electricity

The Malta Fiscal Advisory Council (MFAC) has recommended that Government formulate an exit-strategy for it’s policy on freezing electricity and fuel prices, calling for a targeted approach and the enhancement of incentives for energy savings.

It made the remarks in a statement detailing its Annual Report for 2023, where it highlighted the various recommendations it has made to government over last year, such as the recommendation to avoid inflating government spending and restrain expenditure in light of Malta’s economic recovery being “well underway”.

Energy prices in Malta have been frozen since 2022, with the government paying hundreds of millions annually. Government has argued that the decision was needed to stem the tide of inflation, which has been felt across the economy.

The MFAC tabled its Annual Report for 2023 in Parliament earlier this week. In a statemement, MFAC Chairperson Moira Catania highlighted that despite the global challenges which persisted over the past year, Malta’s economic landscape remained resilient and registered robust economic growth characterised by an improved employment landscape with low unemployment rates and heightened labour force engagement.

The counter-cyclical fiscal policy exercised in the preceding years led to a fiscal deficit ratio which surpassed the three per cent benchmark level and is projected to reach five per cent of GDP in 2023. On the other hand, despite the notable upsurge in government indebtedness, projections indicate that the debt-to-GDP ratio will remain below the 60 per cent threshold in 2023. 

Looking ahead, the recent revocation of the EU’s general escape clause highlights the importance of prudent fiscal management.  At the same time, the EU economic governance framework is being reformed, with a provisional inter-institutional agreement reached in February 2024. The reform will introduce new fiscal rules and obligations.

While the three per cent deficit-to-GDP reference value and the 60 per cent debt-to-GDP benchmark will be maintained, the emphasis within the new economic governance framework will be on debt sustainability. It will also involve a shift towards expenditure control, with specific expenditure paths depending on country-specificities. Concurrently, there will be a concerted effort to bolster structural reforms and public investments to foster sustainability and economic growth.

Other recommendations the MFAC made to government throughout 2023 include enhancing Malta’s international competitiveness, promoting export-led growth, and safeguarding planned productive public capital expenditure. “This entails prioritising labour productivity enhancements to drive competitiveness, bridge skills gaps and embrace the transition towards digitisation and environmentally sustainable business practices.

The Annual Report contains three thematic chapters. The first chapter presents empirical estimates of the link between output and the unemployment rate in Malta. This study finds evidence of a statistically significant relationship between output and unemployment in Malta, though relatively weaker when compared to other EU countries. The unemployment-output relationship was found to have changed over the years, but not by significant proportions, and in general, it tends to be more responsive during contractionary periods than expansionary periods. This research points towards several policy implications concerning fiscal policy and supply-side policies, which are discussed at the end of the Chapter.  

The second thematic chapter involves an analysis of real unit labour costs, labour productivity and price developments in Malta. Over the past two decades, a strategic reallocation of resources towards higherproductivity sectors, notably in the tertiary sector, has been central to Malta’s economic transformation. The analysis shows improvements in Malta’s price competitiveness in certain sectors. While some industries, such as manufacturing, face hurdles due to higher unit labour costs compared to their peers in the Euro Area, other sectors like the arts, entertainment, and recreation sector, including online gaming, showcase Malta’s competitive advantage. The report emphasizes the need for strategic investments in technology, human capital, and innovation to enhance Malta’s competitiveness. A general improvement in profitability is also noted, particularly within the tertiary sector, and the report highlights the importance of investing excess profits in labour productivity aims to ensure a sustainable post-pandemic economy.

The last thematic chapter delves into the fiscal revenue model developed by the MFAC in 2023, which enables the Council to produce forecasts for government revenue components. The model also enhances the institution’s risk assessment capabilities, facilitates counterfactual assessments, and provides the possibility to conduct scenario analyses. This chapter offers a detailed explanation of the foundations of the model and the methodological framework adopted by the MFAC to compute both historical and forecast revenue elasticity estimates to subsequently produce its own revenue projections. Additionally, the Chapter provides a summary of the projections from the two forecast rounds conducted in 2023, highlighting the identified risks vis-à-vis the projections for government revenue published by the Ministry for Finance. Evaluation of the model’s functionality is conducted through simulation exercises. Conclusively, the Chapter delineates the model’s limitations, encapsulates the insights gained and summarises the importance of developing such a revenue forecasting model for informed fiscal policy recommendations.

The Annual Report for 2023, including the audited financial statements, is available on the website of the MFAC: http://www.mfac.org.mt.

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