Government GDP guarantees could harm fiscal sustainability, Council warns

The level of government guarantees in relation to GDP (gross domestic product) is quite high compared to the European Union average and could also pose potential risks to fiscal sustainability in the longer term, the Malta Fiscal Advisory Council has warned.

To this end, in 2016 the Council put forward 13 recommendations, dealing with the budgetary process, transparency and the conduct of fiscal policy.

In its second annual report, the Council noted that, according to the Debt Sustainability Analysis carried out by the European Commission Malta’s fiscal sustainability position does not seem to be at risk in the short and medium terms.

“On the other hand, there could be medium risks to fiscal sustainability in the long term due to challenges associated to age-related costs particularly pensions, health care and long term care,” the report read.

The chairman of the MFAC noted that in its second year of operations, the institution strengthened its organisational structure, established a regular publications timetable and gradually expanded its visibility.

“A sound fiscal policy is critically dependent on taking the right and timely decisions with regard to fiscal sustainability which is supportive of economic stabilisation and growth,” he said. “Convergence towards the stipulated 60% debt-to-GDP threshold can be achieved earlier than originally anticipated, as long as the existing fiscal plans remain unchanged”.

The MFAC welcomed the government’s sustained commitment to reduce the headline fiscal deficit and the public debt – expressed as a ratio of nominal GDP – in line with the medium term objective of achieving a balanced fiscal position by 2019.

The annual report reviewed the progress achieved with respect to the recommendations made in 2015, which dealt with the conduct of fiscal policy, the introduction of new legislation, the budgetary process and fiscal transparency. The Council said it considers many of them to have been fully or largely addressed, namely those dealing with ensuring full consistency between the macro and fiscal forecasts, the extension of the average maturity of public debt, the use of revenue windfalls primarily to build fiscal buffers, the cautious utilisation of IIP funds, and considering a buffer over the minimum structural effort required.