Capacity constraints make sustainable and inclusive growth ‘even more critical’ – MFAC

The Malta Fiscal Advisory Council (MFAC) has called on the Government to expedite structural reforms to meet the challenges presented by the country’s capacity constraints by fostering sustainable and inclusive growth, which has become “even more critical” due to Malta’s strong economic growth.

The Council recommended promoting productive investment, particularly in the areas of digitalisation and green transition, research and innovation, physical and social infrastructure, addressing skills gaps and shortages in the workforce and improving education outcomes.

The call was made in the MFAC’s assessment of the Half-Yearly Report to the Minister for Finance.

The Half-Yearly Report aims to provide an economic and fiscal update based on the information available up to the year’s first half and relate such updates to previously published forecasts.

The MFAC noted that the Maltese economy has continued to expand steadily in the first months of this year, with strong labour market developments and decelerating inflation.

The Council appraised an upside risk for economic growth in 2024 relative to the Government’s projections, driven by improved external demand.

In the first half of this year, estimates by the Ministry indicate that the Government deficit is considerably low, at €242.8 million, compared to the Budget forecast of more than €900 million for 2024.

This, it said, was due to higher-than-anticipated fiscal revenue, which reflected stronger-than-expected economic growth. On the other hand, whilst there were some savings in specific expenditure components, overall expenditure also increased strongly, matching almost one-for-one the unexpected revenue increases.

The report points out that the Government plans to limit net expenditure growth to a rate consistent with reducing the general government deficit by 0.5 percentage points of GDP annually and reaching the three per cent deficit figure over the next four years.

Meanwhile, the Council positively noted that there is currently a buffer of around 10 percentage points to the 60 per cent debt-to-GDP benchmark and it is expected that this will continue to be respected.

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.

It said that “the prevailing energy subsidy policy weighs substantially on public finances, involves risks to the deficit and expenditure trajectory and does not include incentives for energy savings and efficiency.”

It added that the strong performance of the Maltese economy, well above the EU average, and the stabilisation of international oil and gas prices, “provide the appropriate context for a gradual revision to this subsidy so that it is more targeted and coherent with the over-arching objective of achieving a carbon-neutral economy and promoting the green transition.”