A fiscal watchdog has struck a cautious tone on the government’s economic projections for next year, saying the outlook remains “very sensitive” to the assumptions being made by the finance ministry.

In its annual assessment of the government’s budgetary plans, the fiscal advisory council said that, due to the “exceptional circumstances”, the government’s outlook is conditional on the ongoing resilience of the labour market as well as key economic sectors performing in line with expectations.

The council, headed by former Bank of Valletta chairman John Cassar White, is tasked with reviewing the plausibility of the economic assumptions underpinning the government’s annual budget plans.

In a letter to Finance Minister Clyde Caruana, Cassar White said the government’s projections “lie within the endorsable range” by the council.

He said that “due consideration of the uncertainty inherent in macroeconomic forecasts” and the “added uncertainty” brought about by the COVID-19 pandemic was factored into the council’s assessment of the projections.

What is the government projecting?

The government is expecting economic growth to accelerate to 6.5 per cent next year, lifting the real GDP figure above pre-pandemic levels.

Domestic demand is projected to be the main driver of real GDP growth throughout the forecast horizon.

The deficit and debt have ballooned recently, with the government largely pinning it on increased spending to fight the economic slowdown caused by the virus outbreak.

According to two economists, the government’s aim to slash the €1.6 billion spending deficit by half is based on its “ambitious” economic growth projections.

Philip von Brockdorff told Times of Malta last week that the deficit targets for 2022 and 2023 depend on the “ambitious” 6.5 per cent growth target but could be doable as the Maltese economy “never ceases to amaze”.

If the economic growth target is hit, the economist says the planned deficit reduction to 5.6 per cent in 2022 from 11.1 per cent this year could be achieved. 

Echoing von Brockdorff’s reaction on the planned deficit cuts, Malta Employers’ Association director general Joe Farrugia said that the budget is based on “strong assumptions” that might make the attainment of the revenue and deficit targets challenging.

He noted how government spending this year shot well above what was projected during last year’s budget speech.