An assessment of Malta's fiscal policy stance during 2008-2022 : a narrative evidence approach

Abstract

For many years, Malta’s fiscal policy was characterised by recurrent budget deficits and this trend persisted during the first years of Malta’s membership in the Euro Area. However, as from 2013, there was a notable turnaround, with budget surpluses being recorded between 2016 and 2019 which resulted in a rapid decline in the government debt ratio. This improvement in the fiscal position was halted in 2020 with the onset of the covid-19 pandemic as the government provided a strong budgetary response to mitigate the resulting recessionary effects and subsequently to address inflationary impacts from the war in Ukraine. In this context, this paper aims to obtain a better understanding of Malta’s fiscal policy during 2008-2022, by assessing the annual fiscal stance as well as the motivations underpinning these fiscal policy choices. Rather than the traditional approach based on the cyclically adjusted budget balance, which involves various estimation challenges, this paper uses a bottom-up, narrative approach, as pioneered by Romer and Romer (2010). This involves an evaluation of the fiscal stance by adding up individual discretionary budgetary measures. Furthermore, qualitative evidence is obtained from various contemporaneous policy documents to identify the main economic, institutional and political motivations underpinning the prevailing fiscal stance. Based on this narrative evidence, we find that the fiscal policy stance shifted from broadly neutral or contractionary during 2008-2016, to an expansionary stance between 2017 and 2022. Counter-cyclical fiscal policy considerations were relevant mainly during 2009-10 in view of the effects of the international financial crisis, and more strongly since 2020. The expansionary fiscal stance during the latter period was facilitated by the availability of fiscal space and also encouraged by policy diffusion. The requirements of the Stability and Growth Pact were important determinants of the fiscal policy stance during 2008-2015 as Malta faced external pressure for fiscal consolidation from the European Union institutions as well as from the International Monetary Fund. Political factors were particularly relevant. All the four elections covered during the period under review were associated with income tax cuts. Furthermore, our findings show marked divergences in the fiscal preferences of the Nationalist and Labour governments, largely reflecting traditional partisan differences. These affected the observed shifts in the fiscal policy stance as well as the composition of fiscal adjustment.