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There is an alternative to shock therapy that has proven to be effective in addressing a debt crisis in the long term. The alternative is to enact effective fiscal rules constraining deficits and debt accumulation. The Swiss debt brake has proven to be the most successful of these rules-based approaches to fiscal policy. Three decades ago, Switzerland experienced unsustainable growth in debt. They responded with a debt brake that caps the growth in spending at the long-term rate of growth in the economy. Over a transition period, the Swiss were successful in bringing expenditures into balance with revenues and in stabilizing and reducing debt. //
The Swiss debt brake is very much a bottom-up approach to reform. Debt brakes were first enacted at the cantonal level and only later at the federal level. The debt brake was incorporated into the Swiss Constitution through a referendum with support from 85 percent of voters. The debt brake provides for a transition period in which expenditures are brought into balance with revenue. The debt brake has automatic triggers, reducing spending when deficits exceed a tolerance level. Deficit spending is permitted in response to emergencies, but the deficits must be offset by surplus revenues in the near term.