Switzerland puts immense weight on decentralised decision making and the extreme devolution of powers. In this model, financial transfer mechanisms, that re-distribute resources between richer and poorer municipalities within each canton, can be just as important for economic success as the similar transfers between cantons themselves (the so called NFA) at national level. But most inter-communal systems are facing even bigger challenges than the much more widely discussed issues confronting the NFA. Avenir Suisse’s recent “Cantonal Monitoring 5” presented an original and comprehensive analysis and assessment of cantonal transfer mechanisms. It answered questions like: Is there a clear division between the equalisation of resources and the compensation of burdens? Who finances transfer payments and how high are they? How many municipalities are entirely dependent on transfer payments? And to what extent do such transfers weaken inter-communal competition? The 12 different criteria assessed fell roughly into three categories: the basic structure of financial equalisation; the degree of re-distribution; and the incentives prompted by the transfers.


The study unearths a surprising fact: the systems of inter-communal financial equalisation allow a substantial number of poorer communes to cushion themselves from competition without grave consequences. Most cantonal transfer systems grant municipalities a minimum level of revenue per capita. Municipalities that don’t reach this “floor” through their own tax receipts don’t really have to bother making themselves more attractive, as increasing their tax receipts would just lead to an identical loss of transfer subsidies (at least until they attained the floor). Similarly, lower tax receipts would just be compensated one to one by bigger transfers.

Avenir Suisse’s study shows almost 40 per cent of Switzerland’s municipalities are in this position. It also reveals big differences between French and German speaking regions. Whereas only 2 per cent of communes in French speaking areas are affected, the equivalent figure is 56 per cent for German speaking regions. (The reason is the generally very high level of the granted “floor” by most German speaking cantons).

But even leaving aside transfer payments, institutional factors undermine the role of inter-communal competition in boosting good local management. The issue may not, at first glance, appear particularly relevant. But it is a minefield: Regional administrative bodies’ fight for tax revenues is credited great importance across the whole political spectrum. For the Left, it’s seen as a sort of curse – a beggar thy neighbour race to cut taxes, resulting in lower quality of public services, to the detriment of the middle class and the poor, and benefitting only a few rich people. For the liberal Right, by contrast, it’s a blessing, with competition portrayed as a promoter of financial discipline, allowing relatively streamlined and efficient government, and encouraging politicians to pursue the public good.

The roll of direct democracy

In theory, Switzerland’s three tier political system ((communal, cantonal and federal government, ed)) should tempt local politicians to aim for the highest possible local tax rates (which would also make their life more comfortable by eliminating worries about savings). That’s because the proceeds of higher local levies flow entirely to the municipality, while the overall tax burden ((comprising local, cantonal and federal levies, ed)) would rise only modestly. The production factors Labour and Capital also don’t react so sensitively to the tax burden that tax rises are, over the longer term, penalised and tax cuts rewarded. And here, on top of that, come the additional already mentioned effects of financial transfer mechanisms.

Despite these facts, competition, particularly at local level, seems to work very well. Admittedly, it’s difficult, if not impossible, to quantify matters. But, across the board, there appear clear efforts to keep taxes down and public service quality high.

In large part, this stems from Switzerland’s direct democracy and the closeness of ordinary citizens to local government. Municipal tax increases ((which in Switzerland always require a local referendum, ed )) tend only to pass when there are very good reasons. Occasionally, even a municipality in apparent financial difficulties can find voters blocking a tax hike. Tax cuts are much easier, especially when not linked to any reduction in public services.

Voters can also exercise their influence through the ballot box. They can elect local politicians whom they believe will promote a high ratio between quality of public services and tax level. The chances of electing the right representatives tend to be higher in local government, compared with larger scale polls, because of the greater proximity of voters to their local representatives.

Municipal (and cantonal) politicians’ inbuilt sense of good housekeeping sometimes goes very far. Many often show clear pride in their municipalities’ or cantons’ low tax levels, while still offering top level services and avoiding any need for drastic tax hikes in a crisis. The competition in these cases is an indirect one: the rivalry between local or regional administrative units allows easy comparisons and stimulates a need or zeal to be “better” than one’s neighbour. That’s the good news:  local politics in Switzerland tend to be dominated by people apparently dedicated to the well being of their communities and unmoved by materialistic obligations to maximise revenues.

Many equalisation systems with much room for improvement

But if, to take an example from the canton of Bern, the admission of a new resident on social security makes more sense financially for a municipality with few resources than that of a small business, then something, in spite of the actual reaction to such distorted incentives, is wrong.

Transfer mechanisms that penalise success should be judged harshly, and the other, sometimes gross, flaws in many cantonal systems should also not be overlooked. Often, the latter are unnecessarily complex; many are burdened with extraneous factors (often the result of political compromises). Most cantons’ transfer mechanisms have grown with each revision, while some are plainly outdated. Moreover, they often include distorted incentives, which do not contribute to establish a level playing field. In that sense, such mechanisms could actually play a more effective role in contributing to preserving a heterogeneous Switzerland.

This article first appeared in Kommunalmagazin, December 2013.