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Network News • 11-12-2022

Reflections on latest Fiscal Advisory report

Author: George Mangion - Senior Partner PKF Malta
Published on The Malta Independent:11th December 2022

This article borrows extensively from the latest fiscal report issued under the Fiscal Responsibility Act, exclusively by Malta Fiscal Advisory Council (MFAC).  Actually, it is a brief commentary on the annual and half-yearly report for 2022. 

It is encouraging to note, that the MFAC reiterates a caveat in view of the current circumstances in the global economy, reflecting a sensitive macroeconomic outlook.  Certain assumptions are critical to the projections made.  These incorporate the development rate next year of tourism, remote gaming and financial services.  One expects a positive outcome focused on fiscal plans which underpin the Update of Stability Programme.  

What are the salient statistics that emerge out of this report. One starts by mentioning the increase in 2022 of national debt by €866 million, yet so far it appears that the debt to GDP ratio will hover around the prescribed level of 60% - this is the higher limit previously mandated under the Maastricht rules but has been relaxed due to Covid-19.

What is the cause for such increase in debt, one needs to examine various factors but it is easy to assume that the cash grants and vouchers issued by Malta Enterprise during the two years of Covid contribute to the lion share. Another major expenditure, is the capping of energy and cereals prices to ensure stability and tame inflation.  

Notwithstanding, both total revenue and total expenditure have been revised upwards, mainly due to higher current taxes on income and wealth as well as higher expected costs in subsidies mainly reflecting such energy support measures.

The MFAC favourably notes the debt ratio is expected to remain below the 60.0% threshold.  Obviously, as ECB continues to raise interest rates to subdue roaring inflation, one expects a higher cost to servicing enhanced debt levels.  

As stated earlier, the MFAC points out repeatedly the unexpected stimulus cost of the pandemic which led to two consecutive years of large fiscal deficits, following a joy of fiscal surpluses from 2016 to 2019.  The large deficits in 2020 and 2021 led to a steep increase in the debt ratio, contrary to the consistent declines which were experienced previously.  

The golden years of surplus achieved for the five-year period to 2020 was colloquially baptised the "l-Aqwa Zmien" by party apologists.  The party stopped in 2020 when expenditure-to-GDP ratio rose abruptly, to 46.3% and remained elevated in 2021, though it was partially scaled back to 45.5%.  Can the expenditure be contained next two years given the uncertainty that prevails in the Eurozone - one has to wait and see.

The MFAC projects positively that the expenditure-to-GDP ratio to fall just below 40.0% in 2025.  Subsidies are always criticized in modern economies and these tend to wasteful yet they remained elevated in 2021 as pandemic support continued, but are to be reduced in 2022.

On the other hand, one leans on anticipated improvement in domestic demand to keep rising at a relatively similar magnitude as in 2021.  Public investment (gross fixed capital formation) is set to increase in both 2022 and 2023, which is then followed by two years of marginally lower investment. 

One cannot, omit the haemorrhage of funds to buttress the struggling Air Malta airline. This is causing the treasury a heavy burden.  The MFAC report reveals how budgeted subsidies reach €10.0 million in 2022 and €75.0 million in 2023.  What is a sign of times that employees pay (apart from COLA of €9.90 next year) is creeping up. 

Expenditure is projected to increase by 7.1% in 2022.  On a positive side, in 2022, intermediate consumption is expected to rise by 13.2%. The additional expenditure mainly reflects an increase in programmes and initiatives including increased pandemic-related expenses and additional outlays on carbon credits.  A novelty is the plan to shift public investment from that on public infrastructure, road and transport networks to incentives encouraging more green and digital investment.  

A frequent reminder of the profligate policy of subsidies and the other components in total expenditure has increased during the years of the pandemic. This surge mainly reflected the assistance provided by the government to support employment through various initiatives.  

The Ministry is exerting prudence in allocating more expenditure for 2023 with respect to mitigating high energy prices than is envisaged for 2022.  The media revealed that the minister of finance has instructed other ministries to cut back expenditure late 2022 - at least by €200 million. Above all, the projections in the MFAC report are subject to changes in exogenous factors such as the intensity of the Russian war in Ukraine and the taming of inflation within Eurozone.  

It is heartening to note that the risk assessment carried out by the Fiscal Council suggests that both the fiscal balance and public debt could possibly be lower than expected by the Ministry of Finance and Employment.  Many may ask what is the effect on our economy when Britain is expected to face double digit inflation next year.  A high proportion of tourists arrive from Britain and unbridled competition from cheaper holiday resorts may tip the balance against us next year. Another critical factor is the shortage of skilled labour and the gradual substitution by third country unskilled migrants.

This is affecting Britain, which is also facing shortage of workers and constant demands from Unions for higher pay.  Quoting, the UK Labour leader, Sir Keir Starmer, he insists that the UK priority should be to upskill low-skilled workers and not continue to rely excessively on imported workers because of cost considerations.  Other exogenous factors include the energy and food component.

These continued to contribute to the sky-high inflation figures.  It comes as no surprise that following intense discussions the EU has decided to ban member states from buying Russian oil exported by sea from this month, "putting at risk over two million barrels per day", according to estimates by ANZ analysts.  Investors are also evaluating a European Commission-proposed $60 per barrel price cap on Russian crude, which is designed to reinforce the effectiveness of the EU embargo.  It is not all doom and gloom as inflation in the eurozone slowed for the first time in one-and-a-half years, offering a glimmer of hope to the European Central Bank (ECB) in its efforts to combat the worst consumer-price shock in a generation.  It is running at 10 percent in November - a drop of 0.6% from previous month. 

In conclusion, the MFAC has rendered an excellent service in producing an analytical review of 2022 results.  It is known to carry out regression estimates which are complemented with expert judgement, based on ad-hoc information and regular discussions with key stakeholders. 

Author: George Mangion - Senior Partner PKF Malta
Published on The Malta Independent:11th December 2022
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