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1 Overview 19 budget in bn 8 7 2,8,3 1,3 -,1,4 1, Saldo Expenditure Receipts 19 PF 21 PF 22 PF A surplus of approximately 1.3 billion is expected in the ordinary budget for 19. The pleasing budgetary situation is due to the combination of high withholding tax receipts and the lower expenditure caused by the reforms rejected by voters (third series of corporate tax reforms, retirement provision). With growth of 3.1%, receipts are up on the 18 budget, although the figure budgeted for 18 is likely to be exceeded. Relative to the estimate for 18, receipts will be 1.3% higher in 19. Excluding one-time special factors, receipt growth will be 2.5% and thus slightly lower than the expected nominal economic growth rate of 2.7%. Federal expenditure will increase by 1.8%. The Federal Council and Parliament have set political priorities in the task areas of security (+7.1%) and education and research (+2.4%). The debt brake requirements will be met. The structural surplus will amount to around 1 billion. Gross debt is expected to decrease further to 96 billion in 19.

2 Receipts 19 ordinary receipts Shares in percent Direct federal tax mn 3,9 31,8 Value added tax 23 4 mn Withholding tax 7 52 mn 9,6 Nontax receipts mn 6, 9,5 Other tax receipts mn 6,2 Mineral oil tax 4 54 mn 3,2 2,8 Stamp duty 2 3 mn Tobacco duty 2 95 mn Value added tax: 23 4 mn VAT accounts for 31.8% of total receipts, making it the most important source of receipts for the Confederation, together with direct federal tax. Domestic consumption is taxed. This includes the purchase of domestic goods and services, as well as imports. Exports are not subject to VAT. Direct federal tax: mn Direct federal tax accounts for 3.9% of total receipts. It is the most important source of receipts for the Confederation, together with VAT. Direct federal tax is levied on the income of natural persons and on the net revenue of legal entities. Income tax and profit tax receipts have more or less the same weightings. Approximately 7% of receipts are derived from the previous year s taxable income and profits. Withholding tax: 7 52 mn Withholding tax accounts for 9.6% of total receipts. Withholding tax receipts represent the balance of funds received and reimbursed. As both of these can fluctuate, the balance is subject to sharp, unforeseeable fluctuations. For this reason, withholding tax is estimated by means of a statistical smoothing method which assesses the trend. On average, more accurate projections are achieved with this. Mineral oil tax: 4 54 mn Receipts have tended to decline since their peak of 8 (5,222 mn). A key reason for this is the falling average fuel consumption of new vehicles, and that effect is being heightened by the regulations to reduce the CO 2 emissions of passenger vehicles. It still accounts for 6.2% of total receipts.

3 Receipts Stamp duty: 2 3 mn Stamp duty accounts for 3.2% of total receipts. Transfer stamp tax on stock market transactions accounts for over half of stamp duty and has a strong influence on how it develops. The development of the issue tax on the accumulation of net assets/equity depends on the number of newly established companies and on the refinancing requirements of existing companies. The relatively stable receipts from insurance premium stamp duty form the third component of stamp duty. Tobacco duty: 2 95 mn The proportion of tobacco duty relative to total receipts amounts to 2.8%. The revenue is earmarked for old-age and survivors insurance. Other tax receipts: mn Other tax receipts account for 9.5% of total receipts. Other tax receipts consist essentially of transportation taxes such as the heavy vehicle charge and incentive fees such as the CO 2 tax. Nontax receipts: mn Nontax receipts account for 6.% of total receipts. They include among other things the profit distribution from the Swiss National ank (SN), as well as further receipts such as military service exemption tax, building revenue and fees.

4 Receipts Development of 19 receipts in mn and % Ordinary receipts 976 1,3 Value added tax 46 2, Stamp duty 1,4 Mineral oil tax Tobacco duty ,9 -,5 Withholding tax 322 4,8 Direct federal tax 798 3,6 Change YoY in mn Growth rate YoY in % Nominal GDP growth 2,7 % Ordinary receipts Receipts of 73.6 billion are budgeted for 19. Relative to the estimate for May 18, receipts are to grow by 1.3%, or around 1 billion. The biggest growth drivers are direct federal tax (+798 mn), value added tax (+46 mn) and withholding tax (+322 mn). After adjusting for all special factors, receipt growth rises to 2.5%. It will thus be slightly lower than the 2.7% growth rate expected for nominal GDP. Value added tax The 18 estimate was million higher than budgeted. On the one hand, receipts performed better in fiscal 17 than expected at the time of budgeting, and on the other hand, the economic outlook for the year under way was also revised upward. The 19 budget also takes into account the amendments to the Value Added Tax Act, which will be phased in in 18 and 19 and will lead to additional receipts of around 4 million. The reduction in VAT rates as of January 1, 18 is likewise taken into account. The tax rate adjustment will not have its full impact on receipts until 19 and leads to lower receipts of around 18 million in the budget. Due to this reduction in receipts, 19 growth will be lower than nominal GDP growth relative to the current estimate for 18 (2.% vs. 2.7%). Direct federal tax According to the May estimate, income tax is unlikely to reach the budgeted level in 18. On that basis, growth of 5.% is assumed for the 19 budget. Due to the assessment procedure, the receipts budgeted for 19 are largely based on the income generated in 18. The estimate for the 19 budget is based on the assumption that household incomes will rise by 2.7% in 18. Profit tax is likely to be around 5 million higher than budgeted in 18. ased on the current estimate for 18, receipts will grow by 2.2% in 19. For financial planning purposes, nominal gross domestic product (GDP) is used as an indicator for profit development. However, the taxes collected in a fiscal year come from different tax years and their distribution is subject to certain fluctuations. Consequently, receipt growth is generally not in line with nominal GDP growth, which is 3.% in the relevant fiscal year of 18.

5 Receipts Withholding tax Withholding tax receipts are likely to be around 55 million higher than budgeted in 18, as the 17 results were higher. Relative to the 18 estimate, withholding tax receipts are likely to rise by approximately 4.8% to 7.1 billion. On the one hand, taxable dividend distributions are higher due to the good economic performance; on the other hand, companies, individuals and the cantons are postponing their requests for withholding tax refunds due to negative interest rates, as they can thus leave liquid funds interest-free in the accounts of the Confederation. Mineral oil tax Receipts are expected to be slightly lower in 19 (-.5%) than in the 18 budget. Fuel tourism has recovered slightly due to the change in the currency situation. The estimate for the year under way therefore assumes that the budgeted figure will be exceeded. However, the decline in the average fuel consumption of vehicles is also leading to a further decline in receipts in the budget year. Stamp duty It is reckoned that stamp duty receipts will fall by 1.7% to 2.3 billion relative to the 18 budget. While a slight increase (+1 mn) is expected for insurance premium stamp duty and issue tax receipts are set to be constant, transfer stamp tax receipts are likely to be lower (-5 mn). Tobacco duty The estimate indicates that receipts should exceed the budgeted figure in 18 (+7 mn). This is due primarily to the recovery of the Swiss franc exchange rate and the associated decline in shopping tourism in neighboring countries. The taxation of legal cannabis is also generating previously unbudgeted receipts. For the 19 budget, it is assumed that the 1% decline in sales relative to the 18 estimate will remain below the long-term average (-2%). Tobacco duty helps finance the federal AHV/IV contribution.

6 Receipts Development of ordinary receipts in bn and % /FS in CHF bn (lhs) in CHF bn (lhs) in % of GDP (rhs) The normal VAT rate was reduced from 8.% to 7.7% as of January 1, 18 (expiry of the IV supplementary financing). In the case of direct federal tax, the elimination of the penalty for married couples will lead to lower income tax receipts from 21. ecause of the tax reductions, receipt growth is still below nominal gross domestic product. The receipt ratio (budget in % of GDP) is therefore falling slightly.

7 Expenditure 19 expenditure by task area Shares in percent Other tasks mn Agriculture and food mn International relations mn 5, 5,1 1,9 31,8 Social welfare mn Security mn 8,6 Education and research mn 11, 14, 13,6 Transportation mn Finances and taxes mn Social welfare: mn Social welfare accounts for a third of the Confederation s expenditure. Half of this goes to old-age and survivors insurance. Social welfare expenditure growth is determined mainly by ageing, inflation and salary trends. All major expenditure for the task area is laid down by law. This means that just over 95% is strictly earmarked expenditure. Finances and taxes: mn 13.6% of the Confederation s expenditure goes to this task area, which includes interest expenditure, the shares in federal receipts for the cantons and social insurance, and the Confederation s expenditure for fiscal equalization. The expenditure is strictly earmarked and affected by numerous external factors such as the development of interest rates. Transportation: mn Transportation accounts for 14% of the Confederation s expenditure. Approximately 63.5% of transportation expenditure in 19 is attributable to public transportation, 34.6% to road transportation and 1.8% to air transportation. Transportation expenditure is largely restricted because of various forms of earmarking and statutory requirements. Education and research: mn Education and research expenditure amounts to 11% of total expenditure. The task area s development is shaped by the dispatch on the promotion of education, research and innovation (17- ERI dispatch) adopted for the attention of Parliament.

8 Expenditure Security: mn Security is a new task area and accounts for 8.6% of expenditure. Political attention has increasingly turned to security in recent years due to the terrorist attacks in neighboring countries and the military conflicts on the outskirts of Europe. The Federal Council is thus reorganizing financial reporting tasks and reporting on security expenditure as a separate task area. The previous national defense task area included military national defense as well as civil protection and civilian service. The security task area also includes the tasks of police, prison system, intelligence service and border controls, which were previously assigned to the public order and security task area. International relations: mn The task area accounts for 5.% of expenditure, with three quarters being spent on development cooperation. The remainder is largely attributable to political relations, i.e. Swiss diplomatic and consular representations, and expenses for international organizations, etc. Agriculture and food: mn Agriculture and food expenditure represents 5.1% of the Confederation s expenditure. Most of it is loosely earmarked and over 9% is controlled by means of three payment frameworks, i.e. direct payments, production and sales, and fundamental improvements and social measures. Direct payments account for approximately three quarters of expenditure. Other task areas: mn The expenditure of the five remaining task areas (institutional and financial conditions, culture and leisure, health, protection of the environment and spatial planning, economic relations) accounts for 1.9% of expenditure.

9 Expenditure Development of 19 expenditure by task area in mn and % Expenditure by task area ,8 Social welfare 295 1,3 International relations ,5 Transportation 3, Education and research 187 2,4 Agriculture and food 5,1 Security Finances and taxes 298 3,1 Change YoY in mn Growth rate YoY in % Nominal GDP growth 2,7 % Expenditure by task area Relative to the 18 budget, expenditure will grow by 1.8% (+1.3 bn). The Federal Council and Parliament have set political priorities in the task areas of security (7.1%, or +.4 bn; further development of the Armed Forces) and education and research (2.4%, or +.2 bn; according to the dispatch on the promotion of education, research and innovation). Moreover, the increase of 1.3 billion can be explained mainly by the task areas of social welfare (+.3 bn; old-age and survivors insurance) and finances and taxes (+.3 bn; cantons shares of federal receipts). Social welfare Expenditure on old-age and survivors insurance is up by 2.6% to 11.7 billion. In contrast to AHV, IV is down by 2.4% to 3.8 billion. This is due to the fact that revenue of 25 million from the IV supplementary financing is still included in 18. Although the IV supplementary financing expired at the end of 17, VAT revenue for the last quarter of 17 was accrued in 18. Expenditure on health insurance comprises mainly contributions to health insurance premium reductions and has significant year-on-year growth of 4.7% to reach 2.9 billion. Migration expenditure is lower than in the 18 budget (-3.7%), but is still at a high level of 2. billion (14: 1.2 bn) as a result of the increase in asylum applications in 15. Finances and taxes The substantial growth in the area of finances and taxes (+3.1%) is attributable primarily to the cantons share of federal receipts (mainly direct federal tax and withholding tax). This expenditure is directly dependent on receipt growth. In contrast, funding and debt management expenditure is down; the Confederation is continuing to benefit from low interest rates. Fiscal equalization is up by 75 million due to the development of the cantons resource potential. Transportation After having risen sharply in recent years, transportation expenditure is still at the previous year s level of 1.1 billion. Lower road transportation expenditure (-25 mn, lower contribution to the motorway and urban transportation fund) is offset by higher rail transportation expenditure (+242 mn, higher deposit in the railway infrastructure fund, among other things).

10 Expenditure Education and research Expenditure on education and research is marked by the dispatch on the 17- promotion of education, research and innovation. Relative to the previous year, expenditure is up by 2.4% to almost 8 billion. The contributions to basic and applied research are each up by 2.9%, while the contributions to tertiary-level institutions are up by 1.9% and those to vocational education by 1.2%. Security Security expenditure is up by a hefty 7.1% (+.4 bn) year on year. Of the 6.2 billion planned for security in the 19 budget, 5.2 billion, or just over 8%, is for military defense. The task area s high growth rate is also due to the sharp increase in military expenditure. International relations Expenditure is down in the 19 budget, as the federal loan to SIFEM was converted in 18. This explains the year-on-year plunge of 7.5% in the task area. Without this special factor, growth of 2.2% would have been recorded for the international relations task area in 19. Excluding this special factor, development assistance is up by 3.2%. Agriculture and food Expenditure for the agriculture and food task area is still at the previous year s level. Instead of the agricultural export contributions (in accordance with the Chocolate Act ), a general milk supplement and a cereal supplement will now be paid. Other task areas udgeted expenditure is up by 362 million (+4.8%) in the five other task areas. The growth is mainly attributable to one-time effects, particularly the higher deposit in the grid supplement fund.

11 Expenditure Development of ordinary expenditure in bn and % of GDP FS in CHF bn (lhs) udget in CHF bn (lhs) udget in % of GDP (rhs) Expenditure is to grow by 1.8% in 19, and thereby underperform nominal GDP growth (+2.7%). The expenditure ratio (budget in % of GDP) is thus slightly lower, but it will rise again in as a result of the tax reform and AHV financing bill.

12 Economic situation Development of gross domestic product Real and nominal GDP rates of change (in %) 3,5 3, 2,5 2, 1,5 1,,5, E 19 PF 21 PF 22 PF Real GDP rate of change Nominal GDP rate of change Sources: 12-17: State Secretariat for Economic Affairs (SECO) 18-19: State Secretariat for Economic Affairs (SECO), estimates of economic forecasts expert group of June 18-22: Estimates of the Federal Finance Administration (FFA), 19 budget with integrated task and financial plan for to 22 dated (extrapolation with growth rate) The key economic parameters underlying the 19 budget are based on the economic forecast of the Confederation s expert group dated June 19, 18. The Swiss economy has been experiencing a strong upswing since mid-17. Real economic output is expected to increase by 2.% in 19 (18: 2.4%) and consumer prices are to rise by.8% (18: 1.%). Nominal GDP, which is decisive for estimating tax receipts, is up by 2.7% (18: 3.%).

13 Debt brake The federal budget from a debt brake viewpoint in bn Cyclical balance Structural balance Ordinary fiscal balance Thanks to the healthy economy, domestic economic output is above its long-term trend. For the first time since 8, the debt brake thus requires an economic surplus of 294 million in the 19 budget. The budgeted surplus is 1.3 billion. The difference of 969 million corresponds to the structural surplus. The debt brake stipulations are thus adhered to.

14 Debt Debt and debt ratio in bn and % of GDP E Gross debt in bn (lhs) Net debt in bn (lhs) Gross debt ratio in % of GDP (rhs) Net debt ratio in % of GDP (rhs) It is expected that gross debt will post a year-on-year decline of 3.2 billion to reach 96.3 billion in 19 (estimate). This will be made possible by the positive result from the federal budget and the high cash holding. As a result, more bonds can continue to be redeemed than are issued (5.8 bn vs. 3. bn). Net debt is comprised of gross debt less non-administrative assets. Net debt is set to fall by 4.4 billion to 61.2 billion in 19.