I read with interest Chapter 2 of the Malta Fiscal Advisory Council’s (MFAC) Annual Report, which focuses on the new EU Fiscal Framework of Expenditure Control and how this relates to Malta. This chapter delves into the critical area of fiscal responsibility and expenditure control within the evolving European Union (EU) Fiscal Framework, with a specific focus on Malta’s approach.
A key element of this revised framework is the introduction of Medium-Term Fiscal Structural Plans (MTFSPs). Member states are now required to outline their planned average net expenditure growth in these country-specific documents, covering a four-year period, which can be extended to seven years under certain conditions. These plans are submitted to the European Commission and the Council of the EU for assessment and approval, with the agreed net expenditure trajectory becoming binding.
Malta submitted its MTFSP on 20 September 2024, and the European Commission recommended its adoption, concluding that it outlined a credible fiscal trajectory for medium-term sustainability. Notably, the Government of Malta opted to fully adhere to the European Commission’s reference expenditure growth limit of 5.9% for the period spanning from 2025 to 2028. This decision was documented in Malta’s MTFSP, positioning Malta as one of only five member states to adopt the Commission’s proposed average expenditure growth.
Having said so, member states retain the flexibility to adjust their expenditure limits compared to the Commission’s guidance, provided they present sound economic justifications. This adaptability allows for a balance between fiscal prudence and national priorities, ensuring consistency with long-term fiscal sustainability, particularly concerning debt dynamics.
The limit on expenditure growth is not arbitrary; it is significantly influenced by the outcomes of the European Commission’s Debt Sustainability Analysis (DSA), which considers a country’s potential output and its debt-to-GDP ratio.
Despite Malta having the largest expenditure growth limit among EU countries (5.9%), the MFAC notes that meeting this target will present significant challenges for Malta. This is particularly pertinent considering that the average annual growth rate of net nationally-financed primary expenditure in Malta stood at 8.9% between 2013 and 2023 (even when excluding the Covid-19 pandemic year, it stood at 7.5%). This historical trend suggests the considerable effort required to maintain expenditure growth within the new limits.
This significant difference compared to the new 5.9% limit underscores the substantial effort required to restrain expenditure growth. The MFAC explicitly states that the limit and the government’s more ambitious targets represent a challenge given these historical trends and the context of a growing economy and population.
To achieve this limitation, Malta needs to focus on efficient management of government expenditure, ensuring optimal use of taxpayer resources and minimising waste and inefficiencies. This is crucial for fiscal sustainability and preventing excessive debt accumulation. Enhancing the efficiency of existing expenditures could also help avoid reductions in essential services during periods of expenditure restraint.
The MFAC emphasises the importance of continuous monitoring of expenditure developments throughout the year. The margin between the government’s 2025 target of 5.6% net expenditure growth in the Medium-Term Fiscal Strategy (MTFS) and the 5.9% ceiling in the MTFSP leaves limited room for expenditure slippages.
Furthermore, the report points out that tax cuts are considered “expenditure-increasing” under the new framework, as they reduce the fiscal space for actual spending growth. The example of the income tax bracket adjustment in January, estimated to account for approximately 0.54% of GDP, illustrates how such discretionary revenue measures make it more challenging to keep expenditure growth within the targeted limits.
The MFAC also recommends that any higher than projected revenues resulting from better-than-expected economic growth should not be allocated to additional expenditures beyond the limit set in the MTFSP. Instead, these revenues should be used to build potential buffers and accelerate fiscal consolidation, particularly given Malta’s current Excessive Deficit Procedure (EDP).
The MFAC highlights that to restrict the growth of fiscal expenditure, Malta needs to:
- Adhere strictly to the net expenditure growth limit of 5.9% set in its MTFSP for the period 2025-2028;
- Implement measures to significantly reduce the historical growth rate of expenditure;
- Prioritise efficiency in public spending to maximise the use of resources;
- Establish robust and continuous monitoring mechanisms for expenditure;
- Account for the impact of revenue-reducing measures, such as tax cuts, on the available expenditure growth;
- Utilise any surplus revenues to reinforce fiscal consolidation rather than increase spending beyond the agreed limit; and
- Focus on limiting unnecessary spending and making the best use of government resources.
Furthermore, the chapter addresses Malta’s current situation under an Excessive Deficit Procedure (EDP), initiated on 26 July 2024 due to the budget deficit exceeding the 3% of GDP threshold. In this context, the Commission’s 2024 European Semester Autumn Package also set out fiscal path recommendations for Malta. Member states facing an EDP are required to undertake a minimum annual structural fiscal adjustment of at least 0.5% of GDP.
This chapter discusses the fiscal path recommendations that were set out for Malta, along with seven other member states under EDP, in the European Commission’s 2024 European Semester Autumn Package.
According to the Maltese government’s projections in the Medium-Term Fiscal Strategy (MTFS), the headline deficit is targeted to fall below the 3% of GDP threshold by 2026, reaching 3% in that year and 2.6% in 2027. In structural terms, the deficit is also expected to decline below this threshold within the same timeframe, reaching 2.6% in 2026 and 2.2% in 2027.
The MTFS projections indicate that the minimum required annual structural improvement of at least 0.5 percentage points of GDP is expected to be surpassed in both 2025 and 2026. Specifically, the structural primary balance is projected to improve by 0.8 percentage points in 2025 and by 0.7 percentage points in 2026.
For 2027, the planned structural adjustment is 0.4 percentage points. The chapter clarifies that this is still in line with the new EU fiscal rules because the adjustment requirement is reduced to 0.4 percentage points when the deficit is between 1.5% and 3% of GDP.
In conclusion, Chapter 2 of the MFAC Annual report provides a comprehensive overview of the new EU economic governance framework and Malta’s initial response through its MTFSP. While the MTFSPs across member states illustrate a range of net expenditure growth limits reflecting diverse fiscal strategies and economic conditions, the focus now shifts to the implementation of the new framework. The MFAC highlights the next crucial step for member states: enacting the necessary laws and regulations to comply with the new EU fiscal directive by 31 December.
