GLARUS, Switzerland (Reuters) - On a soggy Sunday in May, some 6,000 residents of the Swiss canton of Glarus gathered in a public square to have their say on whether to raise the local transport budget, ban attack dogs and reintroduce free burials.
Dating back to 1387, Glarus is one of only two remaining Swiss community assemblies or 'Landsgemeinde' - a forerunner of the country's system of direct democracy, established in 1848, which gives citizens the final say on almost every single policy put forward at a local, cantonal or national level.
The model is gaining attention in neighboring Austria and Germany - as well as further afield - as politicians look for ways to counter a crisis of legitimacy while voters baulk at unpalatable austerity measures to cut soaring debts.
Swiss research shows that giving citizens a direct say over how their taxes are spent leads to lower public debts, more cost-efficient services and even less tax evasion.
"Because Swiss citizens feel they can control politicians' spending through referendums, they are more prepared to give the government money and have a more positive attitude towards the state," said Daniel Kuebler, co-director of the Centre for Democracy Studies in the northern Swiss town of Aarau.
To be sure, direct democracy is not the only driver of the Swiss success story. The country's neutrality, bank secrecy, liberal labor market, low taxes and stable government have all played their part in drawing investment and driving growth.
But the system has forced politicians to be more frugal than elsewhere. Switzerland recorded budget surpluses throughout the financial crisis despite having to bail out flagship bank UBS, while lawmakers in countries like Greece - the birthplace of democracy - ran up unsustainable debt piles.
"In the cantons and municipalities we have a financial referendum, which means as a politician I keep an eye on spending because I know afterwards I'll be asked, 'Why did you to that?'" said Andrea Bettiga, mayor of Glarus, a canton nestled in the mountains of east central Switzerland.
"If that wasn't the case, I'd probably be a lot more extravagant."
Critics of Swiss direct democracy say initiatives can be hijacked by lobby groups who spend vast amounts of money, and can be used for nationalist measures that target minorities.
In the most controversial recent case, a 2009 referendum banned construction of mosque minarets, of which there were just four in Switzerland at the time. It was backed by the right-wing Swiss People's Party (SVP) which plastered the country with posters showing the Swiss flag covered in missile-shaped towers.
Voters backed the measure despite a campaign against it by the Swiss government, which said it violated human rights, would alienate Muslims and damage the country's reputation for tolerance. It was denounced by countries across Europe and by religious groups, including the Vatican, Protestant churches and Jewish organizations.
In the United States, direct democracy is frequently blamed for the fiscal mess in California, where a 1978 referendum known as Proposition 13 changed the state constitution to ban increases in property taxes in line with inflation.
Supporters say the measure put a sensible limit on state spending, but opponents say it warped the property market to benefit the rich, forced other taxes up and made it impossible for towns to keep pace with the cost of public services. This year, three Californian cities filed for bankruptcy in the space of weeks.
Kuebler said Switzerland's referendums, which allow voters to overrule spending decisions by the legislature, do a better job of encouraging fiscal responsibility.
"You might think that direct democracy would lead to greater public spending because anyone can put forward an initiative, for example, proposing free beer for all," said Kuebler. "But it would never have a chance, because the preference of Swiss citizens is fiscally conservative and not redistributive."
Initiatives to increase workers' annual paid holiday allowance to six weeks from four and to cut the working week to 36 hours from 42 both failed at the ballot box, on grounds such measures would hurt the economy and threaten competitiveness.
In 2003, 85 percent of voters approved a law anchoring a formal "debt brake" into the constitution after government finances spiraled out of control in the 1990s. At around 40 percent of national output, government indebtedness is now just a fraction of that of other European countries.
In a sign of growing interest in the Swiss model, representatives from the German state of Baden-Wuerttemberg attended a conference on direct democracy in Aarau last month.
The German state is looking to regain trust in politics, following a violent backlash over plans for a new railway station in its capital Stuttgart.
"In German society there is a growing discontent with democracy, which politicians in Germany can no longer ignore," Baden-Wuerrtembeg's state premier wrote in an editorial in influential Swiss daily Neue Zuercher Zeitung.
Referendums already exist in many German states, but the legal hurdles are high, in many cases the results are not binding and financial topics are mostly excluded.
SVP politician Natalie Rickli says citizens should be trusted to make wise economic choices.
"The economic miracle of Switzerland is because we have direct democracy," Rickli told a conference last month. "Why do we have lower debt than other countries in Europe? Because we voted for that."
Additional reporting by Emma Thomasson; Editing by Peter Graff