Julien VANDERNOOT Jordan SIGNOR

Funding of Swiss Cantons, Mechanisms and Solidarity

Switzerland is a federal state made up of twenty-six Cantons. This article studies the funding mechanisms of the Cantons and the solidarity they induce. The article is based on the rules and formula provided by the Swiss law and on calculations for the year 2020. This article highlights the redistributive character of the Swiss system of funding and even shows in some cases a paradox of revenues, some Cantons becoming wealthier than others which were initially wealthier.
Keywords
JEL Classification H20, H71, H7
Full Article

1. Introduction

Switzerland is made up of 26 Cantons, namely: Aargau, Appenzell Ausserrhoden, Appenzell Innerrhoden, Basel-Landschaft, Basel-Stadt, Bern, Fribourg, Geneva, Glarus, Graubünden, Jura, Luzern, Neuchâtel, Nidwalden, Obwalden, Schaffhausen, Schwyz, Solothurn, St. Gallen, Thurgau, Ticino, Uri, Valais, Vaud, Zug and Zürich. The funding of these Cantons is not frequently discussed in scientific literature. Nevertheless, the former system of funding has been evoked by Dafflon (2004). This system was criticized (Dafflon et al. (1996) and Swiss Federal Council (2001)) and a new system of funding came into force in 2008 that accounts for both horizontal, and vertical transfers (Soguel, 2019). Thus our research questions gravitate towards the incidence the new solidarity mechanism has on Swiss Cantons.

This article will first study the current funding mechanisms of the Swiss Cantons and place figures on the amounts they received in 2020. Then, it will measure the solidarity by calculating the differences between the amounts the Cantons have received and the ones they would have received in the absence of redistributive mechanisms.

These elements will underline the degree of solidarity in the funding mechanisms of the Swiss Cantons and will show the contributors and beneficiaries, contrasting the theoretical results of Esteller-Moré et al. (2020) indicating that solidarity – horizontal and vertical – may be diverted by pressure groups and their capacity to bend fiscal equalization. Contrarily, it confirms Aslim, and Neyapti (2017) when they argue an intermediate level of fiscal decentralization is preferrable to attain higher local welfare level, be it in the presence of spillover or not; Dmitriev, and Hoddenbagh (2019) reinforce the latter results in a monetary union where transfers accrue to the stabilization and welfare improvement functions, especially in open economies with more rigid wages. Eventually, our method is to compare pre-, and post-reform figures to highligh Canton’s wealth variation and the reform’s role towards more, or less, solidarity. In this, we follow the step of the researchers working in the fields of solidarity and federalism.

2. Funding Mechanisms

The funding of Swiss Cantons is governed by the Federal Law on Fiscal Equalization and Cost Compensation (2003), the Order on Fiscal Equalization and Cost Compensation (2007) and the Federal Order about the Cohesion Fund (2007). These legal provisions came into force on January 1, 2008. The funding includes three mechanisms, namely: Resource equalization, cost compensation and cohesion fund.

2.1 Resource Equalization - Order on Fiscal Equalization and Cost Compensation (2007)

Resource equalization in Switzerland is based on fiscal resources at the disposal of the Swiss Cantons. Cantons whose resources per inhabitant are lower than the average share a compensation which is made of two parts, one paid by the Confederation and the other paid by the Cantons whose resources per inhabitant are higher than the average. The parts are set by the Swiss Federal Assembly, but article 4 of the Federal Law on Fiscal Equalization and Cost Compensation sets out that the part of the Cantons whose fiscal resources per inhabitant are higher than the average must lie between two thirds and eighty percent of the part of the Confederation.

The contribution of each Canton whose resources per inhabitant are higher than the average is a function of the difference between its resources per inhabitant and the average and of its population. The amount received by each Canton whose resources per inhabitant are lower than the average is a function of the difference between its resources per inhabitant and the average of its population. The amounts received and paid by the Cantons as resource equalization are shown in table 1 below.

Table 1. Amounts received or paid by the Cantons as resource equalization in Switzerland (2020, million CHF)

Canton Resource index Population Amount received (+) or paid (-)
Zurich 121.7 1 470 640 -569.3
Bern 77.6 1 021 394 1 034.0
Luzern 89.1 400 279 135.7
Uri 71.3 36 520 54.0
Schwyz 181.3 154 984 -225.4
Obwalden 115.4 37 329 -10.3
Nidwalden 158.0 42 594 -44.2
Glarus 70.3 40 423 62.9
Zug 249.7 122 779 -328.5
Fribourg 79.2 307 299 278.3
Solothurn 72.4 267 432 371.5
Basel-Stadt 146.0 194 498 -159.8
Basel-Landschaft 96.9 283 778 13.8
Schaffhausen 91.1 80 662 20.0
Appenzell A.Rh. 85.0 54 570 29.9
Appenzell I.Rh. 91.1 16 008 3.9
St. Gallen 79.5 501 038 443.5
Graubünden 82.9 204 436 137.1
Aargau 82.2 655 679 467.1
Thurgau 77.7 267 722 268.5
Ticino 96.5 353 562 21.0
Vaud 99.9 777 470 0.3
Valais 65.4 341 702 680.2
Neuchâtel 82.9 179 130 120.4
Geneva 143.7 484 487 -378.9
Jura 64.9 72 919 148.5
Total 100 8 369 334 2 574.5

Source: Swiss Federal Finance Administration

2.2 Cost compensation- Order on Fiscal Equalization and Cost Compensation (2007)

The aim of the Swiss mechanism of cost compensation is to provide support to the Cantons which have to bear financial costs because of geo-topographic or socio-demographic factors. Two mechanisms have therefore been implemented, namely geo-topographic cost compensation and socio-demographic cost compensation.

2.2.1 Geo-Topographic Cost Compensation

The total amount allocated to the Swiss Cantons as geo-topographic cost compensation is fixed every four years by the Swiss Federal Assembly and then indexed annually according to the consumer price index. In 2020, 364.3 million CHF were allocated to the Cantons.

The total amount is divided into four parts. One third of the amount (altitude) is allocated to the Cantons whose proportion of inhabitants living above 800 metres exceeds the national average. The amount allocated to each of these Cantons is a function of its proportion and number of inhabitants living above 800 metres. One third of the amount (terrain steepness) is attributed to the Cantons whose median altitude of the productive surface area is higher than the national average. The amount attributed to each of these Cantons is a function of the median altitude of its productive surface area and of its productive surface area. One sixth of the amount (population density) is allocated to the Cantons whose proportion of inhabitants living in residential areas with less than 200 inhabitants exceeds the national average. The amount allocated to each of these Cantons is a function of its proportion and number of inhabitants living in residential areas with less than 200 inhabitants. One sixth of the amount (low population density) is attributed to the Cantons whose population density is lower than the national average. The amount attributed to each of these Cantons is a function of its population density and of its number of inhabitants. The amounts received by the Swiss Cantons as geo-topographic cost compensation are shown in table 2 below.

Table 2. Amounts received by the Cantons as geo-topographic cost compensation (2020, CHF)

Canton Altitude Terrain steepness Population density Low population density Total
Zurich 0 0 0 0 0
Bern 1 942 727 1 355 864 20 726 702 3 989 426 28 014 719
Luzern 0 0 6 166 670 0 6 166 670
Uri 531 056 5 749 104 1 680 557 3 805 349 11 766 066
Schwyz 2 451 152 2 127 734 1 727 622 602 123 6 908 631
Obwalden 491 547 2 878 058 1 462 475 1 301 439 6 133 520
Nidwalden 0 534 186 480 716 282 089 1 296 991
Glarus 0 3 327 153 33 993 2 067 631 5 428 777
Zug 0 0 0 0 0
Fribourg 1 869 710 0 6 535 300 583 574 8 988 584
Solothurn 0 0 0 0 0
Basel-Stadt 0 0 0 0 0
Basel-Landschaft 0 0 0 0 0
Schaffhausen 0 0 0 0 0
Appenzell A.Rh. 17 508 976 194 758 2 260 351 0 19 964 085
Appenzell I.Rh. 5 142 378 376 851 2 700 826 398 056 8 618 111
St. Gallen 0 0 1 919 947 0 1 919 947
Graubünden 39 855 514 63 342 697 9 096 941 25 974 357 138 269 510
Aargau 0 0 0 0 0
Thurgau 0 0 3 599 495 0 3 599 495
Ticino 0 9 878 168 0 4 615 048 14 493 216
Vaud 73 014 0 0 0 73 014
Valais 29 187 316 29 576 196 704 153 15 066 392 74 534 057
Neuchâtel 21 471 008 2 105 608 0 0 23 576 616
Geneva 0 0 0 0 0
Jura 921 979 0 1 627 438 2 037 703 4 587 121
Total 121 446 376 121 446 376 60 723 188 60 723 188 364 339 129

Source: Swiss Federal Finance Administration

2.2.2 Socio-Demographic Cost Compensation

The total amount allocated to the Swiss Cantons as socio-demographic cost compensation is fixed every four years by the Swiss Federal Assembly and then indexed annually according to the consumer price index. In 2020, 364.3 million CHF were allocated to the Cantons.

The total amount is divided into two parts.

The first part, which represents two thirds of the total amount aims to compensate costs related to poverty, age and integration of foreigners. A burden index, taking into account the proportion of inhabitants who receive social assistance (poverty), the proportion of inhabitants aged over 80 years (age) and the proportion of foreigners from non-neighbouring countries (integration of foreigners) is calculated for each Canton. The Cantons whose burden index is higher than the national average share the allocated amount depending on their population and burden index.

The second part, which represents one third of the total amount aims to compensate costs related to city centres. A burden index, taking into account the size of the municipalities, their population density and their employment rate is calculated for each Canton. The Cantons whose burden index is higher than the national average share the allocated amount depending on their population and burden index. The amounts received by the Swiss Cantons as socio-demographic cost compensation are shown in table 3 below.

Table 3. Amounts received by the Cantons as socio-demographic cost compensation (2020, CHF)

Canton Poverty, age and integration of foreigners City centres Total
Zurich 0 67 132 759 67 132 759
Bern 11 610 636 0 11 610 636
Luzern 0 0 0
Uri 0 0 0
Schwyz 0 0 0
Obwalden 0 0 0
Nidwalden 0 0 0
Glarus 0 0 0
Zug 0 0 0
Fribourg 0 0 0
Solothurn 3 438 499 0 3 438 499
Basel-Stadt 35 956 408 17 997 961 53 954 370
Basel-Landschaft 1 269 235 0 1 269 235
Schaffhausen 1 750 453 0 1 750 453
Appenzell A.Rh. 0 0 0
Appenzell I.Rh. 0 0 0
St. Gallen 0 0 0
Graubünden 0 0 0
Aargau 0 0 0
Thurgau 0 0 0
Ticino 14 511 245 0 14 511 245
Vaud 75 660 888 3 720 671 79 381 559
Valais  7 553 381 0 7 553 381
Neuchâtel 14 173 235 0 14 173 235
Geneva 76 295 830 32 594 986 108 890 816
Jura 672 942 0 672 942
Total 242 892 753 121 446 376 364 339 129

Source: Swiss Federal Finance Administration

2.3 Cohesion fund - Order on Fiscal Equalization and Cost Compensation (2007)

The Order on Fiscal Equalization and Cost Compensation provides for a mechanism called cohesion fund designed to ensure that the new system of funding does not disadvantage the poorest Cantons which will share the total amount of the cohesion fund. The cohesion fund will end in 2036. The total amount to be allocated is fixed at 365.6 million CHF per year between 2008 and 2015 and will then decrease by 5% per year. The Swiss Confederation contributes two thirds of the total amount and the Cantons contributes one third, proportionnally to their population. Therefore, each Canton contributes to the financing of the fund, but only the poorest Cantons get money from the fund as shown in table 4 below.

Table 4.Amounts received and paid by the Cantons as resource equalization in Switzerland (2020, thousand CHF)

Canton Population Amount paid Amount received Net amount received
Zurich 1 470 640 14 789 0 -14 789
Bern 1 021 394 11 539 39 101 27 562
Luzern 400 279 4 184 17 769 13 585
Uri 36 520 419 0 -419
Schwyz 154 984 1 548 0 -1 548
Obwalden 37 329 390 0 -390
Nidwalden 42 594 447 0 -447
Glarus 40 423 464 6 127 5 662
Zug 122 779 1 189 0 -1 189
Fribourg 307 299 2 873 102 960 100 087
Solothurn 267 432 2 939 0 -2 939
Basel-Stadt 194 498 2 331 0 -2 331
Basel-Landschaft 283 778 3 114 0 -3 114
Schaffhausen 80 662 888 0 -888
Appenzell A.Rh. 54 570 647 0 -647
Appenzell I.Rh. 16 008 177 0 -177
St. Gallen 501 038 5 432 0 -5 432
Graubünden 204 436 2 284 0 -2 284
Aargau 655 679 6 548 0 -6 548
Thurgau 267 722 2 755 0 -2 755
Ticino 353 562 3 719 0 -3 719
Vaud 777 470 7 609 0 -7 609
Valais 341 702 3 307 0 -3 307
Neuchâtel 179 130 2 018 81 625 79 606
Geneva 484 487 4 945 0 -4 945
Jura 72 919 818 14 541 13 723
Total 8 369 334 87 374 262 122 174 748

Source: Swiss Federal Finance Administration

3. Summary

Table 5 below summarizes the amounts received or paid by each Canton in the framework of the different funding mechanisms provided for by the Swiss law.

Table 5. Amounts received or paid by the Cantons in the framework of the funding mechanisms provided for by the Swiss law (2020, thousand CHF)

Cantons Resource index Equalization Cost compensation Cohesion fund Amount received (+) or paid (-)  
Geo-topographic Socio-demographic Total  
 
Zurich 121.7 -569 285 0 67 133 67 133 -14 789 -516 941  
Bern 77.6 1 034 042 28 015 11 611 39 625 27 562 1 101 229  
Luzern 89.1 135 717 6 167 0 6 167 13 585 155 469  
Uri 71.3 53 982 11 766 0 11 766 -419 65 329  
Schwyz 181.3 -225 364 6 909 0 6 909 -1 548 -220 004  
Obwalden 115.4 -10 309 6 134 0 6 134 -390 -4 565  
Nidwalden 158.0 -44 180 1 297 0 1 297 -447 -43 330  
Glarus 70.3 62 921 5 429 0 5 429 5 662 74 012  
Zug 249.7 -328 529 0 0 0 -1 189 -329 718  
Fribourg 79.2 278 296 8 989 0 8 989 100 087 387 372  
Solothurn 72.4 371 529 0 3 438 3 438 -2 939 372 029  
Basel-Stadt 146.0 -159 773 0 53 954 53 954 -2 331 -108 149  
Basel-Landschaft 96.9 13 822 0 1 269 1 269 -3 114 11 977  
Schaffhausen 91.1 20 026 0 1 750 1 750 -888 20 889  
Appenzell A.Rh. 85.0 29 907 19 964 0 19 964 -647 49 225  
Appenzell I.Rh. 91.1 3 946 8 618 0 8 618 -177 12 387  
St. Gallen 79.5 443 465 1 920 0 1 920 -5 432 439 953  
Graubünden 82.9 137 061 138 270 0 138 270 -2 284 273 047  
Aargau 82.2 467 108 0 0 0 -6 548 460 560  
Thurgau 77.7 268 482 3 599 0 3 599 -2 755 269 327  
Ticino 96.5 21 036 14 493 14 511 29 004 -3 719 46 321  
Vaud 99.9 322 73 79 382 79 455 -7 609 72 168  
Valais 65.4 680 219 74 534 7 553 82 087 -3 307 759 000  
Neuchâtel 82.9 120 417 23 577 14 173 37 750 79 606 237 773  
Geneva 143.7 -378 880 0 108 891 108 891 -4 945 -274 935  
Jura 64.9 148 499 4 587 673 5 260 13 723 167 482  
Total 100 2 574 480 364 339 364 339 728 678 174 748 3 477 906  

Source: Swiss Federal Finance Administration

4. Solidarity

Table 6 below describes the changes in the financial position of Swiss Cantons as the funding mechanisms are progressively being introduced. The second column shows the standardized tax revenue of the Swiss Cantons which measures their wealth based on their tax revenue. The table 6 also shows the solidarity per inhabitant, which is measured by calculating the difference between the total amount per capita each Canton would receive in case of the application of an allocation key based on the standardized tax revenue and the amounts actually received.

As can be seen from table 6 below, the Swiss funding mechanisms are very redistributive and lead in some cases to a paradox of revenues. We indeed see significant differences between the resource index before funding and the resource after funding taking into account the funding mechanisms of the Swiss Cantons, namely equalization, geo-topographic cost compensation, socio-demographic cost compensation and cohesion fund.

Before funding, the index ranges from 64.9 (Jura) to 249.7 (Zug) and after funding, between 84.1 (Solothurn) and 209.9 (Zug). The greatest gap between the Cantons falls from 184.8 to 125.8. Fifteen Cantons benefit from the solidarity, for amounts between 18.1 and 2027.5 CHF per inhabitant and the other eleven finance it, with contributions between 119.3 and 3723.1 CHF per inhabitant.

Table 6. Changes in the financial position of Cantons before and after the application of the funding mechanisms (2020)

Canton Resource index
before funding
Standardized tax
revenue
Population Standardized tax
revenue /hab
Equalization / hab  Geo-topographic cost
compensation/hab
Socio-demographic cost
compensation /hab
 Cohesion fund/hab Standardized tax revenue
/hab after funding
Resource index
after funding
Solidarity per
inhabitant (CHF)
Zurich 121.7 15 976 464 697 1 470 640 10 864 -387 0 46 -10 10 513 112.5 -856.3
Bern 77.6 7 077 571 232 1 021 394 6 929 1 012 27 11 27 8 006 85.7 754.7
Luzern 89.1 3 183 514 838 400 279 7 953 339 15 0 34 8 341 89.3 18.1
Uri 71.3 232 488 019 36 520 6 366 1 478 322 0 -11 8 155 87.3 1 492.9
Schwyz 181.3 2 509 811 337 154 984 16 194 -1 454 45 0 -10 14 775 158.1 -2 172.2
Obwalden 115.4 384 839 434 37 329 10 309 -276 164 0 -10 10 187 109.0 -601.5
Nidwalden 158.0 601 060 318 42 594 14 111 -1 037 30 0 -10 13 094 140.1 -1 673.3
Glarus 70.3 253 757 634 40 423 6 278 1 557 134 0 140 8 109 86.8 1 539.0
Zug 249.7 2 737 602 675 122 779 22 297 -2 676 0 0 -10 19 611 209.9 -3 723.1
Fribourg 79.2 2 172 682 361 307 299 7 070 906 29 0 326 8 331 89.2 932.2
Solothurn 72.4 1 729 786 082 267 432 6 468 1 389 0 13 -11 7 859 84.1 1 090.2
Basel-Stadt 146.0 2 534 991 102 194 498 13 034 -821 0 277 -12 12 478 133.5 -1 162.2
Basel-Landschaft 96.9 2 456 411 831 283 778 8 656 49 0 4 -11 8 698 93.1 -360.6
Schaffhausen 91.1 656 078 695 80 662 8 134 248 0 22 -11 8 393 89.8 -119.3
Appenzell A.Rh. 85.0 414 288 771 54 570 7 592 548 366 0 -12 8 494 90.9 548.9
Appenzell I.Rh. 91.1 130 259 920 16 008 8 137 247 538 0 -11 8 911 95.4 395.5
St. Gallen 79.5 3 556 368 224 501 038 7 098 885 4 0 -11 7 976 85.3 547.9
Graubünden 82.9 1 513 425 225 204 436 7 403 670 676 0 -11 8 738 93.5 990.7
Aargau 82.2 4 813 306 599 655 679 7 341 712 0 0 -10 8 043 86.1 360.6
Thurgau 77.7 18 584 51 458 267 722 6 942 1 003 13 0 -10 7 948 85.0 683.1
Ticino 96.5 3 046 900 475 353 562 8 618 59 41 41 -11 8 748 93.6 -270.8
Vaud 99.9 6 933 296 644 777 470 8 918 0 0 102 -10 9 010 96.4 -322.8
Valais 65.4 1 995 793 848 341 702 5 841 1 991 218 22 -10 8 062 86.3 1 949.3
Neuchâtel 82.9 1 325 612 337 179 130 7 400 672 132 79 444 8 727 93.4 982.8
Geneva 143.7 6 219 119 056 484 487 12 837 -782 0 225 -10 12 270 131.3 -1 164.0
Jura 64.9 422 558 544 72 919 5 795 2 037 63 9 188 8 092 86.6 2 027.5
Switzerland 100 74 736 441 356 8 369 334 8 930  

Source: Swiss Federal Finance Administration, own calculation

The ranking of Cantons before and after funding is shown in table 7 and figure 1 below.

Table 7. Ranking of the Swiss Cantons in terms of resource index, before and after application of the funding mechanisms (2020)

Before funding After funding
Position Canton Index Position Canton Index
1 Zug 249.7 1 Zug 209.9
2 Schwyz 181.3 2 Schwyz 158.1
3 Nidwalden 158.0 3 Nidwalden 140.1
4 Basel-Stadt 146.0 4 Basel-Stadt 133.5
5 Geneva 143.7 5 Geneva 131.3
6 Zurich 121.7 6 Zurich 112.5
7 Obwalden 115.4 7 Obwalden 109
8 Vaud 99.9 8 Vaud 96.4
9 Basel-Landschaft 96.9 9 Appenzell I.Rh. 95.4
10 Ticino 96.5 10 Ticino 93.6
11 Appenzell I.Rh. 91.1 11 Graubünden 93.5
12 Schaffhausen 91.1 12 Neuchâtel 93.4
13 Luzern 89.1 13 Basel-Landschaft 93.1
14 Appenzell A.Rh. 85.0 14 Appenzell A.Rh. 90.9
15 Graubünden 82.9 15 Schaffhausen 89.8
16 Neuchâtel 82.9 16 Luzern 89.3
17 Aargau 82.2 17 Fribourg 89.2
18 St. Gallen 79.5 18 Uri 87.3
19 Fribourg 79.2 19 Glarus 86.8
20 Thurgau 77.7 20 Jura 86.6
21 Bern 77.6 21 Valais 86.3
22 Solothurn 72.4 22 Aargau 86.1
23 Uri 71.3 23 Bern 85.7
24 Glarus 70.3 24 St. Gallen 85.3
25 Valais 65.4 25 Thurgau 85
26 Jura 64.9 26 Solothurn 84.1

Source: Swiss Federal Finance Administration

Figure 1.Ranking of the Swiss Cantons in terms of resource index, before and after application of the funding mechanisms (2020)

Source: Swiss Federal Finance Administration

The changes in the ranking of Cantons before and after funding allow us to conclude on the presence of a paradox of revenues, in addition to solidarity. Indeed, sixteen of the twenty-six moved in the ranking, while the other ten did not. The eight richest Cantons did not move in the ranking. The largest changes were experienced by St. Gallen which fell six places, going from the eighteenth to the twenty-fourth place, and by Jura which gained six places, moving from the twenty-sixth to the twentieth place.

5. Conclusion

The purpose of our paper was to explain the funding mechanisms of Swiss Cantons and to calculate to what extent they create solidarity and influence the wealth of Cantons. Our analysis enabled us to see that the Swiss system of funding is redistributive and even leads to a paradox of revenues in some cases. This paradox could be reasonable for the aim of relaunching the economy of the poorest Cantons. Additionally, this situation is not an isolated one. Such a paradox of revenues was observed in Canada (Vandernoot, 2014 – a, and b), Belgium (Pagano, Vandernoot and Tyrant, 2011) and in Spain (Bellanca, Martinez Sans & Vandernoot, 2013).

Further research could study the financial flows between the Swiss Cantons on longer periods in order to calculate the cumulative effect of this phenomenon. Indeed, our analysis focus on one year, but serial data would provide better insight in trends and emerging patterns in the Swiss context of solidarity reform. Eventually, transfers might weaken the welfare-improvement effect as Gross (2021) theoretically states.

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© 2021 The Authors. Published by Sprint Investify. ISSN 2359-7712. This article is licensed under a Creative Commons Attribution 4.0 International License. Creative Commons License
Corresponding Author
Julien Vandernoot, Associate Professor, Public Finance and Taxation Department, Warocqué School of Business and Economics, University of Mons (UMONS), Belgium
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Author(s)

Julien VANDERNOOT
Warocqué School of Business and Economics, University of Mons (UMONS), Belgium

Jordan SIGNOR
Warocqué School of Business and Economics, University of Mons (UMONS), Belgium
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