Should Switzerland boost the economy with subsidies just because other countries do?

Government aid for companies is popular around the world. This provides fodder for lobbyists in Switzerland to also demand support in order to «level the playing field» in international competition. Is that a good argument?

Is that fair? The electricity costs for industrial companies in Germany and France were between one-third and one-half the rate in Switzerland by the end of 2022 thanks to government subsidies, according to calculations by local industry representatives. This is a massive competitive disadvantage for energy-intensive Swiss companies, the president of the interest group of energy-intensive industries explained in December: «If the governments of our competitors intervene with a price cap, Switzerland should also do something similar to avoid competitive disadvantages for companies here.»

The federal government should also do something else to avoid Swiss disadvantages: create a state innovation fund to finance young companies. That is what Economy Minister Guy Parmelin wants. The matter is not yet definite. A study ordered by the federal government found no market failure in the financing of young companies, but proponents of a sovereign wealth fund have an all-purpose argument: Many other countries do it too.

Like the doping problem?

This is reminiscent of the doping problem in cycling: If the competition resorts to doping, there is a strong incentive to do the same if you do not want to be left behind. Unlike professional sports, however, business is not a zero-sum game. Moreover, it is much more complex and hardly predictable, as it is subject to ongoing changes. The success of subsidy doping is thus much more difficult to predict.

If Switzerland simply wanted to copy other countries, it would also have to massively reduce wages, double the value-added tax, increase unemployment, adopt the euro and devalue vocational training, for instance. This already illustrates that the term «level playing field», which lobbyists like to use, is misleading: as long as countries differ from each other, there will never be «level playing fields.»

Nevertheless, if other countries subsidize the economy, should Switzerland do the same to avoid disadvantages? It is understandable that affected sectors call for such measures. But the macroeconomic lens may be different. «A measure such as a subsidy must make sense in itself because there is a clear market failure,» says Bernese economics professor Aymo Brunetti, who used to be the federal government's chief economist. He is not convinced by the reference to disadvantages due to foreign subsidies; to make up for it, he says, Swiss companies have «many other locational advantages.» He further states: «The best thing a government can do for business is to provide a generally favorable, predictable and fair business environment, such as a liberal labor market, relatively low taxes, a good education system and effective regulation.»

In principle, the economics professor Reto Föllmi from the University of St. Gallen is also «very skeptical» of the argument of a level playing field: «Subsidizing certain industries has costs and thus disadvantages other sectors and consumers.» And: «If other countries subsidize certain industries, we can take advantage of that and get cheaper supplies.»

Reasons for interventions

However, subsidies can be useful if they correct a market failure and thus provide societal benefits that outweigh the costs. Government subsidization of basic research is not really controversial, for instance: Firms tend to have «too little» incentive to invest in basic research because much of the benefit accrues to others as well.

The issue is more complicated when it comes to sector-specific subsidies in the form of direct payments, artificial price reductions or import restrictions in the name of an «industrial policy.» In this case too, there are arguments for state crutches. They read something like this: Information and coordination problems hinder the development of a (politically desired) economic sector at home, so a government push is needed until a viable ecosystem has emerged. In sectors with high fixed costs, the government stimulus is also intended to help companies reach critical size and bring down production costs due to learning effects as well, until they are internationally competitive.