## 1. Evolution of Spending

## Source details

**Canonical URL:** [1. Evolution of Spending](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025045.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025045.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025045.pdf.json)

---

### A. Introduction: Post GFC Consolidation
- Liechtenstein pursued fiscal consolidation following the global financial crisis (GFC) in response to weak fiscal conditions and international pressures on tax information exchange.
- Key facts and outcomes:
  - Real GDP growth averaged 4 percent during 2003-07.
  - Real GDP experienced a decline by 12 percent in 2009.
  - The multi-year rolling budget forecast for 2010–14 projected a cumulative deficit 14.4 percent of 2010 GDP.
  - The fiscal balance improved by 4.1 percent of GDP during 2014–18.
- Consolidation measures:
  - Expenditure savings: current expenses, state pension and health contributions, aid, and subventions to municipalities; reduced state contribution towards pensions; slowed civil service recruitment.
  - Revenue measures: broadening the tax base targeting income and wealth taxes, rationalization of administrative fees.
  - Structural reforms in the financial sector’s regulatory framework contributed to consolidation.

### B. The Fiscal Framework
- Core design:
  - Budget balance rule (BBR) targets balancing income and expenses in the income statement of the central government over the medium term (Art. 2).
  - Income statement includes results of business activities, financial, and extraordinary results—revenues minus expenses.
  - Net results from assets under external management (interest, dividend income, capital gains less asset management costs) are a key component.
  - Dividends derive from companies like the Landesbank, Post AG, and Telecom.
  - Extraordinary results refer to occasional and unusual expenses or income of more than CHF10 million.
- Implementation and scope:
  - Liechtenstein aims to achieve a balanced nominal budget in practice.
  - The rule does not systematically use macroeconomic assumptions nor account explicitly for shocks.
  - The Financial Budget Act (FHG) 2010 envisages a multi-annual framework covering four years, updated annually.
  - Coverage is limited to the central government; municipalities and social security funds operate autonomously.
  - Escape clauses exist for rare events and one-off future-oriented projects; if key financial parameters cannot be met and the shortfall is not one-off, the FHG obliges the government to present corrective measures within six months.

### C. Budget Rule Principles
- Five principles (first three met on average over financing plan; last two at end of financial plan period):
  - At least a balanced annual income statement.
    - Contributed to budget surpluses and accumulation of sizeable fiscal buffers.
    - Focus on net operating balance or change in net worth excludes net capital investments.
  - The absolute growth of expenditure must not exceed the growth of income.
  - The ratio between self-financing funds and net investments should be at least 90 percent.
    - Contributed to virtually zero debt level.
    - May limit investment in infrastructure or other long-term projects.
    - Exceptions exist for forward-looking and important investments.
  - The ratio between financial assets and external funds should be at least 420 percent.
    - Provides buffers against market stress but may incentivize higher-than-norm asset accumulation and higher opportunity costs.
  - The ratio between financial assets and operating expenses should be between one and three times.
    - Prioritizes fiscal buffers to cover operational costs; may risk holding excessive low-return assets.
- Performance:
  - Outcomes have been in line with the budget rule except for Benchmark 2 based on multi-year financing plans.
  - The escape clause and netting of one-off expenses/income have facilitated eventual realignment with the rule.
  - There may be scope to review Benchmark 2 given restrictions on spending amid rising pressures and frequent breaches.

### D. Expenditures
- Overall profile:
  - Liechtenstein maintains a small government footprint.
  - During fiscal consolidation, spending declined by 5 percentage points and was significantly lower compared to the Euro area average and Switzerland during 2011–22.
  - Current spending accounted for the bulk of the spending adjustment.
  - The wage bill is 5.2 percent of GDP.
  - General government employment levels are 7.7 percent of the workforce (EU median about 16–17 percent).
  - Capital spending was below 2 percent of GDP compared to 3½ percent on average for the EU (2011–22).
- Social protection and public investment:
  - Social protection is about 36 percent of total government outlays or 8.1 percent of GDP.
  - Public investment averaged 1.5 percent of GDP during 2013–2022.
  - Low social spending driven by relatively low pension spending following the pension reform of 2013 and reduced state contributions.
- Recent trends and episodic increases:
  - Without policy measures the central government was projected to accumulate a deficit of 13½ percent of GDP by the end of 2014—prompting restructuring and reductions in current expenses and pension contributions.
  - The pandemic and energy prices crisis induced a spike in public spending reverting to 31.3 percent of GDP in 2020, reflecting discretionary relief measures and augmentation of the Pillar 1 pension.
- Functional breakdown highlights:
  - Social protection and education are main drivers of public outlays.
    - Social protection was 8 percent of GDP in 2022.
    - Education expenditure reached 4 percent of GDP in 2022; government contribution 78 percent, municipalities 22 percent.
    - Public services outlays were 4.3 percent of GDP in 2022.
  - Social protection system details:
    - Three-pillar system including old-age and survivors’ insurance, disability insurance, family allowances, unemployment insurance, and mandatory health insurance.
    - Maximum old age pension is CHF 2,450 (paid 13 times a year); minimum is CHF 1,225.
    - Old age and survivors’ insurance covers widows and widowers’ pensions amounting to 80 percent of the maximum old age pension.
    - A family compensation fund pays one-time childbirth, monthly children, and single parents’ allowances.
  - Health and demographics:
    - Life expectancy is 84.3 years (EU 80.6); women expected to live 2.3 years longer.
    - Universal healthcare with mandatory health insurance financed by employer and employee based on per capita premium.
    - Government subsidizes low-income individuals, children, and young adults but subsidies account for 40 percent of health care insurance.

### E. Revenue
- Tax regime and revenue shares:
  - Low tax regime; tax-to-GDP ratio has generally been low, averaging 14¾ percent of GDP in the last two decades.
  - Tax-to-GDP ratio significantly lower than Austria, the Euro area, and Switzerland and similar to Andorra for the past decade.
  - VAT, customs, heavy goods vehicle tax, CO2 tax, and stamp duties align with the Swiss regime; other taxes are determined domestically.
  - Direct taxes dominate: PIT and CIT contribute about 60 percent of tax revenue.
- Corporate and personal income tax specifics:
  - CIT revenue averaged 4.5 percent of GDP during 2000-22.
  - PIT revenue averaged 3.7 percent of GDP during 2000-22.
  - PIT features:
    - Progressive PIT rates vary from 2.5 to 24 percent.
    - Wealth tax applies via a standard return of 4 percent to net worth as notional income.
  - CIT features:
    - Levied at a rate of 12.5 percent on company profit with tax-related adjustments including a 4 percent notional interest.
    - Dividend income and capital gains from participations generally exempt if anti-abuse provisions do not apply.
    - Income on assets under management of investment funds is not taxed at the investment fund company level.
    - The Principality has signed numerous double tax agreements worldwide.
- Indirect taxes:
  - VAT rate increased from 7.7 to 8.1 percent in line with Switzerland.
  - Reduced VAT rate of 2.6 percent applies to some goods and services, including water and cultural services, and certain sectors notably agriculture.
  - Hotel and lodging industry subject to reduced VAT rate of 3.8 percent.
  - Medical treatment and real estate are exempted.

### VAT performance and VAT Revenue Ratio (VRR)
- OECD VAT revenue ratio (VRR) overview:
  - VRR formula: VRR = VR / (β X r)
    - Where: VR = actual VAT revenues; β = potential tax base; r = standard VAT rate (default VAT rate applicable to the tax base).
  - OECD unweighted VRR for Liechtenstein and Switzerland is about 0.7 on average.
    - Interpretation: an estimated 30 percent of theoretical potential VAT revenue is not collected on average.
    - Comparison: this is lower than the OECD average of 42 percent not collected.
  - Implication: VAT compliance in Liechtenstein (and Switzerland) is high relative to the OECD average.
  - Note: assessment subject to significant data limitations.

### Alignment with international tax standards and recent reforms
- International engagement and reforms:
  - Liechtenstein joined the inclusive framework on Base Erosion and Profit Shifting (BEPS) in 2016.
  - Complies with international standards on exchange of tax information, elimination of harmful tax practices, and elimination of artificial tax structures.
  - OECD Pillar II tax reforms are being implemented; impact has not been quantified.
- Specific measures:
  - Income inclusion rule (IIR) and a qualified domestic top-up tax (QDMTT) effective January 2024.
    - Ensure that all domestic group companies are subject to effective taxation of 15 percent.
  - The undertaxed payment rule (UTPR) is not effective yet.
- Revenue impact:
  - The impact on tax revenue has not been quantified.
  - If foreign jurisdictions where multinational corporate groups operate already ensure sufficient taxation, then IIR does not lead to any additional income.

### Productivity trends and the impact of infrastructure investment
- Productivity and trends:
  - Productivity has been flat over the past two decades.
  - Productivity measured as real GDP per full-time equivalent (FTE) has been volatile but not grown over time.
  - Productivity is higher than in Switzerland, but the gap has narrowed.
  - Alternative measures (e.g., productivity measured through hours worked) show productivity declining in Liechtenstein while increasing in Switzerland.
- Contributing factors to stagnation:
  - Aging workforce reducing labor supply and potentially lowering overall productivity.
  - Geopolitical uncertainties affecting business confidence and investment.
- Potential role of public investment:
  - Additional public investment spending may boost productivity and potential growth.
  - Investment in infrastructure might support increased productivity by stimulating additional private investment and reducing congestion and travel times.
- Empirical model evidence:
  - A tractable empirical model estimated on Liechtenstein data indicates a positive impact of increased public capital spending on productivity.
  - Model prediction: If capital spending/GDP were to increase by 1pp, the model predicts a temporary boost to productivity growth by around 3 percent.
  - Caveat: uncertainty on these effects given data limitations; extending the analysis as macroeconomic statistics are extended would be useful.

*Source: IMF staff paper "LIECHTENSTEIN: THE FISCAL SECTOR FRAMEWORK" (March 5, 2025).*

### 1. Evolution of Spending________________________________________________________________ 6

### 1. Evolution of Spending

### A. Introduction: Post GFC Consolidation
- Liechtenstein pursued fiscal consolidation following the global financial crisis (GFC) in response to weak fiscal conditions and international pressures on tax information exchange.
- Key facts and outcomes:
  - Real GDP growth averaged 4 percent during 2003-07.
  - Real GDP experienced a decline by 12 percent in 2009.
  - The multi-year rolling budget forecast for 2010–14 projected a cumulative deficit 14.4 percent of 2010 GDP.
  - Fiscal consolidation was driven by both revenue and expenditure measures and by structural reforms in the financial sector’s regulatory framework.
  - The fiscal balance improved by 4.1 percent of GDP during 2014–18.
- Consolidation measures:
  - Expenditure savings: current expenses, state pension and health contributions, aid, and subventions to municipalities; reduced state contribution towards pensions; slowed civil service recruitment.
  - Revenue measures: broadening the tax base targeting income and wealth taxes, rationalization of administrative fees.

### B. The Fiscal Framework
- Core design:
  - Liechtenstein’s fiscal framework is centered on a budget balance rule (BBR) targeting balancing income and expenses in the income statement of the central government over the medium term (Art. 2).
  - The income statement includes results of business activities, financial, and extraordinary results—revenues minus expenses.
  - Net results from assets under external management (interest, dividend income, capital gains less asset management costs) are a key component.
  - Dividends derive from companies like the Landesbank, Post AG, and Telecom.
  - Extraordinary results refer to occasional and unusual expenses or income of more than CHF10 million.
- Implementation and scope:
  - Liechtenstein aims to achieve a balanced nominal budget in practice.
  - The rule does not systematically use macroeconomic assumptions nor account explicitly for shocks.
  - The Financial Budget Act (FHG) 2010 envisages a multi-annual framework covering four years, updated annually.
  - Coverage is limited to the central government; municipalities and social security funds operate autonomously.
  - Escape clauses exist for rare events and one-off future-oriented projects; if key financial parameters cannot be met and the shortfall is not one-off, the FHG obliges the government to present corrective measures within six months.

### C. Budget Rule Principles
- The budget rule is anchored on five principles; the first three must be met on average over the financing plan, the last two at the end of the financial plan period:
  - At least a balanced annual income statement.
    - Contributed to budget surpluses and accumulation of sizeable fiscal buffers.
    - Focus on net operating balance or change in net worth excludes net capital investments.
  - The absolute growth of expenditure must not exceed the growth of income.
  - The ratio between self-financing funds and net investments should be at least 90 percent.
    - Contributed to virtually zero debt level.
    - May limit investment in infrastructure or other long-term projects.
    - Exceptions exist for forward-looking and important investments.
  - The ratio between financial assets and external funds should be at least 420 percent.
    - Provides buffers against market stress but may incentivize higher-than-norm asset accumulation and higher opportunity costs.
  - The ratio between financial assets and operating expenses should be between one and three times.
    - Prioritizes fiscal buffers to cover operational costs; may risk holding excessive low-return assets.
- Performance:
  - Outcomes have been in line with the budget rule except for Benchmark 2 based on multi-year financing plans.
  - The escape clause and netting of one-off expenses/income have facilitated eventual realignment with the rule.
  - There may be scope to review Benchmark 2 given restrictions on spending amid rising pressures and frequent breaches.

### D. Expenditures
- Overall profile:
  - Liechtenstein maintains a small government footprint.
  - During fiscal consolidation, spending declined by 5 percentage points and was significantly lower compared to the Euro area average and Switzerland during 2011–22.
  - Current spending accounted for the bulk of the spending adjustment.
  - The wage bill is 5.2 percent of GDP.
  - General government employment levels are 7.7 percent of the workforce (EU median about 16–17 percent).
  - Capital spending was below 2 percent of GDP compared to 3½ percent on average for the EU (2011–22).
- Social protection and public investment:
  - Social protection is about 36 percent of total government outlays or 8.1 percent of GDP, well below the Euro area average of 16 percent of GDP in 2022.
  - Low social spending is driven by relatively low pension spending following the pension reform of 2013 and reduced state contributions.
  - Public investment averaged 1.5 percent of GDP during 2013–2022.
- Recent trends and episodic increases:
  - Without policy measures the central government was projected to accumulate a deficit of 13½ percent of GDP by the end of 2014—prompting restructuring and reductions in current expenses and pension contributions.
  - The pandemic and energy prices crisis induced a spike in public spending reverting to 31.3 percent of GDP in 2020, reflecting discretionary relief measures and augmentation of the Pillar 1 pension.
- Functional breakdown highlights:
  - Social protection and education are main drivers of public outlays.
    - Social protection was 8 percent of GDP in 2022 (significantly lower than Euro area 16 percent).
    - Education expenditure reached 4 percent of GDP in 2022, comparable to the Euro area.
    - Public services outlays were 4.3 percent of GDP in 2022.
  - Social protection system details:
    - Three-pillar system including old-age and survivors’ insurance, disability insurance, family allowances, unemployment insurance, and mandatory health insurance.
    - Maximum old age pension is CHF 2,450 (paid 13 times a year); minimum is CHF 1,225.
    - Old age and survivors’ insurance covers widows and widowers’ pensions amounting to 80 percent of the maximum old age pension.
    - A family compensation fund pays one-time childbirth, monthly children, and single parents’ allowances.
  - Education:
    - Public education expenditure 4 percent of GDP in 2022; government contribution 78 percent, municipalities 22 percent.
    - Education is free and compulsory for ages 6–15; strong vocational training contributes to low youth unemployment.
  - Health:
    - Life expectancy is 84.3 years (EU 80.6); women expected to live 2.3 years longer.
    - Universal healthcare system with mandatory health insurance financed by employer and employee based on per capita premium.
    - Government subsidizes low-income individuals, children, and young adults but subsidies account for 40 percent of health care insurance.

### E. Revenue
- Tax regime and revenue shares:
  - Liechtenstein maintains a low tax regime; the tax-to-GDP ratio has generally been low, averaging 14¾ percent of GDP in the last two decades.
  - Tax-to-GDP ratio is significantly lower than Austria, the Euro area, and Switzerland and similar to Andorra for the past decade.
  - VAT, customs, heavy goods vehicle tax, CO2 tax, and stamp duties align with the Swiss regime; other taxes are determined domestically.
  - Taxation relies on direct taxes: PIT and CIT contribute about 60 percent of tax revenue.
- Corporate and personal income tax specifics:
  - CIT revenue averaged 4.5 percent of GDP during 2000-22 for Liechtenstein compared to Austria 2.4 percent, the Euro area 2.9 percent, and Switzerland 2.7 percent.
  - PIT revenue averaged 3.7 percent of GDP during 2000-22 compared to Austria 9.8 percent and Switzerland 8.3 percent.
  - PIT features:
    - Residents pay unlimited worldwide income taxes; covers employment, self-employment, agriculture, forestry, pensions, and other income.
    - Wealth tax applies via a standard return of 4 percent to net worth as notional income.
    - Progressive PIT rates vary from 2.5 to 24 percent.
  - CIT features:
    - Levied at a rate of 12.5 percent on company profit with tax-related adjustments including a 4 percent notional interest.
    - Dividend income and capital gains from participations generally exempt if anti-abuse provisions do not apply.
    - Income on assets under management of investment funds is not taxed at the investment fund company level.
    - The Principality has signed numerous double tax agreements worldwide.
- Indirect taxes:
  - VAT rate increased from 7.7 to 8.1 percent in line with Switzerland.
  - Reduced VAT rate of 2.6 percent applies to some goods and services, including water and cultural services, and certain sectors notably agriculture.
  - Hotel and lodging industry subject to reduced VAT rate of 3.8 percent.
  - Medical treatment and real estate are exempted.

*Source: IMF staff paper "LIECHTENSTEIN: THE FISCAL SECTOR FRAMEWORK" (March 5, 2025).*

### 17. Despite the existing preferential treatments, collection of VAT is broader compared to

### 17. Despite the existing preferential treatments, collection of VAT is broader compared to peers

### VAT performance and VAT Revenue Ratio (VRR)
- The OECD VAT revenue ratio (VRR) measures the extent to which a VAT regime collects on the natural base of the tax (final consumption expenditure).
- VRR formula: VRR = VR / (β X r)
  - Where: VR = actual VAT revenues; β = potential tax base; r = standard VAT rate (default VAT rate applicable to the tax base).
- OECD unweighted VRR for Liechtenstein and Switzerland is about 0.7 on average.
  - Interpretation: an estimated 30 percent of theoretical potential VAT revenue is not collected on average.
  - Comparison: this is lower than the OECD average of 42 percent not collected.
- Implication: VAT compliance in Liechtenstein (and Switzerland) is high relative to the OECD average.
- Note: assessment subject to significant data limitations.

### Alignment with international tax standards and recent reforms
- Liechtenstein joined the inclusive framework on Base Erosion and Profit Shifting (BEPS) in 2016.
- The country complies with international standards on:
  - Exchange of tax information
  - Elimination of harmful tax practices
  - Elimination of artificial tax structures
- OECD Pillar II tax reforms are being implemented; impact has not been quantified.
- Specific measures introduced:
  - Income inclusion rule (IIR) and a qualified domestic top-up tax (QDMTT) effective January 2024.
    - These measures ensure that all domestic group companies are subject to effective taxation of 15 percent.
  - The undertaxed payment rule (UTPR) is not effective yet.
- Revenue impact:
  - The impact on tax revenue has not been quantified.
  - If foreign jurisdictions where multinational corporate groups operate already ensure sufficient taxation, then IIR does not lead to any additional income.

### Productivity trends and the impact of infrastructure investment
- Productivity trends:
  - Productivity in Liechtenstein has been flat over the past two decades.
  - Productivity measured as real GDP per full-time equivalent (FTE) has been volatile but not grown over time.
  - Productivity is higher than in Switzerland, but the gap has narrowed.
  - Alternative measures (e.g., productivity measured through hours worked) show productivity declining in Liechtenstein while increasing in Switzerland.
- Contributing factors to stagnation:
  - Aging workforce reducing labor supply and potentially lowering overall productivity.
  - Geopolitical uncertainties affecting business confidence and investment.
- Potential role of public investment:
  - Additional public investment spending may boost productivity and potential growth.
  - Investment in infrastructure might support increased productivity by stimulating additional private investment and reducing congestion and travel times.
- Empirical model evidence (note: data limitations acknowledged):
  - A tractable empirical model estimated on Liechtenstein data with variables including public investment, productivity, and GDP growth indicates a positive impact of increased public capital spending on productivity.
  - Model prediction: If capital spending/GDP were to increase by 1pp, the model predicts a temporary boost to productivity growth by around 3 percent.
  - Caveat: some uncertainty on these effects given data limitations; extending the analysis as macroeconomic statistics are extended would be useful.

*Source: sipea2025045 - 17. Despite the existing preferential treatments, collection of VAT is broader compared to (PDF chapter).*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025045.pdf_