THE FISCAL EQUIVALENCE TRAP – DON’T DECIDE, DON’T PAY - HOW A PRINCIPLE OF FISCAL FEDERALISM MOTIVATES STATE INACTION

Abstract

Two questions are crucial in emergency situations: Who has the right – or duty – to act and who must finance emergency measures. In this contribution, we examine the effects of the Swiss emergency powers on the financial system – and vice versa –, and argue that Switzerland’s reactions and, as importantly, its inactions can best be explained by examining the distribution of tasks and costs jointly – and not separately as is often the case. We first briefly recall the essential elements of the Swiss power and resource sharing system, elaborating on the principles of subsidiarity and fiscal equivalence, before presenting the Swiss emergency regime and its controversial use during the Financial Crisis of 2008 and the Covid-19 pandemic. Comparing the two recent examples of extensive use of emergency powers, we show that the Financial Crisis mainly raised democratic issues regarding the horizontal distribution of powers while the Covid-19 crisis also had a strong federal component. We then explain the federal struggles over competences during Covid-19 with a phenomenon we call “Fiscal Equivalence Trap” – a situation in which both (or all) tiers of government refrain from or hesitate to adopt urgently needed measures due to financial considerations.