Medium risks in the long run

On 30 June the Malta Fiscal Advisory Council presented its assessment of the Medium-Term Fiscal Strategy for the period 2017 to 2020, as outlined in the latest Update of Stability Programme. The Council fully supports government’s plans to maintain a fiscal surplus equivalent to 0.5% of GDP between 2017 and 2020.

According to the planned conduct of fiscal policy, both total revenue and total expenditure will grow by less than nominal GDP throughout the forecast horizon. These plans reflect an element of prudence in the revenue projections, combined with an element of expenditure restraint.

In this respect, it is important that expenditure restraint is sought in areas where savings are feasible, but at the same time, ensure that budgeted amounts are sufficient to cover the rising demand for public services, commensurate with a larger population.

At the same time, the Council fully supports the European Commission’s recommendation to expand the scope of the ongoing spending reviews to the broader public sector and introduce performance-based public spending.

The Council highlights the importance that any new initiatives which could be considered over and above what was factored into the Medium-Term Fiscal Strategy document, do not derail the commitment to comply with the Medium-Term Budgetary Objective of structural balance. It is also important to maintain adequate fiscal buffers for times when economic conditions could be less favourable than at present.

The Council confirms that in 2016 there was full compliance with the three fiscal rules which feature in the Stability and Growth Pact and the Fiscal Responsibility Act. The debt rule, the budget balance rule and the expenditure benchmark were all fully met. This was an improvement compared to the partial compliance reported in 2015.

The upward revision in nominal GDP undertaken in December 2016 contributed to lower the debt ratio to below the 60% of GDP threshold, earlier than originally targeted. In fact, the debt ratio declined to 58.3% of GDP in 2016 and is projected to fall further to 47.6% of GDP by 2020.

In turn, the improvement in the fiscal balance between 2015 and 2016 resulted in a structural effort which was substantially larger than the 0.6% of GDP structural adjustment requested by the European Council for 2016.

Furthermore, expenditure developments in 2016 were within the growth limits set by the Commission in respect of the expenditure benchmark. The fiscal strategy outlined by government in the Update of the Stability Programme should ensure that there remains full compliance with the fiscal rules over the period 2017 to 2020.

Apart from compliance with such fiscal rules, it is essential that fiscal policy is sustainable. On the basis of the Commission’s assessment framework, short and medium term risks to sustainability are judged to be low in the case of Malta, as a result of the benign macroeconomic conditions as well as the improved fiscal conditions,