On the Fiscal Sustainability of Swiss Cantons, 1905–2017

Abstract Do Swiss cantonal governments run sustainable fiscal policies? Despite a growing literature on subnational fiscal sustainability, evidence on the Swiss case is largely missing. Drawing on a novel data set that stretches back to 1905, we test for stationarity of cantonal public debt, revenue, and spending and for cointegration between cantonal revenues and expenditures. Based on time series properties, we estimate individual fiscal reaction functions for each canton and for the panel of cantons as a whole. Using second-generation panel modeling—and thus accounting for heterogeneity in cantonal fiscal policy, structural breaks, and cross-sectional dependence (CD) among the cantons—our results show that the cantons run sustainable policies. Moreover, our results provide evidence that fiscal rules explain part of the heterogeneity in cantonal fiscal reactions to increased debt.