PexelsThe Malta Fiscal Advisory Council’s endorsement of the government’s fiscal forecasts have come with a notable caveat: concerns that Malta has significantly exceeded its expenditure commitments under the excessive deficit procedure opened by the EU.
The council also highlighted the risk that Malta’s deficit may be higher than projected next year.
The MFAC acts as Malta’s financial watchdog, with its operations independent of the government even though its council members are appointed by the finance minister.
Last month, the council concluded that the government’s economic projections for 2025 and 2026 were within its “endorsable” range, whilst cautioning that Malta needed to change the composition of its economic growth and indicating that the projections may be on the optimistic side.
And now that it assessed the government’s fiscal projections for the same two years, the council similarly tempered its endorsement of the forecasts with a warning.
Malta’s full compliance with fiscal rules is not expected
Malta was placed under an excessive deficit procedure in 2024 after years of heavy deficits comfortably above the EU’s 3% of GDP threshold: a threshold which could be temporarily surpassed in the immediate aftermath of the Covid-19 pandemic.
The government has generally sought to downplay the significance of this move, making the case that Malta can bring its deficit down gradually as required without having an impact on its measures, including the costly energy subsidies.
The European Commission is not so convinced, warning last month that the excessive deficit procedure may be stepped up in spring because of an excessive growth in spending and calling for the subsidies to be wound down.
In its report, the MFAC expressed concern that Malta significantly exceeded its expenditure commitments, largely due to exceptional spending in 2024.
And while the government initially planned no growth in net expenditure to correct this deviation, the latest fiscal forecasts are now projecting a 5.8% increase, in spite of Malta benefitting from the most flexible EU limit possible.
The latest forecasts confirm that the cumulative deviation from the net expenditure path is projected to reach 2.19% and 1.44% of the GDP respectively for 2025 and 2026.
Consequently, full compliance with the EU’s fiscal rules “is not expected under the current projections.”
Malta risks a higher deficit next year
When it comes to the 2025 projections, the MFAC observed that downside risks to revenue were broadly offset by similar downside risks on expenditure: consequently, the potential outcome of these risks was broadly neutral.
But the same could not be said for 2026, where the risks shift towards a deficit that is higher than projected, due to weaker than expected revenue and potential upward pressure on expenditure.
The materialisation of such risks, the council warns, “could undermine the achievement of the planned structural effort.”
The council’s recommendations
The report presents four recommendations to the finance ministry.
The first recommendation is for the government adhere to expenditure ceilings so that it strengthens fiscal sustainability, with the council recommending that the government refrain from further inflating expenditure and ensure compliance with spending limits.
“High spending leaves Malta vulnerable if economic conditions weaken. At the same time, the Council stresses that this should not come at the expense of productive investment,” it siad.
The second recommendation is to prioritise “sustainable” fiscal consolidation, exploiting the preent favourable economic conditions to do so.
“Any extra revenue should be directed towards reducing the deficit and rebuilding fiscal buffers, with fiscal restraint in non-productive expenditure,” it insisted
The third recommendation is for the government to use its fiscal policy as a strategic enabler to address Malta’s long-term structural economic challenges, raising the country’s productivity and long-term competitiveness.
The final recommendation is for the urgent transposition of the revised EU economic governance framework into national legislation. The council expressed concerns that Malta will not meet the 31 December deadline to update its Fiscal Responsibility Act and other laws in line with this framework, and called for stronger engagement, transparency and parliamentary support to ensure that Malta develops a “modern and credible” fiscal framework.
