Understanding Malta’s public finances

The recent published figures on Malta’s public finances set me thinking. It is true that our growing public debt is still under check thanks to our growing economy. However, the question I am troubled with is if we will we ever revert to a balanced budget or at least reduce substantially the annual deficits we have registered.

The last year we had balanced annual national finances with some small surplus was in 2019. Since then, triggered by the pandemic shock we have been registering massive annual deficits. In the last 4 years we had an average annual deficit of €978 Million per year. This meant that our national debt pile has increased by 87% from just under €6 Billion by end 2019 to over €10 Billion by end 2024.

Source: NSO

The main question that the above figures pose to me is the following. If we managed to have a surplus in our public finances when the total annual public revenue was in the region of €4 Billion to €5 Billion between 2016 to 2019, why are we then registering such large annual deficits when the total annual public revenue has shot up to just under €8 Billion by end 2024? The answer obviously lies in government expenditure. If we compare 2024 to 2019, we see that while Government Annual revenue increased by 54%, government expenditure increased by 73%.

So, the next question is almost natural. On what did government expenditure increase when comparing government expenditure of 2024 to 2019? The answer is shown in the below table.

Source: NSO

As shown above the greatest contributors to the increase in government expenditure where Intermediate Consumption, Compensation of Government Employees, Social benefits, Capital Transfers Payable and Subsidies Payable. 4 out of these 5 categories are directly related to recurrent expenditure. These 5 categories explain 82% of the increase in government expenditure between 2024 to 2019.

Some of the above Government expense categories are self-explanatory, like for example, Compensation of Government Employees, Social benefits and Subsidies Payable.  However, I believe some explanation is needed for the other outlined expenditure categories. Intermediate consumption refers to the value of goods and services consumed as inputs in the production of government services, excluding capital projects like buildings or machinery. Thus, intermediate consumption refers to government’s day-to-day spending in things like office supplies, fuel, IT services, and consulting fees, excluding wages paid to government employees (those are recorded separately as compensation of employees).

On the other hand capital transfers payable are expenditures where the government provides resources—either in cash or in kind—to other entities without receiving anything in return. Examples of these capital transfers include Malta Enterprise schemes, including tax credits aimed at supporting businesses, Renewable energy initiatives, promoting sustainable energy solutions or Housing-related schemes, assisting in the development or improvement of housing infrastructure, to mention a few examples.

In my humble opinion the above numbers give credibility to the advice that both the IMF and the Malta Fiscal Advisory Council (MFAC) have been publishing, whereby they have underscored the necessity for Malta to implement measures aimed at curbing government expenditure to ensure fiscal sustainability.​ The IMF has been highlighting the need to improve expenditure efficiency to rebuild fiscal buffers and support long-term economic resilience and similarly the MFAC has also advised government to avoid inflating spending, preserving productive capital expenditure that promotes medium to long-term growth, while restraining increases in recurrent spending. ​

While our percentages to annual deficit and public debt to GDP are under check thanks to the fact that Malta’s GDP has grown strongly, we cannot plan ahead assuming that Malta’s GDP will keep growing at the pace we have seen in recent years, as there are mounting risks out there that are likely to be out of our sphere of control and we need the necessary resilience to navigate anything thrown at us, like we did in the recent past.