Zug's finances are constantly monitored

The introduction of negative interest rates by the Swiss National Bank (SNB) in 2015 was originally intended as a quick, short-term measure. But negative interest rates have now become a part of everyday life in the financial sector. This is also a challenge for the cantons. The Canton of Zug has now learned to live with negative interest rates, and has even generated income from them. According to Finance Director Heinz Tännler, this is only possible with consistent liquidity management, so called ‘Cash Management’.

The Canton of Zug earned around CHF 1.8 million from negative interest income in 2019, but only had to pay CHF 6,000 in negative interest in the same year.

In order to avoid having to pay negative interest on balances, the Canton of Zug took various measures. “We were able to negotiate interest-free limits with several financial institutions. This means that, up to a certain account balance, no interest had to be paid, as long as the balance did not exceed these limits,” explains Tännler. "In addition, we check all our account balances several times a day, so that we can immediately intervene where necessary." The limits that are granted are a matter for negotiation, however, and are "not set in stone". If these limits were to be lowered, the canton could come under pressure again, depending on the situation.

"As a further measure to avoid negative interest rates, we try to keep our liquidity, i.e. our cash holdings, as low as possible", explains Tännler. Withholding tax credits are therefore currently left with the federal government, because the latter does not charge negative interest. "Here, we make use the legal leeway, in that a total of five years are available for the collection of the funds before the limitation period expires."

This liquidity management involves considerable effort, adds the Finance Director. “Based on the figures in the latest budget and financial plan, the monthly cash flow is calculated using two-year planning for the current and the following year. The most important inflows and outflows of funds can thereby be planned.“ The canton of Zug paid its share of just under CHF 330 million into the NFA in two tranches in 2019 - in early January and early June. ”Large payments to the state coffers are made from the end of March to the beginning of April, when the majority of the federal taxes - at least CHF 1.3 billion in 2019 - are paid in by taxpayers. Most of this money is then transferred to the federal government a few days later,” says Tännler, explaining how this works.

The effective cash flow statement is then used on a monthly basis to check the current situation compared to the planning. According to Tännler, the current account balances are also evaluated weekly and compared to the balance of the previous year. "This planning and monitoring work is part of the regular duties of the finance directorate."

Since the introduction of negative interest rates, cash flows have been planned on a daily basis, with daily comparisons with the current situation. “This makes an optimal management of funds possible, by keeping liquidity as low as possible on the one hand, and by negotiating and agreeing on borrowings at an early stage on the other. But this work involves considerable additional effort,” says the Finance Director.

                                              The Canton of Zug has its finances under control.

As the Canton of Zug currently has more than CHF 1 billion in withholding taxes held by the Confederation, and thereby withdrawn from the canton's money cycle, short-term loans and credits are necessary in order to fulfil financial obligations such as wage payments “practically throughout the whole year, for which we currently receive negative interest income. We usually obtain these loans and credits through brokers or financial institutions,” says Tännler.

The negative interest paid to the Canton of Zug builds up to a tidy sum. “In total, we earned CHF 1.8 million from negative interest income, compared to the around CHF 6,000 that we had to pay due to negative interest.” The topsy-turvy financial world since the introduction of negative interest has made this optimised liquidity management possible, and of which we have taken advantage, even though the canton has net assets and actually does not need any external funds. "But withholding tax credits that have been collected remain with the canton, and thereby continually burden the limits again," adds the Finance Director. The management of funds is likely to remain challenging in the future, as the Finance Department assumes that negative interest rates can be expected for the next three to five years. If the market situation should worsen, Tännler adds that a plan of measures has already been drawn up, in order to be able to react quickly.

"As the canton of Zug expects high earnings surpluses in the next few years and, in addition, as the first withholding tax credits will have to be reclaimed from summer 2021 onwards due to the statute of limitations, liquidity will increase massively," continues Tännler. “These circumstances force the canton to plan measures on a rolling basis, and to think ahead. In this context, it is ultimately also necessary to check whether cash should be deposited in a suitable location.