Stop inflating non-productive spending, watchdog urges government

An independent public finance watchdog has recommended that the government refrains from further inflating expenditure, especially in areas of “non-productive spending”.

In its annual report handed to Finance Minister Clyde Caruana, the Malta Fiscal Advisory Council noted that successive budgets have been characterised by high levels of expenditure and permanent revenue-reducing measures.

While positively noting the government’s commitment to keep spending below the EU’s 3% of GDP threshold and the considerable margin to the 60% debt-to-GDP ratio, the council expressed concern about the way spending is being apportioned.

It said that, although the fiscal balance has been reduced, on the back of strong revenue growth, this situation may not persist, particularly should Malta’s macroeconomic conditions become less favourable.

It is advised that spending restraint would help the government preserve the necessary space for adjustments in its expenditure

It also emphasised the importance of prioritising expenditure policies that enhance the quality, efficiency and long-term sustainability of public finances.

Labour market conditions remain favourable, with employment rising by 3.9%, sustained by continued immigration flows- Malta Fiscal Advisory Council

The council said labour market conditions remained favourable, with employment rising by 3.9%, sustained by continued immigration flows. The unemployment rate declined to historically low levels, close to 3%.

Taking a deeper dive into the underlying drivers of Malta’s economic growth, the council noted that the main growth engine has been domestic demand, particularly driven by private and government consumption. Current forecasts suggest that this pattern is likely to persist in the short term.

While this demand-driven momentum has supported economic activity in the near term, the council said continued reliance on domestic demand as the principal engine of growth carries inherent risks. These include mounting pressures on infrastructure and public finances, as well as relatively limited gains in productivity and external competitiveness.

In this context, the council reiterated the importance of gradually rebalancing the growth model towards a stronger export-oriented dimension.

It said transitioning towards export-led growth remains a pressing strategic priority. This will require sustained support for innovation, export diversification, productivity improvements and the upgrading of existing competitive sectors.

The council said enhanced efforts are necessary to safeguard and expand Malta’s export market share across a broad range of economic activities, thereby strengthening the economy’s long-term resilience and growth potential.