Swiss economy Press Release
Central Switzerland: A key factor in locational competition is diminishing
The cantons of Central Switzerland rank among the most appealing business locations in Switzerland. Thanks to its outstanding locational quality, Central Switzerland has seen positive economic development and above-average employment growth in recent years. However, recent corporation tax trends have reduced the relative advantage of these cantons. In the competition among business locations, Basel-Stadt, Basel-Land, and Geneva are becoming ever more popular.
Like Switzerland itself, the cantons of central Switzerland benefit from their central location. Their proximity to the greater Zurich area, the countryside, and idyllic landscapes ensure a high quality of life. From an economic point of view, the region scores with its low tax levels, a solid pool of skilled workers, and in many cases good transport connections.
Central Switzerland: Continued tax advantages and financial strength…
For legal entities, Central Switzerland is extremely attractive from a tax perspective. Since 2011, Nidwalden has had the lowest corporate tax rate of any canton. Lucerne, Obwalden, Zug, Schwyz, and Uri are also well ahead. The tax burden for private individuals is also extremely low, with the cantons of Zug, Schwyz, Nidwalden, Uri, and Obwalden enjoying the lowest tax rates in Switzerland. Lucerne too is below the Swiss average. Relocating to Central Switzerland usually means substantial tax savings, especially for high-income households. Not surprisingly, the cantons of Zug, Schwyz, and Nidwalden have the highest average wealth in Switzerland. The three cantons with the greatest financial strength must make correspondingly high transfers to low-resource cantons within the national fiscal equalization (NFA) framework. Obwalden has also risen in the ratings, becoming the fourth Central Switzerland canton in the group of seven NFA contributing cantons.
...but the tax benefits are shrinking
However, the corporate tax reform adopted on May 19 of this year, which abolishes the privileged taxation regime for special status companies in Switzerland, has changed the tax competition landscape for companies. In order to counteract the migration of special status companies and to remain attractive, the majority of the cantons are planning or have already implemented a cut in ordinary corporate tax rates. As a result, the frontrunners in the corporate taxation race are becoming more tightly bunched and the competitive edge of the Central Switzerland cantons is diminishing.
In an overall ranking of locational quality, all of the Central Switzerland cantons – with the exception of Uri – are above the Swiss average in the Credit Suisse locational quality indicator for 2019. This gives a clear indication of the high locational quality of Central Switzerland. However, by cutting its corporate income tax rate to just 13.04%, effective from the beginning of the year, the Canton of Basel-Stadt has moved up the rankings from 4th to 1st in 2019, just ahead of Zug. Zug is likely to regain the top spot again next year by reducing its corporate income tax rate to around 12%, a move which will take effect at the beginning of 2020. However, according to the outlook for locational quality in 2025 drawn up by Credit Suisse economists, most of the cantons in Central Switzerland will become less attractive (see Figure 1).
Coping with the strong Swiss franc and protectionism
Central Switzerland's economic structure proved robust during the euro crisis and after the Swiss franc shock of 2015. Between 2012 and 2017, almost 26,000 new jobs were created in Central Switzerland, corresponding to a more than 7% increase in employment. This makes Central Switzerland, together with the Lake Geneva region, one of Switzerland's most dynamic regions. All the cantons of Central Switzerland showed a positive employment trend during this period. In absolute terms, most jobs were created in the Canton of Lucerne (+11,500, +6.5%); in percentage terms, growth was strongest in Zug with just under 10%, followed by Schwyz (+8%).
At the same time, the industrial sector in Central Switzerland suffered a decline in employment. Yet the sector proved comparatively crisis-resistant during this turbulent period, shedding 300 full-time jobs (-0.5%). In the same period, around 29,000 industrial jobs were lost across Switzerland (-4.5%). This robustness is primarily due to less cyclical high-tech industries, such as aircraft construction in Nidwalden, electrical engineering and chemicals in Obwalden, and medical technology and pharmaceuticals in Zug. Companies in Central Switzerland also appear to be well positioned in international trade and, according to this year's Credit Suisse SME survey, are coping well with the rise in protectionist tendencies. Around 37% of all SMEs surveyed in Central Switzerland see little or no challenge in trade barriers.
Innovative business landscape
Central Switzerland is home to many innovative businesses. In addition to the established high-tech industries, a growing number of companies and start-ups are choosing to set up in Central Switzerland. In absolute terms, most start-ups are based in the canton of Zurich, followed by Vaud, Geneva, and Bern. Measured in terms of the number of start-ups per resident, Zug is easily the canton with the highest start-up density in Switzerland. In Canton Schwyz this concentration is just above the Swiss average, in Obwalden just below it.
Spending on research and development (R&D) is a further indication of the innovative strength of Central Switzerland's economy. In 2017, companies in Central Switzerland invested a total of CHF 1.6 billion in internal R&D activities (i.e. in research activities which take place within the companies themselves). This is 44% more than just five years ago. No other major Swiss region has seen private sector spending on research and development grow so strongly in recent years as Central Switzerland.
Population growth: Affordable housing as a crucial factor
Population growth in Central Switzerland was only slightly behind the national average at just over 1.1% per annum between 2005 and 2017. The main driver of population growth is international immigration, with intercantonal migration playing a comparatively minor role. The various migratory flows not only contribute to population growth, but also increase the average educational level. People who immigrated to Central Switzerland between 2013 and 2017 tend to have an above-average level of education compared with the resident population and more often have a tertiary level qualification (see Figure 2).
Within the cantons, areas with medium population density recorded the highest population growth. According to Credit Suisse economists, the reason for this is that residents of these municipalities can save money on living costs while still enjoying an acceptable level of cultural and leisure amenities compared to urban municipalities. This is a necessary compromise, as in Zug and Lucerne in particular and in tax-privileged lakeside municipalities, many middle-class families can no longer afford to buy their own home (see Figure 3). In recent years, the Lucerne region of Sursee/Seetal has benefited most from this development. Thanks to inflows from other Lucerne regions and neighboring cantons, it has achieved the strongest population growth of all the regions in Central Switzerland (+1.7 % p.a.).
The regional study "Die Kantone der Zentralschweiz – Perspektiven regionaler Wirtschaftsräume" (The cantons of Central Switzerland – perspectives of regional economic regions) is available in German at the following link: