No, this is not an intervention one would necessarily have expected from him. Jean-Pierre Danthine, well known in Switzerland’s financial community as the founding director of the Swiss Finance Institute (which began operations exactly 20 years ago) and later as a member and vice chairman of the Governing Board of the Swiss National Bank, has come out in support of the Climate Fund Initiative. He did so in the French-speaking Swiss media several days ago, before crossing the «Röstigraben» last Tuesday with an interview in the «Tages-Anzeiger».

The Climate Fund Initiative, on which voters and cantons will decide on 8 March, seeks to oblige the Confederation, cantons and municipalities to combat global warming and its consequences and to finance and implement the relevant measures in a «socially equitable» manner. Specifically, the Confederation would use an investment fund to finance its own projects, particularly in the areas of decarbonisation, energy efficiency, education and biodiversity, while also supporting projects by cantons, municipalities and private actors through contributions. The fund would also be able to grant loans, guarantees and sureties.

No Debt Brake for the Climate Fund

A transitional provision regulates the funding of the fund. Until 2050, the Confederation is to allocate between 0.5 percent and 1 percent of gross domestic product (GDP) to the fund each year. It is also stipulated that these funds, within the framework of the federal budget, are not subject to the debt brake (which is also enshrined in the Federal Constitution) – a point that for many centre-right and liberal voters is reason enough to reject the initiative.

How does Danthine argue his case, given that he is neither a left-wing redistributionist nor a radical Green, but is regarded as a prudent and nuanced thinker? When asked about this in the interview, he replied: «I am a strong supporter of the debt brake. But it is not an end in itself. Fiscal discipline is fully compatible with the climate fund. I would even argue that the climate fund is a more suitable instrument for strengthening public finances in the long term than the debt brake in its current form.»

A Debt Brake 2.0 to Allow Sensible Investments

Danthine advocates a debt brake 2.0 that would permit investments with a positive return, for example in climate protection.«Today, we accept debt in order to save more tomorrow. In other words: we may incur 100 Swiss francs more in debt, but will have 150 francs less in expenditure in the future.»

With an adjusted debt brake, GDP would be higher overall, as this would allow better adaptation to climate change. Danthine also stresses, however: «To justify an exception we need very strict criteria.»

Theoretically Compelling, Empirically Questionable

Danthine’s logic is compelling in principle: if the debt brake prevents sensible investments, it should be adjusted. And an investment is sensible if its cost today is lower than the future (discounted) additional expenditure that would arise if it were not made.

However, this is a somewhat academic perspective that overlooks historical experience and certain realities of the political process. If political actors always made fact-based and rational decisions, the introduction of the debt brake in 2003 would already have been a mistake – or at least unnecessary.

In Practice, the Second-Best Solution is the Better One

This is because the debt brake significantly restricts the room for manoeuvre of parliamentarians, who are entrusted with budgetary authority. Quite evidently, however, they do not always act responsibly in the long-term national interest, which is why the sovereign – incidentally by an overwhelming majority – considered it sensible, for good reasons, to introduce this guardrail (economically speaking, a classic second-best solution).

Christoph Schaltegger, Professor of Political Economy at the University of Lucerne, knows Swiss fiscal policy, federal finances and the fine mechanics of the debt brake as well as almost anyone else – and not only from an academic perspective, having also served as an adviser in the Federal Department of Finance to Federal Councillor Hans-Rudolf Merz. What does he think of Danthine’s proposal to adapt the debt brake?

Schaltegger Does not Categorically Opose Adjustments

In his conversation with finews he makes it clear from the outset that he is not fundamentally opposed to the idea of exempting sensible investments from the debt brake. «It would indeed be possible to modify the debt brake accordingly on the basis of double-entry accounting. But the effect might be quite different from what proponents currently hope for.»

This is because the Confederation would then, as a logical consequence, also have to manage its balance sheet more actively – that is, divest shareholdings not required for its core tasks, such as Swisscom and Swiss Post. «Such a further development of the debt brake would lead to a strengthening of equity capital with a focus on the mandate, and would narrow the room for manoeuvre available to Parliament,» Schaltegger cautions.

But the devil is not only in the theory - it is also in the practical implementation.

Germany as a Cautionary Example

Schaltegger points to Germany as a deterrent example. A year ago, the Bundestag (and the upper house, the Bundesrat) amended the Basic Law to soften the debt brake. This paved the way for extensive investments in infrastructure and defense. «In Germany, similar arguments were made at the time, but in reality it is now apparent that many of the expenditures enabled by this have little to do with the original purpose and, in some cases, are not investments at all.»

This is due in no small part to the gravitational pull of an expansive welfare state. Once politicians in such a system gain greater spending leeway, a substantial share of these funds tends to flow back into that very area. Schaltegger refers to this as the «dominance of the welfare state», which contributes to a misallocation of resources.

Everyone Wants to «Invest in the Future»

In addition, politicians naturally tend to promote the expenditures they advocate «investments in the future», even when, on closer inspection, they merely serve to satisfy today’s needs at the expense of tomorrow – especially when financed by debt.

And even if agreement can be reached on what constitutes investment and what constitutes consumption, there are still pitfalls. Any investment calculation is based on assumptions about future returns, which may turn out to be incorrect – a phenomenon that repeatedly leads to write-downs in the private sector as well.

How Large Would the Return Ultimately Be?

When it comes to investments in government functions, estimating future returns is at least equally difficult. Schaltegger illustrates this with an area he knows particularly well from first-hand experience: «What is the return for Switzerland if it invests an additional CHF 1 billion in the education sector today? What does the next generation gain from having even more academic degrees and even more university buildings?»

Switzerland already invests heavily in educational infrastructure, meaning the marginal benefit of additional spending is clearly diminishing. This principle also applies to other areas of government activity, such as climate protection.

Net-Zero Target and Windfall Effects

Schaltegger is critical: «How high is the return of the net-zero target really?» He also draws attention to the significant windfall effects of government subsidies in the energy sector. Many homeowners would replace their heating systems or carry out energy-efficient renovations even without subsidies, but naturally accept the contributions from the federal government or cantons with gratitude.

Finally, Schaltegger points to the option that already exists under the current debt brake regime to finance major investment projects (such as the New Rail Link through the Alps, NEAT) via a separate infrastructure fund.

Intended and Unintended Effects of Danthine's Proposal

Will the debate on loosening the debt brake along the lines of the large northern neighbour also gain momentum in Switzerland following Danthine’s proposal? Arguments against this include the fact that the rule requiring expenditure and revenue to be balanced over the medium term (across the economic cycle) is deeply entrenched in Switzerland. It has also proven its worth, as evidenced by the Confederation’s comparatively low debt ratio by international standards.

However, political economy suggests that a number of actors in Switzerland, too, may seek to seize the moment to loosen this self-restraint for ostensibly «good reasons» - alongside climate protection, for example defence.

From this perspective, one might hope that Danthine’s intervention will foster a sober discussion about potential optimisation of the current framework – and not provide ammunition for those politicians who simply wish to take the easier route of higher spending outside the debt brake.