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Text File | 1994-05-02 | 25KB | 479 lines

<text> <title> Switzerland: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Switzerland </hdr> <body> 1. General Economic Framework Switzerland has an internationally oriented, open economy, characterized by a high savings rate, a large services sector, a highly skilled workforce and a developed manufacturing sector. Although Switzerland enjoyed its eighth consecutive year of economic expansion in 1990, growth rates were somewhat lower than in the two preceding years. The main economic development in 1990 was the acceleration of inflation, triggered mainly by spiraling rents which were the result of hefty mortgage rate increases, an overheated economy, and rises in interest rates and oil prices. On an annual average, inflation rose from 3.2 percent in 1989 to 5.4 percent in 1990. The rise in prices is worrisome since Switzerland, like Germany, is usually considered a low-inflation economy. Fiscal policy is not actively employed as a countercyclical device. In the Swiss federal system, the weight of the cantons and communities in the fiscal equation is both heavy and largely independent of federal policy. The budgeted federal share of both total public expenditures and revenues is approximately 35 percent. Recently, increased government spending (particularly for international economic assistance) and declining tax revenues have led to a deterioration of the public sector budget situation. For the first time in seven years, the federal government is expected to incur a budget deficit (SFR 1.5 to 2 billion) in 1991. Cantonal budgets, which have been in the red for several years, are expected to be equally high. The proposed 1992 federal budget anticipates a deficit of SFR 2 billion, while the combined overall public sector deficit is expected to widen to SFR 5 billion in 1992. Switzerland is likely to face budget deficits at all levels of government until the mid 1990's. On June 2, 1991 Swiss voters rejected a government sponsored tax package which would have modernized the country's tax system and made it more "Euro-compatible" by introducing a Value Added Tax (VAT). This was the third time in 15 years that Swiss voters rejected the VAT. Analysts predict the Federal Council and Parliament will put off for the next several years any new attempt at making Switzerland's new tax package like that of its neighbors. The Government must introduce a new tax package before its present authority to levy taxes expires in 1994. With the exception of an anticipated reform in the Stamp Tax on securities transactions and the introduction of a new tax on gasoline, major revisions of the current tax system are unlikely. The primary objective of the Swiss National Bank (SNB) is to control inflation. After introducing a restrictive monetary policy in mid 1988, recent consumer price index statistics show that inflation finally peaked and is now declining. However, monetary policy remains and is expected to remain tight until inflation is brought down further. The financial market's reaction to the policy is demonstrated by the persistence of higher short-term than long-term interest rates. With other EFTA countries, Switzerland has concluded an agreement with the EC establishing a "European Economic Area" which is scheduled to become effective on January 3, 1993. The European Court of Justice has determined that certain sections of the agreement violate the Treaty of Rome. Renegotiation of those sections may be required. Switzerland's inclusion in a larger European Economic Area will require that the Swiss government enforce a wide range of EC directives and regulations. 2. Exchange Rate Policies There are no multiple exchange rates, nor any significant capital controls. The SNB's past concerns about an internationalization of the franc have diminished and capital controls have been progressively dismantled. At present, reporting requirements on foreign exchange flows are essentially for the purpose of statistical collection. Relatively high Swiss interest rates and tight monetary and fiscal policies have been factors strengthening the Swiss franc over the past year. In recent years, the SNB has focused increasingly on the need for a stable exchange rate to maintain the competitiveness of the country's export-oriented industries. This is especially true with respect to the German mark, since Germany accounts for approximately one third of Swiss trade. 3. Structural Policies The Swiss use market mechanisms to establish prices for most manufactured product categories. The retail trade is dominated by a few large organizations with one, Migros, accounting for 40 percent of supermarket sales. Switzerland also has a wide variety of cartel-like arrangements which are not prohibited under Swiss law. However, under the 1986 Cartel Act, a government cartel commission determines whether a cartel is in the public interest. Government agencies use competitive bids for procurement. The Defense and the Post Telephone and Telegraph (PTT) Departments have some restrictions on foreign purchases (small arms, clothing and boots, telecommunications equipment). The PTT requires foreign vendors to have local representatives and service facilities. At the same time, the use of government subsidies in industry is rare. Except for telecommunications, the impact of Swiss pricing policies on U.S. exports is insignificant. Although government influence on pricing is usually diluted as value is added in processing, it often remains important even at the retail level. Government offices administer retail price controls for many items (including bread, potatoes, some fruits and vegetables) and conduct price surveillance of others. Farmers receive guaranteed prices for bread grains, sugar beets, and other basic products. Actual overseeing of prices is often delegated to private sector or mixed cartel-like organizations (e.g., "fruit bourses" for fruits and vegetables). Prices of imports are raised to domestic levels by variable import charges and by requiring importers to take over domestic products at high prices as a condition of importing. With respect to taxation, Swiss citizens have the right of initiative and referendum at all levels of government. Although the government must introduce a tax package before its present authority to levy taxes expires in 1994, major revisions of the current system are unlikely, with two possible exceptions. Parliament has already approved the introduction of reforms in the country's Stamp Tax on securities transactions. This measure will likely be challenged in a public referendum. The Federal Council is also discussing a 30 percent tax on gasoline. Switzerland has a bilateral tax treaty with the United States. 4. Debt Management Policies As a net international creditor, debt management policies are not relevant to Switzerland. Switzerland participates in the Paris Club debt reschedulings and is an active member of the OECD. Switzerland will join the International Monetary Fund and the World Bank in 1992 if a threatened referendum against membership is unsuccessful. 5. Significant Barriers to U.S. Exports Switzerland has practically no tariff barriers. It imposes no countervailing duties and has concluded no restrictive bilateral agreements. The only trade-impeding, non-tariff barriers affecting to some degree U.S. exports continue to exist in the areas of technical standards and testing requirements for industrial products, in particular for telecommunications equipment. However, these liberal trade policies do not apply to agriculture, a sector with extensive barriers. Import licenses: Swiss licensing procedures do not hinder imports from the United States. Switzerland issues a general import license which in the case of manufactured goods is granted freely and