Brussels opens excessive deficit procedure against Malta

The European Commission has today recommended that the Council of Ministers opens an excessive deficit procedure for Malta.

In 2012 Malta recorded a general government deficit of 3.3% of GDP, breaching eurozone rules to keep deficits below the 3% threshold.

The Commission wants Malta to put an end to its excessive deficit by 2014, but it believes the deficit will rise to 3.4% in 2013 and 2.7% in 2014 - an improvement of 0.7%. Additionally, it will have to ensure that government debt approaches 60% of the country's GDP.

Malta will also have to specify and rigorously implement the measures that are necessary to achieve the correction of the excessive deficit by 2014, and use all windfall gains for deficit reduction.

The Commission 2013 spring forecast projects that the deficit will continue to be above the reference value in 2013 and 2014, respectively at 3.7% and 3.6% of GDP. These budgetary projections are based on current policies, thus incorporating the 2013 budget that was endorsed by Parliament in April 2013, which includes expansionary measures on both the revenue and expenditure side, as well as the already planned equity injection into Air Malta (0.6% of GDP), with a net deficit-increasing impact of 0.3% of GDP.

The expansionary measures are only partially compensated by increases in excise duties, the collection of tax arrears as well as the expenditure savings and higher social contributions stemming from the 2006 pension reform.

In addition, revenue contribution from one-offs will fall after 2012. Current deficit levels will push debt to 73.9% of GDP in 2013 and to 74.9% of GDP in 2014. In 2015 and 2016, the general government deficit is projected to remain above the 3% of GDP reference value, and the debt-to-GDP ratio would increase to 75.6% of GDP by 2016.

Recommendations

While the Labour government says it will reduce the deficit to 0.8% in 2016, the Commission said its target was "more ambitious than required by the Stability and Growth Pact, but its achievement is not planned within the programme period."

Malta's 2013 deficit target relies on relatively high growth in tax revenues, which does not appear to be fully explained by the underlying macroeconomic scenario. In addition, it is not sufficiently supported by detailed measures, as is also the case for the subsequent years.

The Commission also said that Malta did not make sufficient progress towards compliance with the debt criterion in 2012 and is not projected to do so in 2013-14. "While Malta's fiscal framework is quite flexible, its non-binding nature and the short horizon of fiscal planning are not supportive of a sound fiscal position."

Brussels added that tax compliance and evasion continue to pose a challenge to the quality of public finances. "In 2012, Malta stood out as the country with the second highest gap between the tax treatment of debt and equity financing of new investment. This debt bias may lead to excessively high corporate leverage and inefficient allocation of capital. Malta is among the few Member States without any provisions to counter the debt bias."

Another stark reminder came on pensions and age-related expenditure, where compared to other member states the statutory retirement age remains low and the increase legislated with the 2006 reform is slow.

"The employment rate of older workers is low and a comprehensive active ageing strategy has still to be developed. Limited primary care provision, combined with the projected ageing of the population may lead to high healthcare costs in the long term. The administrative capacity in the area of public procurement is weak, leading to complicated and lengthy procedures."

Brussels said measures had to be taken to reduce the rate of early school leaving, and said the recent launch of the preparatory process leading to an early school leaving strategy are welcome, and that Malta had taken significant steps to increase participation by women in the labour force, mainly aimed at improving reconciliation of work and family life.

But Malta's competitiveness was said to remain at risk in view of the very limited diversification and poor environmental performance of its energy supply leading to high electricity tariffs.

"The dire financial state of Enemalta adds to this insecurity, but the electricity connector with Sicily is expected to provide relief after 2014. While a number of initiatives have been further pursued, such as the uptake of photovoltaic power, the share of renewable energy sources remains particularly low and the feasibility of major projects, such as the development of wind farms, seems to be at stake.

"Progress was registered in energy efficiency, notably for public buildings, supported through Union funding. The environmental performance of Malta's transport system is also poor. Malta would benefit from a comprehensive transport strategy that seeks to improve public transport, the road network, the system's carbon performance and to further encourage the use of other types of transport than passenger cars."

Brussels said Malta had to ensure the long-term sustainability of public finances, reform the pension system to curb the projected increase in expenditure, including by accelerating the increase in the statutory retirement age, by introducing a link between the statutory retirement age and life expectancy and by encouraging private pension savings.

Another recommendation was to pursue health-care reforms to increase the cost-effectiveness of the sector, in particular by strengthening public primary care provision.