MACRO ECONOMICS

SWITZERLAND

- SHASHANK JOGANI, 28

INDEX

Sr. No.

TOPIC PAGE NO.

1. ACKNOWLEDGEMENT 32. ABSTRACT3. OBJECTIVES4. INTRODUCTION 45. TRADE POLICIES6. MONETARY POLICY OF

SWITZERLAND AND ITS ASSESSMENT

7. FISCAL POLICY OF SWITZERLAND 58. 2010 SWISS BALANCE OF PAYMENTS 79. CONCLUSION 1110. BIBLIOGRAPHY 13

ACKNOWLEDGEMENTI have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and others. I would like to extend my sincere thanks to all of them.

I am highly indebted to H.R College and the teaching faculty for their guidance and constant

supervision as well as for providing necessary information regarding the project and also for

their support in completing the project.

I would like to express our gratitude towards my parents, fellow friends and the teacher

Ms.Anupama Sawant and Mr. Hersh Gaba for their kind co-operation and encouragement which

helped me in completion of this project.

My thanks and appreciations also goes to all those who have in some ways helped me in

developing the project and people who have willingly helped me out with their abilities.

ABSTRACTThe book report helps us profoundly understand the economy of the beautiful country of Switzerland. It gives us a brief about the distribution of the work force in the various sectors and the contribution of various sectors to the economy. The report helps us to understand the policies implemented by the Swiss Government and also the manner in which the government uses funds for public expenditure. It also helps us understand the Balance of Payment structure of the Swiss economy. Switzerland is a member of many international economic organizations and it is rated to be one of the most lenient countries to trade in. The report also makes us analyze the monetary and fiscal policies implemented in Switzerland.

OBJECTIVESThe objectives for doing the project are as follows:

To profoundly understand the economic structure of Switzerland To understand the impact of Switzerland on the global economy and to analyze its

efficieny

INTRODUCTION:

Switzerland is a peaceful, prosperous, and modern market economy

with low unemployment, a highly skilled labor force, and a per

capita GDP among the highest in the world. Switzerland's economy

benefits from a highly developed service sector, led by financial

services, and a manufacturing industry that specializes in high-

technology, knowledge-based production. The main areas include

micro technology, hi-tech, biotechnology and pharmaceuticals, as

well as banking and insurance know-how. The service sector now

employs the greatest number of people.

Most of the people working in Switzerland are employed by small and medium-sized enterprises,

which play an extremely important role in the Swiss economy. The Swiss are concerned that

economic activity should have as little impact as possible on the environment. Switzerland's

energy and transport policies aim to be environmentally friendly.

The Swiss have brought their economic practices largely into conformity with the EU's, in order

to enhance their international competitiveness, but some trade protectionism remains,

particularly for its small agricultural sector. The global financial crisis and resulting economic

downturn put Switzerland in a recession in 2009 as global export demand stalled. The Swiss

National Bank during this period effectively implemented a zero-interest rate policy in a bid to

boost the economy and prevent appreciation of the franc. Switzerland's economy grew by 2.7%

in 2010, when Bern implemented a third fiscal stimulus program, but its prized banking sector

has recently faced significant challenges. The country's largest banks suffered sizable losses in

2008-09, leading its largest bank to accept a government rescue deal in late 2008. Switzerland

has also come under increasing pressure from individual neighboring countries, the EU, the US,

and international institutions to reform its banking secrecy laws. Consequently, the government

agreed to conform to OECD regulations on administrative assistance in tax matters, including tax

evasion. The government has renegotiated its double taxation agreements with numerous

countries, including the US, to incorporate the OECD standard, and it is working with Germany

and the UK to resolve outstanding issues, particularly the possibility of imposing taxes on bank

deposits held by foreigners. Parliament passed the first five double-taxation agreements,

including that with the US, in March 2010. The agreement with the US awaits US Senate

approval. In 2009, Swiss financial regulators ordered the country's largest bank to reveal at

Washington's behest the names of US account-holders suspected of using the bank to commit tax

fraud. These steps will have a lasting impact on Switzerland's long history of bank secrecy.

TRADE POLICIES:DEPENDENCE ON TRADE:

Switzerland has virtually no mineral resources and a restricted surface area. It depends for its

wealth on foreign trade. The relatively small size of its domestic market - a total population of

just over 7,785,800 - is another factor which has encouraged Swiss manufacturers to look

abroad: they need foreign markets in order to make investment in research and development

worthwhile.

Switzerland imports bulky raw materials and exports high-quality goods. In 2003 the value of

one tonne of exported goods was two and a quarter times more than that of the same amount of

imports.

ECONOMIC AND TRADE FREEDOM:

Switzerland’s economic freedom score is 81.9, making its economy the 5th freest in the

2011 Index. Its score has improved by 0.8 point since last year, with notable improvements in

monetary and labor freedom. Switzerland is ranked 1st out of 43 countries in the Europe region,

and its overall score is much higher than the world average.

Switzerland’s openness to foreign trade and investment continues to provide real stimulus for a

dynamic and resilient economy. A sound regulatory environment and minimal barriers to trade

have contributed to the country’s status as one of the world’s most competitive and innovative

economies. Macroeconomic stability and a highly developed and competitive financial sector

reinforce Switzerland’s position as a global financial

hub. Its financial sector has recovered swiftly from the

global financial crisis and has withstood a weakening

of Switzerland’s bank secrecy laws.

Well-secured property rights, including for intellectual

property, promote entrepreneurship and productivity

growth. Flexible labor regulations and the absence of

corruption also sustain vibrant entrepreneurship.

Inflationary pressures are under control. The judicial

system, independent of political influence, ensures

strong enforcement of contracts.

BUSINESS IN SWITZERLAND:

Switzerland’s competitive and transparent regulatory framework strongly supports commercial

activity, allowing business formation and operation to be efficient and dynamic. Bankruptcy

proceedings are relatively easy.

TRADE IN SWITZERLAND:

Switzerland’s weighted average tariff rate was 0 percent in 2009. However, prohibitive

agriculture tariffs and quotas block trade in some products. Services market access barriers and

restrictive biotechnology regulations add to the cost of trade. Ten points were deducted from

Switzerland’s trade freedom score to account for non-tariff barriers.

Trade freedom is Switzerland as compared to world freedom (Switzerland : Blue, World : Black)

GOVERNMENT SPENDING IN SWITZERLAND:

In the most recent year, total government expenditures, including consumption and transfer

payments, held steady at 32 percent of GDP. Direct government participation in the economy has

been confined to such public services as post offices, railways, and defense. Stimulus spending

was limited to infrastructure investment and labor support to higher temporary work benefits.

The debt-to-GDP ratio has been on the decline and is now below 40 percent.

MONETARY FREEDOM IN SWITZERLAND:

Inflation has been extremely low, averaging 1 percent between 2007 and 2009. Government

measures influence the prices of agricultural goods and pharmaceutical products, and the

government influences prices through regulation, subsidies, and state-owned utilities. Ten points

were deducted from Switzerland’s monetary freedom score to account for measures that distort

domestic prices.

INVESTMENT FREEDM:

Foreign investment receives national treatment, and most sectors are open to private investment.

Project screening applies in a few sectors. Joint stock companies must have a majority of resident

Swiss nationals on their boards. Foreign investments are subject to review by the Competition

Commission if the value of the investing firm’s sales reaches certain levels. The investment code

and its implementation are generally transparent and efficient, but this varies widely across

regional cantons. Residents and non-residents may hold foreign exchange accounts. There are no

restrictions on repatriation of profits or current transfers.

FINANCIAL FREEDOM:

Switzerland is a leading financial center with highly developed and well-regulated institutions.

Foreign and domestic investors have adequate access to capital and a wide variety of credit

instruments. Mergers and acquisitions have reduced the number of banks, but there are still over

300. The two largest banking groups account for around 60 percent of the system’s total assets.

Credit is allocated on market terms. Insurance is well developed, and the state-owned postal

service offers a variety of financial services. Banking and finance regulation is strong and

effective, but there are weaknesses in the ability to monitor and assess systemic risks and oversee

cross-border practices of complex financial institutions. Switzerland’s stock exchange is one of

Europe’s largest, and capital markets are sophisticated and well developed. The global financial

crisis hit the two major banks (UBS and Credit Suisse) hard. The government bailed out UBS in

2008 with asset purchases and a capital injection but sold off its stake in 2009.

PROPERTY RIGHTS:

The judiciary is independent, and contracts are secure. Switzerland has one of the world’s best

protection regimes for both foreign and domestic holders of intellectual property.

FREEDOM FROM CORRUPTION:

Corruption is perceived as almost nonexistent. Switzerland ranks 5th out of 180 countries in

Transparency International’s Corruption Perceptions Index for 2009. Corruption is not pervasive

in any area of the economy, and enforcement against domestic corruption is effective. The

Federal Council ratified the U.N. Convention Against Corruption on September 24, 2009.

LABOR FREEDOM:

Switzerland’s labor regulations are flexible, and provisions concerning work hours have been

eased. The non-salary cost of employing a worker is moderate, but dismissing an employee can

be costly.

MONETARY POLICY OF SWITZERLAND AND ITS ASSESSMENT:

As expected, at its quarterly monetary policy meeting, the SNB kept its target three-month

LIBOR rate on hold at 0.25%. As the chart below shows, the official rate has been at this level

since March 2009. The Central Bank seemed less upbeat on growth prospects, but remains

worried by the “danger of overheating in the real estate sector”. We expect a first hike in

December 2011, but only if the franc gives back some ground, or at least stabilises.

For 2011, the SNB kept its GDP growth forecast unchanged at 2%, roughly in line with our own

expectations (2¼%). However, the monetary authorities added quite clearly that “downside risks

predominate”, mentioning the debt problems in the euro area periphery, the need to undertake

fiscal restrictive measures in various parts of the world, and the commodity price increases.

For Switzerland, to no surprise, the SNB added that “the main risks remain, on the one hand, the

effects of the strong Swiss franc on the export industry and, on the other hand, the danger of

overheating in the real estate sector”.

Regarding its conditional inflation forecasts, the SNB has made only minor adjustments: from

0.8% to 0.9% for 2011 (due to higher oil prices), from 1.1% to 1.0% for 2012 and from 2.0% to

1.7% fro 2013 (both due to a higher franc and slower international growth). As shown in the

above chart, on the hypothesis of unchanged rates, headline inflation is not expected to climb

above the 2% mark until Q4 2013, compared to Q3 2013 in its previous statement.

Once again, the SNB made no strong declaration regarding the Swiss franc and its recent surge.

It merely mentioned that “the SNB is concerned about exchange rate developments”. There were

absolutely no hints on potential renewed interventions in the currency markets. Overall, the

situation remains the same. For domestic reasons, the SNB would be happy to start hiking short-

term rates. However, with the franc so strong (see chart below), its margin of manoeuvre looks

pretty limited. So, for the next few months, the SNB is likely to remain on hold. We expect a

first hike in December 2011, but it will happen only if the franc gives back some ground, or at

least stabilises.

FISCAL POLICY OF SWITZERLANDFISCAL SOVEREIGNTY

Switzerland is a federal republic in which the sovereignty of the constituent states (the cantons)

is limited by the enumerated powers delegated to the federal state (the Confederation) through

the federal constitution. Consequently, the original authority to levy taxes is vested in the

individual cantons of Switzerland through their constitutions.[1] Within the bounds of the

authority delegated to them by cantonal law, the municipalities may also levy taxes. The extent

of that authority varies from canton to canton.[2] While the formal framework of the most

important cantonal direct taxes has been harmonized through the 1990 Federal Tax

Harmonisation Law, the cantons (and, as the case may be, the municipalities) remain free to set

their tax rates or establish new taxes, except on tax objects already taxed under federal law.[3]

Since after World War II, the federal constitution authorises the Confederation to levy a number

of taxes, the most significant of which are an income tax, a withholding tax and a value added

tax. However, Switzerland is unique among modern sovereign states in that the authority to levy

these taxes is limited in duration and extent.[4][5] The Constitution imposes an upper limit on the

federal tax rates and causes the federal authority to levy taxes to expire in 2020. A renewal of

that authority requires a constitutional amendment, which must be approved in a popular

referendum by both a majority of the popular vote and the cantons. If that renewal is not

approved at the polls (as it has been six times since 1958),[5] the Confederation itself will

conceivably dissolve for lack of funds. All attempts to remove this limitation by amending the

constitution to provide for a permanent federal authority to levy taxes have been rejected in

Parliament or – no less than five times – by popular vote, most recently in 1991.[6]

CONSTITUTIONAL LIMITS TO TAXATION

The federal constitution imposes certain limits on taxation at the federal cantonal and municipal

levels. To begin with, it provides that no tax may be levied except where provided for by federal,

cantonal or municipal statute. Because statutes can at all levels be made subject to a popular

referendum, Swiss tax rates are in practice set directly by the voters through instruments of direct

democracy.

The constitution mandates that taxation must be general and equal in nature, and it must be

proportionate to one's ability to pay.[7] The Federal Supreme Court has interpreted this as

prohibiting a regressive tax,[7]although flat rate taxes (as instituted in several cantons) are held to

be constitutional by tax law scholars. Moreover, double taxation by several cantons is

constitutionally prohibited, as is a confiscatory rate of taxation.[7]

FISCAL FREEDOM IN SWITZERLAND:

Taxation is more burdensome at the cantonal levels than it is at the federal level. The top federal

income tax rate is 11.5 percent, and the combined top income tax rate (federal and sub-federal)

can be as high as 41.5 percent, though it is generally much lower. The federal corporate tax rate

on net income is 8.5 percent (7.8 percent since income and capital taxes are deductible) but, in

combination with cantonal rates, can be as high as 24 percent. Other taxes include a value-added

tax (VAT), a tax on securities and insurance premiums, and cantonal-level property taxes. In the

most recent year, overall tax revenue as a percentage of GDP was 29.4 percent.

2010 SWISS BALANCE OF PAYMENTSThe year 2010 was characterised by economic recovery in Switzerland and abroad. The

Swiss current account surplus rose by CHF 25 billion to CHF 86 billion, or 16% of gross

domestic product. The larger surplus was primarily attributable to net income from direct

investment. While improved earnings by foreign subsidiaries resulted in higher receipts from

direct investment abroad, the corresponding expenses, i.e. income earned on foreign direct

investment in Switzerland, declined. Overall, the surplus in investment income rose by CHF 23

billion to CHF 49 billion. Receipts from exports of goods increased by 8%, while those for

services were up by 5%. Expenses for imports of goods also rose, by 11%. By contrast,

expenses for services obtained abroad declined slightly, by 2%. Overall, foreign trade in goods

and services showed a surplus of receipts over expenses amounting to CHF 64 billion (2009:

CHF 63 billion).

In the financial account, a net capital outflow of CHF 92 billion was recorded, compared with

CHF 25 billion in 2009. The financial account was greatly influenced by transactions carried out

by the Swiss National Bank (SNB). On the one hand, the SNB increased its reserve assets (on a

transaction basis) by CHF 138 billion (2009: CHF 47 billion), which led to correspondingly high

capital outflows. On the other hand, capital inflows amounting to CHF 31 billion resulted from

the reduction in swap and repo business with other central banks and commercial banks abroad.

The high net inflows of capital from portfolio investment (CHF 31 billion) were also related to

the SNB, as foreign investors made large purchases of money market instruments issued by the

SNB (SNB Bills). Direct investment recorded a net capital outflow of CHF 35 billion. Swiss

direct investors reinvested profits earned by their subsidiaries abroad, while foreign investors

withdrew funds from their subsidiaries in Switzerland. The lending and deposit business of

commercial banks resulted in net capital inflows of CHF 15 billion.

CURRENT ACCOUNT

Foreign trade recovered from the sharp downturn suffered in 2009. In goods trading (special

trade), receipts from exports rose by 7% despite the high level of the Swiss franc.

Metal industry exports, which had declined particularly markedly in 2009, recovered most

strongly (21%). Expenses for imports grew more strongly (9%) than receipts for exports, with

imports of raw materials and semi-manufactured goods as well as energy sources recording the

greatest increases. The surplus in goods trading (special trade) was down by CHF 1 billion to

CHF 19 billion.

In cross-border trade in services, receipts were up by 5%. The most important contributory factor

was higher receipts from merchanting business, which rose by one-third to CHF 20 billion. This

was due to higher raw materials prices and a relocation of business operations to Switzerland.

The increase in receipts from tourism and fees for the use of intellectual property (e.g. licences

and patents) was less pronounced. Receipts from bank financial services continued to decrease

and amounted to CHF 16 billion; this item has been falling for the last three years. Expenses for

foreign travel, bank financial services and fees for the use of licences and patents were lower

than in 2009. The only area where expenses were up on 2009 was transportation services. The

surplus from trade in services increased by CHF 5 billion to CHF 51 billion. Income from direct

investment abroad (receipts) rose by CHF 19 billion to CHF 72 billion.

Not since 2005–06 has such a high level of income been recorded. The earnings position of

foreign subsidiaries improved for most industries. By contrast, income from foreign direct

investment in Switzerland (expenses) fell from CHF 38 billion to CHF 35 billion. This was

primarily due to reduced reinvested earnings (retained profits) of finance and holding companies

in Switzerland. Income from portfolio investment in both directions increased from its

exceptionally low level of 2009. In the case of income from other investment, both receipts and

expenses decreased, although the decline was more pronounced for expenses. The main

contributory factor was lower interest rates and capital holdings, which led to reduced earnings

from bank interest rate business. Overall, the surplus in investment income rose by CHF 23

billion to CHF 49 billion, and thus was mainly responsible for the strong increase in the current

account surplus by CHF 25 billion to CHF 86 billion.

FINANCIAL ACCOUNT

Direct investment abroad (capital outflows) increased from CHF 30 billion to CHF 40 billion.

Swiss companies mainly invested in existing subsidiaries abroad. Insurance companies were

most active, followed by finance and holding companies, although banks also invested

considerable sums abroad. The largest amounts were invested in the US and in Central and South

America. By contrast, Swiss companies withdrew significant amounts of capital from the EU.

Foreign direct investment in Switzerland (capital inflows) amounted to CHF 5 billion, with

foreign investors reinvesting earnings in Switzerland and granting loans to their subsidiaries. At

the same time, there was some disinvestment, in particular by companies from the EU.

Looking at portfolio investment, for the first time Swiss investors sold more securities issued by

foreign borrowers than they purchased (portfolio investment abroad). In net terms, CHF 8 billion

flowed into Switzerland, due to sales of foreign money market instruments, the volume of which

was higher than investments in shares and bonds. Foreign investors spent a net CHF 23 billion

on Swiss-issued securities (portfolio investment in Switzerland), buying mainly money market

instruments, in particular SNB Bills. Banks further reduced their claims and liabilities with

respect to banks abroad. This resulted in net capital inflows of CHF 19 billion in interbank

operations. Business with customers abroad resulted in net capital outflows of CHF 3 billion. For

the first time since 2008, banks were again – on balance – lending to foreign customers. The

SNB further reduced its swap and repo transactions with other central banks and with

commercial banks abroad. This resulted in net capital inflows of CHF 31 billion. Since the SNB

purchased considerable amounts of foreign exchange, reserve assets (on a transaction basis)

increased by CHF 138 billion (capital outflows)

CONCLUSION

The economy of Switzerland is one of the world's most stable economies. Its policy of long-term monetary security and political stability has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment. Because of the country's small size and high labor specialization, industry and trade are the keys to Switzerland's economic livelihood. Switzerland has achieved one of the highest per capita incomes in the world with low unemployment rates and a low budget deficit. The service sector has also come to play a significant economic role.

BIBLIOGRAPHY

http://www.heritage.org/index/country/Switzerland http://en.wikipedia.org/wiki/Taxation_in_Switzerland http://www.oecd.org/document/

34/0,3746,en_2649_37401_48709218_1_1_1_37401,00.html http://www.traveldocs.com/ch/economy.htm http://www.swissworld.org/en/economy/?gclid=CJC4_ITEq6wCFYEc6wodwxPF6A http://en.wikipedia.org/wiki/Economy_of_Switzerland http://www.indexmundi.com/switzerland/economy_profile.html http://perspectives.pictet.com/2011/06/16/switzerland-monetary-policy-assessment/