VAT up half a point for twelve years: 24 billion for armaments

The Federal Council has adopted the message for a temporary increase in value added tax to finance the army's armament programme. The increase would last twelve years, starting in 2028, and is expected to yield 24 billion francs. The proposal must still pass Parliament and a popular vote.

The standard rate, currently 8.1 per cent, would rise by 0.5 percentage points. The special rate of 3.8 per cent, applied to the hotel sector, would rise by 0.3 points. The reduced rate of 2.6 per cent, which covers food and medicines among other things, would remain unchanged: a choice through which the government intends to soften the impact on low-income households.

What the 24 billion is for

The Federal Council justifies the request by pointing to the deterioration of the geopolitical situation in Europe and to the gaps the army has accumulated after decades of savings measures. According to the government, shortfalls in capability and equipment now limit the ability to protect the country effectively.

Of the 24 billion, fifteen are earmarked for buying systems to defend against the threats judged most likely: long-range attacks, cyberattacks and mini-drones, plus the protection of critical infrastructure. Within that sum, nine billion covers priority purchases and six billion represents an estimated additional requirement for a further ground-to-air defence system and for the extra costs of the Patriot system.

The remaining nine billion buys nothing new: it offsets price rises in the armaments sector, driven up by global demand. Without that adjustment, the government argues, even purchases already decided could not be completed on the scale planned.

The additional revenue will flow into an Armaments Fund, together with part of the army's ordinary budget. For as long as the fund exists, all armament purchases will be financed from it, with Parliament's approval. The fund will be able to borrow up to a maximum of six billion in order to make advance payments quickly and absorb payment peaks, but the debt must be cleared by the time the temporary VAT increase expires, in line with the debt brake.

The mechanism deserves attention. An indirect tax hits consumption regardless of income, and half a point of VAT spreads across every everyday purchase not covered by the reduced rate. In exchange, the earmarking and the time limit are explicit, and any extension beyond the twelve years would have to go back to the electorate.

One question will run through the parliamentary debate: whether spending deemed a priority for national security should be financed with an additional tax or by finding room within the ordinary budget. The answer will also determine how hard the referendum campaign is fought.