Malta Fiscal Advisory Council’s Review of Draft Budgetary Plan 2025
Recently, the Malta Fiscal Advisory Council (MFAC) released its assessment of the Draft Budgetary Plan 2025 (DBP25) presented by the Ministry for Finance (MFIN). Here, we summarize the MFAC’s key findings and recommendations based on their evaluation of DBP25.
Macroeconomic Forecasts and Potential Growth
The MFAC generally commends MFIN’s macroeconomic forecasts for 2024 and 2025, though it perceives possible growth in real GDP beyond projections, with 2024 showing particular promise. The first half of 2024 saw an unexpected economic growth of 6%, surpassing MFIN’s full-year estimate of 4.9%. MFAC notes that while MFIN anticipates a slowdown in the second half of 2024, current soft indicator data does not support this outlook. Moreover, there is potential for stronger domestic demand in 2025, where domestic demand might exceed expectations.
Despite these promising factors, the MFAC advises caution regarding Malta’s heavy reliance on domestic demand-driven growth. They stress the need for a shift towards export-led growth to ensure sustainable economic progress in the medium term.
Fiscal Projections and Debt Sustainability
MFAC’s report highlights risks related to fiscal projections and debt sustainability, with fiscal deficit reduction seemingly driven by GDP growth rather than significant deficit reduction strategies. The projected reductions in the fiscal deficit appear largely reliant on overall GDP growth, without substantial cuts in the deficit itself. Additionally, the council identifies potential risks in expenditure categories such as compensation of employees and gross fixed capital formation in 2024. It also conceives that expenditure may be lower than projected, potentially impacting 2025 finances.
On a positive note, the MFAC observes potential for increased government revenue, especially from direct taxes. However, they express concerns about the risks associated with the current fixed energy price policy, which could jeopardize fiscal targets. Despite these risks, fiscal projections suggest compliance with the Excessive Deficit Procedure (EDP) requirements and the new expenditure rule, with the debt-to-GDP ratio expected to remain significantly below 60%.
Recommendations for Future Strategies
Given these assessments, MFAC proposes several key recommendations crucial for Malta’s economic strategic planning:
- Prioritizing Export-Led Growth: The council underscores the importance of shifting focus from domestic demand to export-led growth, necessitating improvements in competitiveness and labor productivity.
- Enhancing Public Finance Efficiency: Expenditure should be redirected towards productive capital investments, prioritizing quality, efficiency, and sustainability in public finances.
- Revising Energy Price Policies: MFAC advocates for a revision of the fixed energy price framework to develop a more targeted approach that promotes energy efficiency.
- Adhering to Fiscal Targets: The government should remain committed to its fiscal goals, particularly considering Malta’s EDP status. It should use any surplus in government revenue to expedite fiscal consolidation and broaden fiscal room.
- Exploring Expenditure Restraint: Fiscal space can be enhanced by restricting expenditure, especially in non-productive areas, allowing room for fiscal adjustments in 2025.
The implementation of these recommendations will be instrumental in achieving sustained economic growth and safeguarding the fiscal health of Malta.
Overall, while the DBP25 provides a robust framework for Malta’s economic and fiscal environment, attention to risks and strategic adjustments as outlined by the MFAC will be crucial for the country’s economic resilience and long-term prosperity.
