In 2001, Article 126 of the Swiss Constitution codified a structural balanced budget rule for the federal government, known as the 'debt brake'. This was designed to prevent structural deficits leading to an increase in debt, as happened in Switzerland in the 1990s. The provision was approved by popular vote (referendum) with an approval rate of 85% at the end of 2001. The new constitutional provision was applied for the first time to the 2003 federal budget. 

The Swiss rule is relatively simple. The bulk of the federal budget must be planned to break even each year, after adjustment for economic conditions. In other words, 
"structural" borrowing is prohibited. Instead, the Swiss are content to cap federal spending each year at the level of structural tax revenues, i.e., adjusted for cyclical variations.

As a result, public spending remains broadly stable around the trend in public revenues, rather than undergoing cycles of austerity and largesse. When economic growth is below trend, budget deficits can occur. However, over the whole economic cycle, every Swiss franc of expenditure covered is paid for: surpluses must be generated in periods of expansion to compensate for borrowing when the economy is slowing down. In other words, it is a counter-cyclical fiscal policy.

Unlike Switzerland, the United States has never introduced a constitutional amendment aimed at establishing a balanced budget and curbing indebtedness. To make the federal government more fiscally responsible, it created the debt ceiling. Set by Congress, this ceiling is the maximum amount that the federal government can borrow to finance the obligations that elected officials and presidents have already approved.  The ceiling, which currently stands at $31.4 trillion, was created over a century ago. Since 1960, Congress has raised or extended the debt ceiling 78 times, including 29 times under Democratic presidents and 49 times under Republican presidents.

At the beginning of August, the rating agency Fitch downgraded the US Treasury's debt rating from AAA to AA+, corroborating what all the major federal budget and monetary agencies have been saying for years: the country is on an imprudent and unsustainable fiscal path, and nothing has been done to remedy it. The figures speak  for themselves: since fiscal year 2000, the debt subject to the ceiling has risen from around $5.7 trillion to around $32.5 trillion today.

Despite the aforementioned risks, it seems impossible to envisage the United States defaulting on its debt at all. There is a simple reason for this: a government can never default on its local currency debt if its central bank is prepared to buy the bonds. This is the case not only for Uncle Sam but also for Japan. The Japanese case is also instructive, particularly in terms of the hidden risks incurred by investors in government bonds. Indeed, one consequence of a central bank buying unlimited quantities of domestic sovereign bonds is that, at some point, the private sector no longer wants this paper.

For example, the Bank of Japan now owns more than half of the Japanese government bond market, which has the effect of making this market relatively illiquid. Another consequence of a central bank buying generous amounts of government paper is that these purchases are generally made by printing more fiat money. The result is either inflation or currency depreciation, or both.

As Daniel Müller-Jentsch of Avenir Suisse put it: "Switzerland has drawn up the blueprint for what I am sure will be the standard tax model of the future".
Although the debt brake is already part of the policies of many governments in the form of fiscal rules using predefined ratios (e.g., the EU's stability pact), these mechanisms have not always been respected due to occasional economic threats, resulting in a sharp rise in public debt in many developed economies. Rapidly ageing populations and rising social protection costs linked to unemployment and health insurance threaten to add a further debt burden in most of these countries.

For many states, the temptation is great to turn to the central bank and commercial banks for help in financing their growing debt. As we saw above with the Japanese case, these lax policies are not sustainable in the long term and will one day force these countries to return to budgetary discipline. In this context, Switzerland's positive austerity could well serve as a model. It teaches us that two measures are essential to restore the health and viability of a nation's public finances.