After the sovereign debt crisis, it was clear that member states had to get their public finances in order. Strengthening governance in fiscal policy was a priority and new legislation mandated the setting up a fiscal council in each member state to oversee the budgetary performance and identify potential risks that could undermine fiscal sustainability. The Malta Fiscal Advisory Council, set up by the Fiscal Responsibility Act in 2014, has just issued its first annual report. Chairman Rene Saliba told Vanessa Macdonald his small team was taking an active role.

How much leeway were member states given with regards to the setting up of the council, particularly in terms of executive powers?

The mandate given to the Maltese council is wider than that of many other fiscal councils in the EU, which reflects the local authorities’ commitment to have a proper framework of governance.

For example, not all fiscal councils are authorised to put up recommendations: some of them are only empowered to see theextent to which, for example, macro­economic projections and fiscal projections are robust and sustainable.

Also, the EU legislation gives the council the mandate to endorse macroeconomic projections but leaves the endorsement of fiscal projections optional. We do both.

Having said that, some governments actually delegate the process of creating the forecasts – which we do not, due to logistics and resources.

We do look at the projections turned out by the Finance Ministry to see these are robust and sustainable an ongoing basis. The legislation obliges us to issue an opinion on all publications issued by the Finance Ministry, not just specific ones, including annual and mid-year reports, the stability programme updates and the draft budgetary plans.

Why is it important for the Fiscal Council to oversee projections?

Obviously when the government is planning its programme it might be aiming to reach a certain fiscal target – say a deficit reduction – and one way of reducing that ratio would be to be over­optimistic in its economic growth outlook. Many countries were very overoptimistic and the actual results were completely out of line with the projections.

The advent of fiscal councils and the rule-based approach has meant that governments have been much more prudent in the way they prepare fiscal forecasts as they know that they will be very carefully scrutinised

The advent of fiscal councils and the rule-based approach has meant that governments have been much more prudent in the way they prepare fiscal forecasts as they know that they will be very carefully scrutinised.

It is interesting to see that where­as the Commission was traditionally considered to be the more conservative, in some respects the forecasts being produced by the Finance Ministry are on the low side compared to those of the Commission. The Commission’s out­look on the debt ratio appeared to be more optimistic than those of the Finance Ministry, with the former saying by 2017 it will be below the 60 per cent benchmark. Of course, only hindsight will prove which is correct!

You can exert influence but you have no executive powers. You could not, for example, stop a Budget because you think it is nonsense.

Even in other countries, the approach is always for the Fiscal Council to issue an opinion but it could definitely not do more. The Fiscal Council is not there to override parliamentary rule; that would go against democracy.

However, the council’s opinion carries weight. By endorsing the forecast – or otherwise – and issuing recommendations where it feels that they are warranted, the Fiscal Council alerts public opinion whether things are going wrong or whether there are certain risks which need to be addressed.

And the fact that the Fiscal Council is in touch with international institutions like the International Monetary Fund, the European Commission, rating agencies and so on, is another way to draw attention to areas that need highlighting.

One area that other fiscal councils resort to is the ‘comply or explain’ approach, where the government either has to comply or, if it has other views, needs to explain it in a public way.

In Malta, so far at least, this is not the case. The legislation does not provide for it and we rely more on informal consultations with the finance ministry on a regular basis which are delivering the results we would want at this stage.

For example, the ministry released a document in June with an appendix giving its reaction to the recommendations we had made in April to the Stability Programme update. So although there is not a formal ‘comply or explain process’, there is feedback, showing where appropriate whether they will follow-up or take action.

The Fiscal Council is still at the capacity building stage but we hope that eventually this practice could be taken on board locally in a formal way. It is a principle that many other EU Fiscal Councils feel should be a common standard.

Do you only make recommendations reactively or do you raise issues proactively? And what reaction has there been from the government and Finance Ministry to your recommendations?

A combination of both. There are certain areas where the Fiscal Council has put up its recommendations on issues that show that there are certain risks. But we also try to be preemptive and propose ideas to be followed up.

Other things are left for the bilateral discussions.

Recommendation

• Extend the average maturity of government stocks

Long-dated paper would lock in government debt at a rate which is exceptionally low, maximising on the historically low interest rates from the point of view of debt servicing costs.

It also lowers the roll over risk as each time you go back to the market you depend on the extent to which people will take it up and also the cost of that demand. Once you have locked people in, that risk is avoided or postponed until it matures.

In recent years the retail sector in Malta has displayed an exceptionally brisk demand for government paper, notwithstanding the continuous decline in interest rates. And households in Malta – those taking up to €100,000 – have been an anchor, ensuring stability when the sovereign market elsewhere collapsed during the crisis.

This stability is still being shown as successive issues of government paper are oversubscribed by households.

The government’s allotment policy has historically been to give priority to the retail sector which means that institutions are crowded out. That is why there are cases when the Treasury issues additional auctions purely for the institutional investors.

The international debate on the extent to which banks should continue to be exposed to sovereigns beyond a certain threshold is still ongoing and needs to be monitored very closely as it has financial stability implications.The international community might set very rigid thresholds beyond which banks should not be holding government paper. One needs to be very cautious about how to introduce such measures, to avoid the possibility of very destabilising shocks.

Obviously the fact that this debate has been going on for a number of years means various banks have been taking preemptive action. In certain countries, banks have already started to shed their exposure.

You have to be careful: banks should not be forced to move out rapidly because that could create another crisis. And one should be careful that this will not lead to banks investing in lower quality paper and riskier pastures, especially in a low interest rate scenario where there could be asset price bubbles in certain areas.This is a very sensitive and hot area because of its potential implications overseas. No decision has yet been taken by the international community but the banks have definitely repositioned themselves in the market to prevent overexposure.

Recommendation

• Use Individual Investor Programme funds to create long-term sustainable growth

Seventy per cent of the revenue from the Individual Investor Programme will to go to the Development Fund rather than being put into the Consolidated Fund. We see this as a prudential – and positive - measure that the proceeds are not fully going into the recurrent Budgetary process but that part of it is hived off for longer-term deployment.

It is worth pointing out that even though only 30 per cent is going into the Consolidated Fund, for statistical purposes, Eurostat considers the entire amount to have an impact on the deficit and debt – which is why the ratio of deficit to GDP was 1.5 per cent, whereas due to local legislation, only 30 per cent will show up in Malta’s reporting.

In simple terms, our recommendation is that the 70 per cent should not lull us into considering it to be money in our pocket which we can then spend …

From the point of view of implications for future budgets, it will all depend on how that amount in the Social and Development Fund will be deployed. The Council recommended that one should avoid committing those funds to projects which would create additional burdens on the Budget in future years. Rather it is important to consider the acquisition of financial assets, for example. The Development Fund could take up equity in high priority public projects, which would indirectly contribute to growth in other fields, while long-term loans to viable projects would mean that the funds have not been transferred, creating additional burdens in future. So we should be vigilant about how this money should be used.

Recommendation

• Consider a property tax system which is not based on transactions

Revenue has been very buoyant in recent years and has exceeded expectations, but some of the contributing sources might be more volatile than others and might not sustain their current high level of contribution. It is very important as a preemptive measure to consider additional sources of revenue to compensate for possible shortfalls in certain areas. One area which could be studied is tax on property.

When you tax transactions, you are at the mercy of the level of transactions so it is better to have something of a more recurrent nature.

A tax on underdeveloped vacant property – as a disincentive through fiscal means to avoid hoarding – was mentioned in the Budget and we understand that this area is now being discussed with the stakeholders to see how it could go forward.

But there could be other ways of looking at taxation on property. We know this is a sensitive subject but we also know that in certain respects Malta stands out as one of the exceptions in Europe with regards to the way that property is taxed.

We have a very high level of property ownership which is good, as households are very asset rich – although not necessarily liquid – but also one needs to look at the long-term perspective of the sustainability of public finances and how it could be partly strengthened through new ways of looking at property taxes.This is an area that needs to be studied to assess the social and economic implications. At this stage, we are asking for the issue to be studied. We cannot hide behind a status quo, arguing that things should always stay the same.

Ideally, there should be a study group with the relevant stakeholders to look at this with a fresh mind, without assuming that all that has happened in the past should necessarily be continued in the future if it contributes to an improvement in the situation!