Updated | Ministry says Commission opinion lacked details of €28 million on revenue measures

The European Commission has issued an opinion saying Malta’s draft budget in 2014 – submitted earlier this year – will not fulfill the requirements to correct the government’s deficit under the excessive deficit procedure (EDP).

Sources told MaltaToday that the lack of detail on Budget 2015 revenue measures in the draft budget that the finance ministry gave to the Commission, meant that the EC had to base its opinion on a “no policy change” based on previous budgets.

“The headline deficit target is expected to be met in 2013, while this is not the case for the headline deficit in 2014 nor the structural effort in both 2013 and 2014,” European Commissioner Pierre Moscovici said.

He added that the draft budget did not specify in detail the measures that underpin the revenue and expenditure targets for 2014, and therefore did not comply with EU reporting obligations.

“Malta has made limited progress with regard to the structural part of the fiscal recommendations issued by the Council in the context of the European Semester. Therefore, the Commission invites the authorities to take the necessary measures within the national budgetary process to ensure that the 2014 budget will be fully compliant with the SGP, notably to address the risks identified by the Commission in its assessment of the Draft Budgetary Plan,” Rehn said.

Government reaction

In a statement, the finance ministry said the Commission opinion concludes that the draft budgetary plan “appears plausible for 2014, while optimistic for 2015. No changes are being requested to be made to Malta's budget for 2015.‎”

The ministry pointed out that the €28 million euro worth of fiscal consolidation measures announced in Budget 2015 were not formally taken into consideration by the European Commission in this evaluation.

“This is because the deadline for the submission of the Draft Plan to the Commission came well before the announcement of the budget in the Maltese Parliament, and so details could not be given beforehand so as to avoid market instabilities. This is an outstanding issue with the Commission in view of our national parliamentary programme, and which the government would like to address for next year,” finance minister Edward Scicluna said.

 In spite of this significant omission, dictated by the calendar, Malta was still not placed in the category of member states whose position will be examined once again in early March 2015. 

In its opinion, the Commission confirms the reduction in the deficit ratio to 2.7% in 2014 in spite of the Commission’s forecast of 3.4%. Its 2.7% forecast for this year contrasts with the government’s own estimate of 2.1%.

Scicluna also said that a report on pensions will be submitted to the Cabinet in the coming weeks.

“The ministry acknowledges the risks pointed out by NAO report, as well as the Commission, in relation to the implementation of the large investment projects, developments in expenditure and the interlinkages between the domestic economy and external macroeconomic environment, and is actively following them.

“On its part, the Commission acknowledges Malta’s progress with the implementation of fiscal-structural reforms, and states that ‘Malta has adopted the reform of the fiscal framework, has rolled out a number of already reported measures to improve tax compliance and fight tax evasion, and finally is in the process of approving a bill providing for the set-up of third pillar pension scheme with a view to improving pension adequacy’.”

Excessive deficit procedure

Malta faced a new Excessive Deficit Procedure (EDP) on 21 June 2013 and was given until 1 October 2013 to take effective action to ensure a sustainable correction of the excessive deficit by 2014 and to bring down debt to 60% of GDP.

The EC said the 2014 draft budget appeared “cautious for 2013 and plausible for 2014” but that the scenario could turn out better than expected if the positive momentum from the first half of 2013 is carried forward.

The draft budget confirms the deficit targets of 2.7% of GDP and 2.1% of GDP respectively for 2013 and 2014. The Commission said that there are risks that the deficit outcomes could be “worse than targeted in the Draft Budgetary Plan” because the projected increase in tax revenues, especially indirect tax, does not appear to be fully explained by the underlying macroeconomic scenario, nor is it underpinned by measures.

“There is a risk of slippages in the public sector wage bill and in intermediate consumption, given previous years’ experience.

“In addition, the financial situation of the energy provider Enemalta, which could require additional subsidies. On the other hand, as has frequently occurred in the past, net capital expenditure could be lower than planned if it used to compensate for slippages in budgetary execution.”

Malta was said to have complied so far with Council recommendations to correct of deficit, but the EC said there was a risk that the correction of the deficit may not be achieved “owing to the apparent lack of a sufficient effort to support it. The situation will have to be reassessed against the spring 2014 notified data.”

The EC completed its assessment of 16 euro area countries’ 2015 Draft Budgetary Plans, focusing on their compliance with the provisions of the Stability and Growth Pact. For seven countries (Belgium, Spain, France, Italy, Malta, Austria and Portugal), the Commission’s opinions point to a risk of non-compliance. The Commission asks the latter two groups of countries to take the necessary measures within the national budgetary process to ensure that the 2015 budget will be compliant with the Pact.