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Sound fiscal prudence advice

Every government needs to plan its short-term fiscal objectives within the context of a broader strategy for long-term financial sustainability. Malta’s economic growth over the last few years has been encouraging but it will be a mistake not to focus on numerous slow-burning issues that could lead to significant challenges in the coming decades.

The Malta Fiscal Advisory Council advises the government on the effectiveness of its fiscal management, especially from the perspective of sustainability. Its input is an essential check on the administration’s budgetary performance, a test that is valuable to the European Commission that must ensure all member states abide by the provisions of the Stability and Growth Pact.

The council has reported that, last year, Malta registered a fiscal surplus of 3.9 per cent of GDP that was higher than initially anticipated. The debt ratio came down to 50.8 per cent of GDP, well within the limit of 60 per cent mandated by the Stability and Growth Pact. Satisfactory economic growth and positive fiscal turnout “comfortably met and exceeded a requirement to maintain a balanced budgetary position”.

But the government has been advised to control its expenditure as the sustainability of its positive fiscal performance cannot be guaranteed. The council “encouraged the government to remain vigilant and to continue to monitor expenditure developments carefully to avoid any significant departure from the fiscal targets”.

Electoral cycles are relatively short and political expediency can often tempt a party in power to throw caution to the wind to court popular favour. This mistake has been the downfall of some EU member states like Greece, Spain and Ireland as they had to be rescued by painful restructuring plans defined by the European Commission and the International Monetary Fund.

The fiscal council made some very valid remarks about long-term issues that will increasingly put pressure on public finances. Malta has the EU’s second-highest projected increase in age-related expenditure. Put simply, Malta’s population is ageing fast and there is no guarantee that even imported labour, which almost by definition is usually transient and dependant on the state of the economy, will ease the state pension’s burden as it continues to increase.

The pensions challenge will be compounded by the need for more investment in the public health and long-term care systems. To this must be added the cost of investment in the physical infrastructure, which has suffered from under-investment for decades. With Malta’s eroding eligibility for EU cohesion funds, the government needs to put long-term priorities at the forefront of its fiscal planning.

Some economic analysts see little evidence that long-term issues are being given the importance they deserve. On the pensions’ front, for instance, the government has already declared it has no intention to introduce the mandatory savings second pillar even when it is clear the present pension scheme is inadequate for most people.

Despite the good economic performance for the last few years, the dependence on tourism, financial services and e-gaming exposes this country to serious sustainability challenges if any of these economic pillars were to suffer from some external shock. The fiscal council’s advice to blend economic growth with fiscal prudence, especially on the expenditure side, should not be taken lightly by the government.

This is a Times of Malta print editorial

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