall exclusively under the competences of the Confederation (foreign affairs, monetary policy and armed forces). As specified in Article 3, all tasks not assigned to the Confederation remain with the cantons (security and police, education including universities, healthcare, welfare, utilities, etc.). The Constitution also provides for shared competences between both the Confederation and the cantons. Therefore, the Confederation and cantons assume joint responsibility in some areas (regional traffic, regional development, environmental protection, flood protection, etc.). Finally, the cantons are responsible for the administrative implementation of the federal law, but they are free to adopt different approaches in its implementation.

The last federalism reform 2004-2008 reassigned several policy areas to either the federal or cantonal level in order to clarify the division of tasks between the Confederation and cantons in areas such as schools and higher education, culture, waste management, wastewater treatment and urban transport. It also set up several coordination mechanisms between the Confederation and regional governments, hence the existence of many coordinating bodies and partnership agreements in several sectors (e.g. Swiss Conference of Federal Ministers of Education, Swiss Conference of Cantonal Ministers of Public Health). Of the 53 tasks that used to be jointly financed by the Confederation and the cantons, in the end 21 of them were split off and clearly reassigned following the reform.

Municipal competences vary between catons, depending on the canton's legislation. They typically relate to education, social services, water and electricity, and traffic, local roads, land use planning, natural resource management, recreation and culture and municipal police. In principle, municipal competences are full and exclusive, but some have been transferred and shared in a context of inter-municipal cooperation, in particular in sectors such as firefighting, medical care and schools.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	State level	Municipal level
1. General public services (administration)	Internal administration; Justice	Internal administration; Citizenship
2. Public order and safety	Civil defence; Security and police; Emergency and rescue services	Local police (fire department, traffic police, regulation of trade and commerce); Civil protection
3. Economic affairs / transports	Regional development (shared); Regional traffic (shared); cantonal roads	Electricity supply; Traffic; Public transport; Local roads and streets
4. Environment protection	Environmental protection (shared); Flood protection (shared)	Environmental protection; Waste water; Waste collection and treatment; Natural resource management; Conservation of landscape
5. Housing and community amenities	Spatial planning; Public works; Building regulations	Local development and land-use planning; Building regulations and permits; Water supply
6. Health	Hospitals; nursing homes; Prevention and promotion of health	Prevention and promotion of health
7. Culture & Recreation	Culture	Sport facilities; Cultural facilities; Heritage
8. Education	Pre-school, primary, lower and upper secondary education; Higher education and universities	Pre-school, primary and secondary school (schools operation)
9. Social Welfare	Social policy; Family benefits; Maternity; Unemployment assistance	Social assistance; Home care services; Care for the elderly; Responsibilities linked to the social insurance system

Scope of fiscal data: At regional level, cantons; at local level, municipalities, and nonfinancial special purpose entities.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION Art. 3 of the Constitution states that Swiss cantons have discretion over their revenues and taxes, provided they are not assigned to the Confederation. Cantonal laws enact the financial autonomy and competences of municipalities. Fiscal equalisation is enshrined in the Constitution and the federal government has the authority to equalise fiscal disparities. A significant constitutional reform enacted in 2008, which was one of the most comprehensive reforms of federalism since the creation of the Swiss federation in 1848, aimed at modifying the allocation of responsibilities between the Confederation and the cantons and improving the system of financial equalisation. This reform had five components: improving the horizontal and vertical financial equalisation scheme; equalising charges; disentangling the tasks of the Confederation from those of the cantons and their financing; and improving vertical cooperation for joint tasks between the cantons and the Confederation. The most recent changes in the subnational finance framework have focused on addressing disparities in fiscal regulations across cantons. This was effective through the enactment by referendum of the Federal Act on Tax Reform and AHV Financing (TRAF) in 2019, and through a new reform of the equalisation system in 2020, aimed to support the most disadvantaged cantons by increasing revenue distribution between the richest and the poorest regions.

The Conference of the Cantonal Directors of Finance aims at coordinating the cantons in fiscal and public finance matters. It is in charge of finding a joint position among the cantons and negotiating with the federal government.

Switzerland’s fiscal framework is also characterised by the active participation of citizens regarding fiscal matters. Any constitutional amendment, including provisions on the distribution of fiscal power, must be adopted by a double majority of the cantons and the people via a compulsory referendum. In addition, if a law is contested by a sufficient number of citizens, it must be submitted to a referendum (so-called “optional referendum”).

Subnational, state and local government expenditure by economic classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	15 941	1 0582	5 359	22.2%	14.8%	7.8%	58.8%	39.0%	19.8%	100%	100%	100%
Inc. current expenditure	13 405	8 898	4 507	18.7%	12.4%	6.3%	57.3%	38.0%	19.3%	84.1%	84.1%	84.1%
Compensation of employees	4 584	3 031	1 552	6.4%	4.2%	2.2%	83.6%	55.3%	28.3%	28.8%	28.7%	29.0%
Intermediate consumption	2 704	1 092	1 612	3.8%	1.5%	2.3%	76.0%	30.7%	45.3%	17.0%	10.3%	30.1%
Social expenditure	1 895	1418	477	2.6%	2.0%	0.7%	19.4%	14.5%	4.9%	11.9%	13.4%	8.9%
Subsidies and current transfers	4 114	3294	820	5.7%	4.6%	1.1%	93.7%	75.1%	18.7%	25.8%	31.1%	15.3%
Financial charges	109	63	46	0.2%	0.1%	0.1%	53.3%	30.8%	22.4%	0.7%	0.6%	0.9%
Others	0	0	0	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Incl. capital expenditure	2 535	1 683	852	3.5%	2.4%	1.2%	68.3%	45.4%	23.0%	15.9%	15.9%	15.9%
Capital transfers	894	776	118	1.3%	1.1%	0.2%	70.2%	60.9%	9.3%	5.6%	7.3%	2.2%
Direct investment (or GFCF)	1 641	907	734	2.3%	1.3%	1.0%	67.3%	37.2%	30.1%	10.3%	8.6%	13.7%

EXPENDITURE: The subnational government share in GDP and public spending in Switzerland is among the highest of the OECD, well above the OECD average (17.1% of GDP and 36.6% of public spending in 2020) and even the OECD average for federal countries (20.6% and 43.5% respectively). Cantons at the regional level account for the majority of public spending in Switzerland (39%), whereas the federal government accounts for a slightly lower share, and municipalities for approximately 20%. Within the subnational sector, cantons account for 66% of subnational expenditure and municipalities 34%.

Subnational governments are key public employers (subnational government share in public staff spending is 22 percentage points above the OECD average of 61.2% and 8 points above the average for federal countries of 75.8%), especially at the cantonal level. Cantonal staff expenditure accounted for 55.3% of total public staff spending vs 28.3% for the municipalities.

DIRECT INVESTMENT: Subnational governments are key public investors, with a share of subnational government investment in public investment and GDP higher than the OECD average for federal countries, which amounted to 61.5% and 2% of GDP in 2020. In 2019, the main areas of subnational government investment were general public services (34% of subnational government investment), economic affairs/transport (25%) and education (21%). At the local level, the primary area of investment was education (31% of municipal investment), followed by economic affairs/transport (25%).

In Switzerland, public investment is a shared responsibility across levels of government. Switzerland’s 26 cantons accounted for slightly more than half of subnational investment (55% of subnational government investments in 2020) and for 37.2% of total public investment. They have significant independence to shape investment policies and set incentives to attract investment, and, between 2015 and 2020, 15 cantons have financed their investments primarily through their own resources.

Public-private partnerships are not widely used in Switzerland. Instead, contractual arrangements between the Confederation and cantons are implemented through multi-annual programmes, usually over four years. Municipalities should also be informed and taken into account in the elaboration process. Since 2008, these types of contractual agreements have been the main instrument for implementing environmental investments in partnership between the Confederation and the cantons. At the end of the programme, if the targets are not achieved, cantons may be required to return funds. In addition, a significant share of transfers from the central government are allocated to inter-cantonal investment projects, focused on collaboration in specific fields (fishing, healthcare services, road and police networks).

Swiss municipalities also play a direct role in investment, as they were responsible for 45% of subnational government investment in 2020. On average between 2015 and 2020, only five cities have financed their investment by relying essentially on their own resources (Bern, Chur, Luzern, Neuchâtel et Schaffhausen).

Subnational, state and local government expenditure by functional classification
2019	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure by economic function	14 642	9 469	5 173	20.0%	13.0%	7.1%	-	-	-	100%	100%	100%
1. General public services	2 105	1 363	742	2.9%	1.9%	1.0%	49.1%	31.8%	17.3%	14.4%	14.4%	14.3%
2. Defence	53	27	26	0.1%	0.0%	0.0%	8.9%	4.6%	4.4%	0.4%	0.3%	0.5%
3. Security and public order	1 061	742	318	1.5%	1.0%	0.4%	88.3%	61.8%	26.5%	7.2%	7.8%	6.2%
4. Economic affairs/transports	1 850	1 207	643	2.5%	1.7%	0.9%	53.1%	34.6%	18.4%	12.6%	12.8%	12.4%
5. Environmental protection	368	87	281	0.5%	0.1%	0.4%	81.8%	19.3%	62.5%	2.5%	0.9%	5.4%
6. Housing and community amenities	138	20	118	0.2%	0.0%	0.2%	98.7%	14.5%	84.2%	0.9%	0.2%	2.3%
7. Health	1 555	1 347	208	2.1%	1.8%	0.3%	98.1%	85.0%	13.1%	10.6%	14.2%	4.0%
8. Recreation, culture and religion	536	190	346	0.7%	0.3%	0.5%	73.6%	26.1%	47.5%	3.7%	2.0%	6.7%
9. Education	3 962	2 453	1 509	5.4%	3.4%	2.1%	90.6%	56.1%	34.5%	27.1%	25.9%	29.2%
10. Social protection	3 015	2 032	982	4.1%	2.8%	1.3%	25.8%	17.4%	8.4%	20.6%	21/5%	19.0%

Overall, education is the primary area of subnational government spending, for both state and local governments, representing more than one-quarter (27.1%) of subnational expenditure, and 91% of total public spending on education at the country level. It is followed by social protection (21.5% of subnational government expenditure), general public services, economic affairs/transport, and health. subnational government expenditures in social protection mostly include expenditure related to unemployment, migration and ageing-related protection, which are shared with the federal government, as subnational governments (mostly cantons) are responsible for one-quarter of total public spending in this sector.

Overall, the Swiss cantons are responsible for the bulk of the financing and implementation of public services, in particular in the fields of healthcare (85% of total public spending in 2019), education (56.1% of total public spending), security and public order spending (26.5%) and social protection (17.4%). In the health sector, cantons play a primary role as they are responsible for nearly all public spending in this category. Health expenditure has increased since 2016 in particular due to the weight of health protection and financing of hospitals on cantonal budgets.

Municipal spending is mainly targeted at education (29.2% of local expenditure), and social protection (19%). Municipalities are responsible for most of total public spending on housing and community amenities (they are responsible for 84% of total public spending in this sector), environmental protection (62.5% of total public spending) and recreation and culture (47.5% of total public spending).

Subnational, state and local government revenue by category
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	15 565	10 265	5 300	21.7%	14.3%	7.4%	62.1%	41.0%	21.2%	100%	100%	100%
Tax revenue	8 291	5 117	3 174	11.6%	7.1%	4.4%	55.6%	34.3%	21.3%	53.3%	49.9%	59.9%
Grants and subsidies	3 777	2 871	906	5.3%	4.0%	1.3%	-	-	-	24.3%	28.0%	17.1%
Tariffs and fees	2 747	1 688	1 059	3.8%	2.4%	1.5%	-	-	-	17.7%	16.4%	20.0%
Income from assets	694	552	142	1.0%	0.8%	0.2%	-	-	-	4.5%	5.4%	2.7%
Other revenues	57	37	20	0.1%	0.1%	0.0%	-	-	-	0.4%	0.4%	0.4%

OVERALL DESCRIPTION: The subnational fiscal framework in Switzerland is quite flexible, providing a large room for manoeuvre to cantons and municipalities over their finances. According to the Constitution, the cantons may determine their own revenue and taxes. While indirect taxation is part of the Confederation’s responsibility, direct taxation is a shared competence of the municipal, state and Confederation levels. As a result, Switzerland is one of the most OECD decentralised countries in fiscal terms. The share of subnational government tax revenue in total subnational government revenue is the highest, well above the average for OECD federal countries (45.8% in 2020) while the dependence on transfers (from federal or state governments) is one of the lowest in the OECD, compared to the OECD average for federal countries of 35.3%. In addition, subnational governments have a high degree of power over setting tax rates and bases.

To balance the disparities between subnational governments, the Confederation has developed a strong intergovernmental transfer system with equalisation components, which was revised more recently in 2008 and in 2020 to further benefit the poorest regions.

TAX REVENUE: In addition to representing a large share of subnational government revenue, tax revenue accounted for 11.6% of GDP and 55.6% of public tax revenue, above the OECD average for federal countries (9.3% of GDP and 44.5% of public tax revenue). In 2020, tax revenue accounted for around half of states’ revenues, and up to 60% of municipal revenue.

The 1993 Federal Law on Tax Harmonisation instituted a set of principles to be upheld by all cantons with regard to liability, purpose, tax calculation periods, procedure and criminal law on fiscal matters. Likewise, cantons and municipalities are free to set tax ranges, rates and tax exemptions. Overall, at the subnational level, the primary source of tax revenue in 2020 was the personal income tax (62% of subnational government tax revenue), followed by the property tax (15.3%) and the corporate income tax (12% of subnational government tax revenue). These three main taxes are utilized by both cantons and municipalities.

At the regional level, cantons can levy any kind of tax that is not exclusively attributed to the Confederation (the federal constitution only prohibits double taxation). These include in particular taxes on personal income (60% of cantonal tax revenue and 30% of cantonal total revenue in 2020), revenue from the property tax (respectively 14.8% and 7.4%) and on corporate income (12.3% and 6.2%). Other regional taxes include a tax on the earned income of foreigners without a residence permit, a wealth tax, a tax on equity, inheritance and gift taxes, a lottery income tax, taxes on motor vehicles, etc. Cantonal tax authorities are in charge of the income tax administration and collection. This incurs a high degree of fiscal competition in some cantons with a strong revenue potential related to both the corporate and individual income tax. Traditionally, Swiss tax regimes are characterised by lower tax rates for corporations mainly active abroad. This imbalance was addressed by the Federal Act on Tax Reform and AHV (pension system) Financing (TRAF), which was adopted by referendum in 2019 (after a previous failed reform attempt in 2017). The reform, that became effective in 2020, comprises, among others, measures abolishing special cantonal tax regimes that are not aligned with international standards, the creation of patent boxes and the possibility for cantons to introduce additional deductions for R&D expenditures. As a result, revenue from the CIT should decrease for both cantons and municipalities in the coming year in order for them to remain competitive. On the other hand, cantons will receive a higher share of direct federal tax which will serve to compensate the municipalities under their jurisdiction for any reduction in tax receipts.

At the municipal level, communes can levy taxes to the extent they are authorised to do so by the cantons. Municipal main taxes include PIT, CIT, a tax on net wealth, a real estate and real estate transfer taxes, etc. They are mostly levied as a percentage of the basic cantonal taxes (centimes additionnels). In 2020, tax revenue from the PIT was the largest source of municipal tax revenue (65.0%), supplemented by revenue from the property tax (16.1%) and from the CIT (11.6%).

The recurrent tax on immovable properties, at both cantonal and communal levels, provided significant tax revenues. It accounted for 15.3% of subnational government tax revenue and 8.1% of subnational government revenue, i.e. 1.8% of GDP, above the OECD average of 1.0% of GDP in 2019. It is levied on land and buildings and paid by individuals and legal entities who are recorded in the land register as the owners or users (usufructuaries) of a property. The tax is calculated on the full taxable value of the property. Several cantons have decided not to levy this tax while the remaining cantons apply a variety of systems.

GRANTS AND SUBSIDIES: Intergovernmental transfers from the Confederation make up for 24.3% of subnational government revenue, accounting for almost 28% of cantonal revenue and 17.1% of municipal revenue. In 2020, federal transfers to cantons were mainly composed of the redistribution of the national direct tax (Impôt Federal Direct – IFD) in the form of earmarked grants (in areas such as agriculture, health, social protection, elderly, road traffic management, research and higher education, etc.); non-earmarked funds; and equalisation funds. Overall, current grants formed 95% of total grants in 2020, vs. 4.6% for capital grants.

Transfers from the Confederation to the cantons include a large system of equalisation established in 1958, further reformed in 2008 and more recently in 2020. The system is both vertical and horizontal and is mainly based on three building blocks, composed of revenue equalisation (around 81% of total transfers to cantons in 2020), cost equalisation (14%) and temporary mechanisms to mitigate the impacts of successive equalisation reforms (5%), as detailed below. In addition, cantons also receive a share of the revenues of the Swiss National Bank, according to a distribution agreement revised every 6 years (including the Confederation and the cantons). Based on the latest distribution agreement 2020-25, the Confederation will receive CHF 2 billion and the cantons CHF 4 billion. There also exists a specific system of transborder transfer between the canton of Geneva and bordering French local governments (Haute-Savoie and Ain). Based on a 1966 agreement, the canton of Geneva redistributes part of the payroll of French residents working in Switzerland.

The first block of the equalisation system is a revenue equalisation fund, that aims to reduce fiscal disparities across cantons by ensuring each canton has a level of resources per inhabitant equivalent to at least 86.5% of the Swiss average (as compared to 85% of the average prior to the 2020 revision). Through both vertical and horizontal equalisation schemes, the fund is co-financed by the Confederation (which funds 60% of the total) and by cantons with high revenue potential (contributing to 40% of the fund, or two-thirds of the federal contribution). In 2020, 7 cantons were “contributors”, and 19 cantons were beneficiaries. The canton of Zoug was the most important contributor and the Jura canton was the biggest beneficiary from the fund.

The second block of the cantonal equalisation system is a cost equalisation fund that aims to compensate for the unusual expenditure resulting from high costs for the delivery of public services that some cantons (e.g. mountain and central cantons) incur because of their topography and socio-demographic characteristics.

Finally, the third component includes three temporary mechanisms set up to mitigate the consequences of the successive equalisation reforms on the cantons. A first temporary "neutralisation" fund was set up in 2007 for a limited period of time (until 2034 at the latest), to ensure that the 2008 equalisation system does not incur a degradation of the fiscal situation of any canton. It is financed for two-thirds by the Confederation, and for one-third by all the cantons, depending on their population. A second mechanism was set up following the 2020 reform, with additional transfers to be made (exclusively funded by the Confederation) to cantons with low-revenue potential from 2021 until 2025. Finally, a new temporary mechanism will be introduced in 2024 to mitigate the impact of the Federal Act on Tax Reform and AHV Financing (TRAF). The Confederation plans to allocate CHF 180 million for this purpose over six years.

At the municipal level, each canton also has its own grants and equalisation system for its municipalities. Transfers make up 17% of municipal revenue on average. With the 2008 reform, the share of non-earmarked transfers to municipalities increased from 24% to 40%, strengthening the financial autonomy of municipalities. In 2020, most transfers to municipalities were used to fund expenditure for social welfare (social assistance, asylum rights). 11% of transfers to municipalities were capital transfers, against 89% for current transfers.

OTHER REVENUE: The share of other revenue, comprising tariffs and fees and revenue from properties, is significant for both Swiss cantons and municipalities compared to other OECD countries, amounting to 22.6% of total subnational government revenue in 2020.

User charges and fees are particularly significant (17.7% of revenues compared to 13.3% in the OECD) while revenue from property (including assets sales, rents) accounted for 4.5% of total subnational government revenue, also above the OECD average of 2.0% in 2020. At the local level, tariffs and fees (e.g. public transport fees) represented 20% of the revenue of municipalities alone, and property income 2.7%. The net property assets of cantons and municipalities have been increasing in recent years, partly due to favourable market conditions.

Subnational, state and local government fiscal rules and debt
2020	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	15 682	9 297	6 385	21.9%	13.0%	8.9%	51.6%	30.6%	21.0%	100%	100%	100%	-	-	-
Financial debt	10 906	6 061	4 845	15.2%	8.5%	6.8%	48.9%	27.2%	21.7%	69.6%	65.2%	75.9%	100%	100%	100%
Currency and deposits	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Bonds / debt securities	4 754	3 401	1 353	-	-	-	-	-	-	30.3%	36.6%	21.2%	43.6%	56.1%	27.9%
Loans	6 152	2 660	3 492	-	-	-	-	-	-	39.2%	28.6%	54.7%	56.4%	43.9%	72.1%
Insurance pensions	137	120	18	-	-	-	-	-	-	0.9%	1.3%	0.3%	-	-	-
Other accounts payable	4 639	3 116	1 523	-	-	-	-	-	-	29.6%	33.5%	23.9%	-	-	-

FISCAL RULES: The federal and cantonal level set their fiscal rules independently, as the federal level has no power over the cantons, and there is no formal fiscal policy coordination between the federal and cantonal level. Most Swiss cantons introduced self-imposed balanced budget rules and fiscal rules, including debt brakes, spending brakes and sanctions in case of non-compliance. In 2003, the Federal government introduced a federal fiscal rule (“debt brake”) through popular vote, imposing budget-balance requirements over the budget cycle, with surpluses used to pay down debt, as structural deficits shall be offset in future budgets. Fiscal rules vary greatly across cantons, and a few cantons have no budget rules at all. While in some cantons fiscal rules impose strict budget discipline with balanced payment of accounts and sanctions mechanisms, other cantons enable debt increases in case of recession. Similarly, fiscal rules set by cantons for the communes vary substantially across jurisdictions (mostly the “golden rule”). By the way of the fiscal referendum implemented at the cantonal level, expenditure which exceeds a certain limit is subject to a popular referendum.

DEBT: Cantons’ borrowing is not restricted, but fiscal rules include debt brakes. Municipalities have the right to borrow but with some constraints which vary across cantons, depending on each canton´s constitution and fiscal law. Overall, subnational government debt as a percentage of GDP is below the OECD average (27.9% of GDP in 2020) and even more compared with the OECD average for federal countries (36.6%). Swiss subnational government debt is, however, significantly above the OECD average for federal countries when considering the share in total public debt (26.5% on average). This share has been increasing for both municipalities and cantons since the last decade. 59.3% of subnational government outstanding debt is held by the cantons, whose share in subnational government debt has increased (from 55% in 2016), and 40.7% by the municipalities in 2020, with outstanding debt amounting to 13.0% and 8.9% of GDP in 2020 respectively.

Subnational government outstanding debt is made up of financial debt (69.6%), other accounts payable (30%) and pension liabilities (less than 1%). In 2020, the financial debt was composed of loans for 56.4% of debt stock, and 43.6% of bonds for the remaining part. Cantons rely primarily on bond issuance (which makes up for 56.1% of their financial debt), whereas for municipalities, loans remain the primary source of borrowing (72.1% of local debt).

Significant disparities exist regarding subnational government debt across Swiss regions, with a higher subnational government debt level in cantons in southern regions compared to a lower level in the northern regions. Some cantons have engaged in issuing green and social bonds to finance the net zero transition and reduce socio-economic disparities. The first canton to issue a green bond was the canton of Geneve in 2017. These emissions have since been regulated at the cantonal level by a “Framework Document applicable to green, social and sustainable emissions of the Republic and Canton of Geneva”. Since then, few other cantons have also issued green bonds, such as Zurich and Bâle-Ville.

TERRITORIAL MANAGEMENT OF THE CRISIS: Switzerland's overall strategy to deal with the COVID-19 pandemic was based on a three-phase model, and the three pillars of vaccination, screening and non-pharmaceutical measures. The Confederation made use of its special powers in extraordinary situations, in particular in the first phase of the crisis, and health functions were recentralised at the national level. However, the role of cantons and municipalities has been no less crucial in the fight against the pandemic, and the tasks of the Confederation and the cantons in dealing with the COVID-19 pandemic are closely linked. They require coordinated assessment, harmonized measures and defined processes. The Conference of Cantonal Governments (KDK) coordinates activities related to the crisis with the Federal Council and among cantons. In particular, it organises specialised conferences with all 26 cantons to meet regularly on topics related to the crisis. The distribution of each person's roles was defined in 2020 in a strategic document jointly drafted by the Federal Office for Public Health (OFSP) and the Conference of Cantonal Health Directors (CDS).

In addition, multi-level crisis management structures have been set up in each canton. For example, the city of Zurich is part of the special COVID-19 staff of the canton, as is the city of Winthur and the Association of Municipalities of the Canton of Zurich (GPV).

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Subnational governments have played an important role in providing support measures throughout the COVID-19 pandemic. At the regional level, cantons provide support to businesses through the “Measures for hardship cases related to the COVID-19 epidemic”, which started in 2020 and have been extended throughout 2022. The support includes a co-financing from the Confederation (ranging from 70% to 100% of the total compensation), but each canton is responsible for the distribution and allocation of the funds throughout its jurisdiction. Cantons have also participated in securing bank loans to qualified start-ups, by contributing up to 35% of the guarantee to complement the federal guarantee (remaining 65%).

Individual innovative measures have also emerged in some subnational governments to support local businesses, in partnership with local stakeholders, including from the private sector. The canton of Vaud has launched WelQome, an online platform to help merchants and stimulate economic recovery. Through this platform, the regional government subsidises vouchers to consumers to be spent in local businesses (restaurants, etc). The municipality of Lausanne launched a similar initiative, allocating CHF 7.8 million in the form of vouchers and discount books to be spent in local shops and markets.

Municipalities have also initiated social measures to support their population and economic stakeholders. The City of Zurich has intervened quickly to support the people and companies affected e.g., by providing support for childcare facilities, emergency aid for the self-employed and small businesses, or by reducing the rents of restaurants and companies located in the city, starting in spring 2020.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The COVID-19 crisis had an impact on subnational government finance in Switzerland, in particular at the level of cantons. Cantons experienced an increase of 11% of their expenditure between 2019 and 2020 (in real terms), driven by a rise of subsidies and current transfers (+11%) and capital transfers (+204%), including mainly transfers to communes. On the other hand, subnational government revenue has suffered from a decrease in tax revenue from businesses driven by the TRAF reform (primarily felt by cantons) and on households, and a decline in transportation fees (parking fees, fines, etc.), in particular for municipalities.

The impact of the crisis has been differentiated across subnational governments, based on their economic fabric and the resilience of their tax base. Some cantons (Vaud) have maintained a solid financial health throughout 2020, whereas others (Jura) have increased their deficit. The impact on subnational government finance is also differentiated between levels of government. Overall, the cantons, who were in charge mainly of emergency measures (direct COVID measures, health expenditure including support for cantonal and university hospitals), felt more the impact of the crisis in 2020-21, whereas municipalities are in charge of longer-term social support measures, and will therefore feel the impact of the COVID-19 for longer, as Switzerland’s tax collection system is spread out over several years.

Because of the good fiscal situation of subnational governments prior to the crisis, they had a relatively good capacity to absorb the fiscal impact compared with other OECD countries. The level subnational government debt has remained unchanged, whereas extraordinary expenditures have resulted in a new high debt for the Confederation. In order to reduce this debt, the Federal Council is proposing changes to the Finance Act, currently under consideration, which aim to avoid tax increases and drastic savings programs.

ECONOMIC AND SOCIAL STIMULUS PLANS: At the level of the Confederation, a Recovery Plan focused on the stimulus of the tourism sector was launched in September 2021. The Plan is structured around existing instruments and tourism promotion tools, such as Switzerland Tourism, Innotour and the New Regional Policy. The Recovery Plan includes three concrete measures, including making an additional CHF 10 million from the Regional Development Fund available to the cantons, without additional conditions, for the 2020-23 period, to relaunch regional and local tourism.

At the regional level, several cantons have released their own recovery plans to support their economies throughout and after the pandemic. For instance, the canton of Friburg issued a regional recovery composed of 25 measures, focused mainly on construction, mobility and energy, business competitiveness, training, consumption, tourism, agriculture, culture and sport.