Sustainability of Fiscal Policy
The combination of the BAK Taxation Index (EATR tax burden) and the sustainability of fiscal policy provides a comprehensive picture of the tax attractiveness of a location. The sustainability of a location's fiscal policy is an indicator of the health of the public budget and thus of the durability of the current tax level: in sustainably financed locations, the tax level is secure in the longer term; in locations that are not sustainably financed, there is a threat of tax increases. The "fiscal gap" indicator used by the EU is used as a sustainability criterion here. This indicator shows how much a country's (or canton's) budget would have to be adjusted in order to achieve the so-called Maastricht criterion (a national debt of 60% of GDP) within a period of fifteen years.
Financial sustainability 2021 and tax burden on companies (combined analysis)
Measured by the EU criterion, the Swiss cantons are characterised by a more sustainable fiscal policy than the majority of the EU countries. That is, in an international comparison, the financial situation of most cantons is in very good condition. This is due in particular to the comparatively low debt ratios in the cantons. At the same time, the tax burden for companies (and analogously: for highly qualified employees) is low in international comparison. Our analysis of the sustainability of public finances 2021 shows that the cantons can also afford this favourable tax climate.

Methodology
For the assessment of the sustainability of fiscal policy, an indicator is used which the EU uses for its monitoring of the financial sustainability of the EU member states (current publication: "Debt Sustainability Monitor 2020"). Specifically, this is the fiscal gap indicator S1, which is designed to assess fiscal sustainability in the (medium-term) period. The starting point of the fiscal gap indicator is the intertemporal budget constraint of the state. This requires that the present value of the initial debt stock and all future expenditures must be covered by the present value of the final debt stock and all future revenues. A debt ratio (government debt as a percentage of GDP) of 60% is assumed as the final debt level or target debt for all locations. This corresponds to the Maastricht criterion and ensures that the results are comparable between territorial authorities. The influence of demographic change is taken into account in future expenditure. The fiscal gap indicator derived from the intertemporal budget constraint is defined as the difference between the sustainable primary balance ratio and the primary balance ratio in the base year. (The primary balance ratio corresponds to the primary balance – i.e. the difference between primary revenue and primary expenditure – as a percentage of GDP). The sustainable primary balance ratio is the primary balance ratio that would have to be achieved annually from the base year onwards in order to reach a gross debt ratio of 60% by the end of the period under consideration (15 years from the base year). The fiscal gap thus indicates the extent to which the primary balance ratio of the base year would have to be adjusted to reach the gross debt ratio of 60%. When interpreting the fiscal gap, it should be noted that negative values indicate a sustainable and positive values an unsustainable fiscal policy. The following two examples illustrate the interpretation of the fiscal gap: For Italy the fiscal gap is 9.2% and the primary balance ratio in the base year (for Italy this is 2025) -0.8%. This means that after the five-year transition period, Italy needs a primary balance ratio 9.2 percentage points higher each year than in the base year to reach a gross debt ratio of 60% in 2040. Conversely, in the Canton of Lucerne the fiscal gap is -1.9% and the primary balance ratio in the base year is 0.7%. After the five-year transition phase in the period up to 2037, the canton of Lucerne could therefore in principle afford a primary balance ratio -1.9 percentage points worse each year than in the base year and would still achieve the Maastricht debt target of 60% in 2037. The data preparation for the cantons is designed in such a way that the individual cantons each include their municipalities and a share of the federal level (including social security funds) corresponding to their economic strength. The total of all cantons thus represents the whole of Switzerland.
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