The MFAC assessment of Budget 2025

A few days ago, the Malta Fiscal Advisory Council (MFAC) has issued its review of the Draft Budgetary Plan 2025 (DBP25) submitted by the Ministry for Finance (MFIN). I wanted to use this article to summarise the MFAC’s key findings and recommendations based on its assessment of the DBP25.

In essence, the MFAC broadly endorses the MFIN’s macroeconomic forecasts for 2024 and 2025. However, the Council identifies upside risks to real GDP growth for both years, particularly in 2024, due to several factors, as we had a stronger-than-expected performance in the first half of 2024, where the economy grew by 6% in the first half of 2024, exceeding the MFIN’s full-year projection of 4.9%. MFAC outlines that MFIN’s forecast implies a slowdown in the second half of 2024, but soft indicator data does not support this projection. Moreover, MFAC highlights that there is potential for stronger domestic demand in 2025, as it believes that domestic demand could outperform expectations in 2025.

Having said so, the MFAC cautions that Malta’s reliance on domestic demand-driven growth is of concern, and it stresses the importance of transitioning to export-led growth to achieve sustainable economic expansion in the medium term.

The MFAC’s assessment also highlights several risks associated with the fiscal projections and debt sustainability, whereby fiscal deficit reduction is being driven by GDP growth. The MFAC clearly notes that the projected decline in the fiscal deficit is primarily driven by GDP growth rather than substantial deficit reduction measures. Furthermore, the Council identifies downside risks in some expenditure categories, particularly compensation of employees and gross fixed capital formation in 2024, while it also acknowledges that expenditure could be lower than projected, with potential spillovers to 2025. Overall, the MFAC sees upside potential in government revenue, particularly from direct taxes.

The Council reiterates its concerns regarding the risks associated with the current fixed energy price policy, which could undermine fiscal targets. Despite these risks, the MFAC acknowledges that the fiscal projections indicate compliance with the Excessive Deficit Procedure (EDP) requirements and the new expenditure rule, with the debt-to-GDP ratio projected to remain well below the 60% threshold.

Based on its assessment, the MFAC makes several key recommendations, which I believe should be well noted and given their due importance. The MFAC urges the government to prioritise a shift from domestic demand-driven growth to export-led growth. This requires enhancing competitiveness, particularly by improving labour productivity. On the other hand, the MFAC emphasises the importance of prioritising expenditure that ensures quality, efficiency and sustainability in public finances. It thus advocates for reallocating resources towards productive capital investment. The council also advocates for the revision of the fixed energy price framework to adopt a more targeted approach that incentivizes energy efficiency. Finally, the MFAC urges the government to strictly adhere to its fiscal targets, particularly given Malta’s EDP status and to utilise any higher-than-projected government revenue to accelerate fiscal consolidation and build fiscal space, whilst exploring expenditure restraint measures, particularly on non-productive spending, to create more room for fiscal adjustment in 2025.