An analysis of Malta's debt reduction paths in line with the EU's fiscal framework

Abstract

In recent years, Europe has experienced a major shock as a result of the financial crisis. The fact that it was armed with fiscal rules and governance, of which the main was the Stability and Growth Pact, proved futile in coping with such a crisis. European economies buckled under the pressure which was fuelled by the crisis but further amplified as a result of lax fiscal governance. Indeed a sovereign debt crisis erupted jeopardising not only countries but the whole European Monetary Union and challenging the very existence of the Euro. In this light, the European Union put in place a new fiscal framework aimed at correcting the highly unsustainable positions that many EU governments found themselves in, characterised mainly by soaring debt levels. These new rules are contained in the so-called 'Six-pack' and the 'Fiscal Compact' focusing on achieving fiscal sustainability in member states. Malta is no exception and despite showing high levels of resilience in the face of such a crisis, the main fiscal indicators of deficit-to-GDP ratio and debt-to-GDP ratio are violating the SGP's 3% and 60% benchmarks respectively, making the implementation of the Excessive Deficit Procedure against Malta highly likely. Projecting the future medium-term of these indicators is thus highly important so as to give the EU and policy makers an idea of future prospects. Estimates based on a percentage change can be found in the yearly Stability Update for Malta however these are only point estimates. In contrast, this dissertation aims to produce a possible range of fiscal outcomes based on a 'fan chart methodology' following a similar methodology conducted to study the Irish economy. The deficit and debt ratios will be subject to a stochastic process governing the real rate of economic growth. A limiting factor is that 'no policy change' to growth variations is assumed.