The Malta Fiscal Advisory Council  has just released its Second Annual Report, which was presented to the Minister for Finance on 30 March and tabled in Parliament on 5 April in line with the requirements of the Fiscal Responsibility Act, 2014 (Cap 534).

In his statement, the chairman of the MFAC noted that in its second year of operations the institution strengthened its organisational structure, established a regular publications timetable and gradually expanded its visibility.

The chairman also highlighted that "sound fiscal policy is critically dependent on taking the right and timely decisions with regard to fiscal sustainability which is supportive of economic stabilisation and growth".

In this respect, the MFAC "welcomes government's sustained commitment to reduce the headline fiscal deficit and the public debt, expressed as a ratio of nominal GDP, in line with the medium-term objective of achieving a balanced fiscal position by 2019".

The chairman also remarked that "convergence towards the stipulated 60% debt-to-GDP threshold can be achieved earlier than originally anticipated, as long as the existing fiscal plans remain unchanged".

The MFAC feels that it is important that the strategic focus would be broadened beyond the traditional headline fiscal targets to direct more attention towards the numerical fiscal rules specified in the Fiscal Responsibility Act and in the Stability and Growth Pact, particularly the required improvement in the fiscal balance in structural terms (that is after adjusting for cyclical and one-off factors) and the expenditure benchmark established by the European Commission.

Apart from presenting information about the role and activities of the MFAC, the Annual Report provides an overall coverage of the recommendations made by the Council in the various reports published to date.

A chapter is dedicated to the review of the progress achieved with respect to the recommendations made in 2015, which dealt with the conduct of fiscal policy, the introduction of new legislation, the budgetary process and fiscal transparency.

The council is of the view that progress has been noted across many of these recommendations, a number of which, the MFAC considers as fully or largely addressed, namely those dealing with ensuring full consistency between the macro and fiscal forecasts; the extension of the average maturity of public debt; the use of revenue windfalls primarily to build fiscal buffers; the cautious utilisation of IIP funds and considering a buffer over the minimum structural effort required.

A separate chapter reviews the 13 new recommendations made by the MFAC in 2016, providing both an explanation and the rationale for each recommendation. Seven of these recommendations dealt with the budgetary process, another four focused on transparency and the other two were related to the conduct of fiscal policy.

The Annual Report includes three special features chapters, with the aim of increasing awareness and understanding about public finance issues among stakeholders. This year's edition presents a comparison of Malta's public finances with those in the euro area, identifying similarities and differences and possible explanations in the case of divergences.

Another special feature focuses on fiscal risks, with special emphasis on public debt sustainability and contingent liabilities.

The Council notes that, according to the Debt Sustainability Analysis carried out by the European Commission, it appears that there are no risks to Malta's fiscal sustainability position in the short-term while in the medium-term the level of fiscal risks is also considered to be low.

On the other hand, there could be medium risks to fiscal sustainability in the long-term due to challenges associated to age-related costs particularly pensions, healthcare and long-term care. Moreover, the level of government guarantees in relation to GDP is quite high compared to the EU average, which could also pose potential risks to fiscal sustainability in the longer term. It is therefore important to maintain such risks within pre-defined prudential limits.

The third special feature reviews the methodology used by the European Commission to assess compliance with the expenditure benchmark, which is included in the Stability and Growth Pact. Its relevance to the conduct of fiscal policy in Malta is expected to increase. Indeed, in December 2016 an agreement was reached at European level, whereby stronger focus on an expenditure-based indicator is envisaged for the setting and assessing of member states' fiscal policies and outcomes by the European Commission.

The Annual Report, including the audited financial statements, is available on the MFAC's website www.mfac.org.mt