How a sustainable fiscal policy can be performed in a federal system is not only a Swiss problem but is also discussed in other federal countries like Germany and Austria, and in the European Union. Contrary to most other countries, the Swiss fiscal system is characterised by an extensive fiscal federalism with high fiscal autonomy at all governmental levels, by direct popular rights which include fiscal referenda at the cantonal and local levels, and by particular constitutional and/or statutory fiscal restraints in order to prevent excessive public debt. In this paper, the effects of these constitutional clauses on public deficit and debt are investigated.
Using a panel of the 26 Swiss cantons from 1980 to 1998, we provide evidence that fiscal constraints significantly reduce budget deficits, while direct democracy leads to significantly lower public debt. It is also shown how the problem of a possible bail out of member states or local communities can be solved in a federal state by choosing appropriate institutions.
Keywords: Direct Democracy, Referenda, Initiatives, Public Debt, Budget Deficits.