Malta Fiscal Advisory Council welcomes strong economic growth, warns of persistently high deficit

The Malta Fiscal Advisory Council (MFAC) has published its assessment of the Annual Report 2023 issued by the Ministry for Finance.

The MFAC noted that the Maltese economy sustained its robust performance in 2023, achieving stronger growth than anticipated. The better-than-expected GDP outturn had a positive impact on the main fiscal ratios. Specifically, the deficit ratio improved by 0.6 pps. compared to the previous year, even though, in absolute terms, the deficit remained close to 2022 levels.

However, at 4.9 per cent of GDP, the deficit remained above the three per cent benchmark. While the level of debt increased, the debt ratio maintained a buffer of almost 10 pps. below the 60 per cent of GDP reference value.

In its Assessment Report, the MFAC put forward several recommendations, including:

The economy’s growth should continue to be export-led, reducing reliance on domestic drivers, particularly private consumption. Achieving this necessitates continued efforts to secure a robust competitive position by enhancing labour productivity, specifically through addressing skills gaps

The government should avoid inflating government spending to ensure adherence with the benchmark fiscal expenditure path. Whilst efforts to restrain government expenditure should be explored, productive capital expenditure promoting medium to long-term growth should not be curtailed.

Fiscal consolidation should ensure that the required fiscal effort is achieved. Indeed, the structural adjustment must be more than the 0.4 pps. of GDP recorded in 2023, given that in an Excessive Deficit Procedure, a country must realise a minimum annual effort of 0.5 pps. The Government should also consider targeting a greater effort than the minimum required, particularly whilst in a high economic growth environment, to build fiscal buffers.

Despite GDP growth significantly exceeding forecasts for 2023, government revenue did not exhibit a corresponding increase. The elasticity of both direct and indirect taxes to GDP growth remained low compared to previous years. Such discrepancies should be investigated, and any necessary actions should be taken.

Maintain the buffer achieved below the 60 per cent debt benchmark and closely monitor the various components contributing to changes in debt, particularly interest expenditure and the level of stock-flow adjustment. The latter exhibits considerable volatility and over the past years has turned out rather different than forecasted.

The Council reiterated its recommendation to prepare an adequate exit strategy in relation to the fixed-energy-price policy, adopting a more targeted approach and enhancing incentives for energy savings.

The full report, entitled “Assessment of the Annual Report 2023”, is available on the MFAC’s website.