On 30 September, the Malta Fiscal Advisory Council (MFAC) presented to the Minister for Finance its assessment of the Government’s fiscal strategy and performance based on the Medium Term Fiscal Strategy 2015-2018, the Annual Report 2014 and the Half Yearly Report 2015 recently published by the Ministry for Finance. The MFAC confirms that the Government has broadly complied with the requirements of the Fiscal Responsibility Act, 2014
The MFAC notes that the targets for the fiscal deficit- and public debt-to GDP ratios for 2014 have been met and this has enabled the country to exit from the EU’s Excessive Deficit Procedure. The MFAC considers that the macroeconomic projections remain plausible albeit subject to a number of risks, while the positive fiscal outturn for the first six months of the year suggests that the headline fiscal target ratios for 2015 can reasonably be met. Robust economic growth is anticipated to contribute higher than expected revenues and compensate for the upward revision in the expenditure plans for the year. It is important that the Government remains vigilant to ensure that any significant deviations from the fiscal targets are rapidly addressed.
The MFAC views positively the added fiscal transparency created by requirements stipulated under the Fiscal Responsibility Act. In this respect, the MFAC invites the Government to enhance the transparency of the reports further by providing additional explanations to justify the assumptions behind the fiscal forecasts, and by elaborating on the main drivers of the projected changes in contingent liabilities. The MFAC also considers important that the Government fully explains the revenue and expenditure measures underpinning its strategy, beyond the current year.
The MFAC acknowledges that the current main priority for fiscal policy in Malta is to achieve further progress towards the Medium Term Objective (MTO) of structural balance by 2019, and to gradually lower the public debt ratio to 60% of GDP, in line with the timetable agreed with the European Commission. In this respect, the current conduct of fiscal policy appears to be conducive to prudent economic and budgetary management to the extent that this is geared towards attaining these goals without acting as a drag on economic activity. This will enable the Government to have sufficient flexibility to act in the eventuality of a deterioration of the current benign economic conditions at some point in the future.
The MFAC also encourages the Government to proceed with expenditure rationalisation where feasible, as this would ensure that sufficient resources can be channelled into more productive activities and to support initiatives aimed at protecting the vulnerable segments within society, without endangering fiscal sustainability. Expenditure rationalisation and timely decisions to address the long term challenges of ageing would enable a higher degree of predictability regarding the level and stability of future tax rates which is important for private sector planning and decision making. Initiatives aimed at incentivising work and building human capital are also positively viewed by the MFAC as these contribute to raise Malta’s potential output, thereby sustaining rising standards of living. On the other hand the MFAC stresses on the importance that possible revenue windfalls are used to bring about fiscal consolidation and are not used to finance undue permanent expenditure commitments.
Overall, the MFAC is of the opinion that the Government is complying with the announced fiscal strategy aimed at maintaining public finances on a sustainable track. On the basis of the information presented by the Ministry for Finance, the MFAC considers that the budget rule is being satisfied. The structural adjustment effort as planned by the Government is also consistent with the minimum effort indicated in the EU’s Country Specific Recommendations.
The full report, entitled “An Assessment of the Medium Term Fiscal Strategy 2015-2018, Annual Report 2014, and Half Yearly Report 2015”, is available on the website of the Malta Fiscal Advisory Council http://www.mfac.gov.mt.