Debt Free Zone: How Liechtenstein Manages to Live Within Its Means

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As you may have heard, the United States’ gigantic national debt means we’re firmly in our creditors’ pockets. But what about countries on the opposite end of the spectrum? Who’s got the tiniest national debt? In that arena, it’s tough to beat Liechtenstein. The tiny European principality has a whopping external debt of zero dollars.

That’s right; Liechtenstein doesn’t owe anyone cash. Its national credit card is carrying a zero balance. Liechtenstein’s not alone. The CIA’s World Factbook also lists Brunei, Macau, and Palau as having no external debts. How do Liechtenstein and its fellow countries pull off this trick? And can the U.S. swipe any of their secrets?

As far as the second question goes, probably not. Liechtenstein has a lot of factors working in its favor when it comes to keeping its debt low. First, it’s extremely small. The entire country only fills 62 square miles of mountainous terrain between Switzerland and Austria. The tiny speck of land is home to just 35,000 citizens or so. With such a small population, the country hasn’t had a standing army since 1868; it relies on Switzerland for its defense. Liechtenstein doesn’t even have its own unique currency. Instead, it uses the Swiss franc.

Open for Business

Not having to deal with fielding an army or running a monetary system shaves quite a bit off of Liechtenstein’s expenses, but its business atmosphere is its real magic bullet.

The country has exceedingly low business taxes that max out at 20 percent, and the rules for incorporating a business are extremely loose. Thanks to this tax-haven status, businesses from other countries can make quite a bit of cash by incorporating in Liechtenstein while really having little more than a post-office box within the country’s borders.

This little loophole has led to Liechtenstein being home to more than twice as many companies (some 75,000) as people (35,000). The government collects taxes from all these businesses, which brings in boatloads of money. Taxes on these nominal offices generate upwards of 30 percent of the country’s tax revenue.

Image credit: Andrew Bossi, used under Creative Commons license

Liechtenstein’s unique financial arrangements haven’t always helped the principality make friends on the international stage. Other countries have accused Liechtenstein of being one big mountainous tax dodge. The principality was actually on the Organization for Economic Cooperation and Development’s list of “uncooperative tax havens” until May 2009. Since then, Liechtenstein has actively been promoting greater financial transparency in its financial institutions.

On top of that, Liechtenstein’s small population props up a flourishing industrial sector. The country’s factories churn out ceramics and small power tools, and it’s a leading manufacturer of sausage casings. Liechtenstein is also the world’s leading exporter of false teeth.

Liechtenstein’s citizens couldn’t possibly buy all of this stuff, so the great bulk of the production is exported. In 2009 the country’s exports totaled $2.83 billion, while its imports were just $1.77 billion, mostly in raw materials and food.

As the CIA’s World Factbook also notes, 51 percent of Liechtenstein’s labor force commutes in from Austria, Switzerland, or Germany. This setup is another boon for the country, which gets to enjoy these workers’ labor without having to foot the bill for their day-to-day social program expenses.

Thanks to all these little quirks, Liechtenstein’s government runs at a significant surplus. In 2008 the government took in $943 million in revenue against just $820 million in expenses. It’s probably not a recipe that the United States could learn from, but it’s an excellent way to have no national debt.

August 10, 2011 - 12:18pm
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