Updated | Labour MEP Edward Scicluna forecasts further economic troubles

Adds statement by finance ministry at 8:46pm

The deficit for the first quarter of 2012 has risen to 5.5% of the Gross Domestic Product (GDP) according to Labour MEP Edward Scicluna.

He said that according to figures he has worked out himself, modelled on the European Commission's system, Malta's economic performance in the first quarter might have serious repercussions.

"The government is not understanding the seriousness of the situation. Even if Malta maintains its deficit below the 3% target in the remaining three quarters of the year, Malta will exceed the 3% target."

Scicluna explained "the second quarter is indicating that the situation is getting worse. During a recession even a stable deficit and a stable debt quickly gets out of hand. But both deficits and debt are continually rising due to uncontrolled expenditure."

This could lead to Malta being included in the European Commission's Excessive Deficit Procedure (EDP).

The procedure was established to ensure that member states correct gross fiscal policy errors. The EU set two targets for all member states, one to keep the deficit below 3% of GDP and the other to keep government debt below 60% of GDP.

The Labour MEP said that from his workings Malta's debt stood at 75% of GDP in the first quarter of the year, and if one had to add the government guarantees the total actual and contingent debt burden rises to 92%.

He said entering the Excessive Deficit Procedure will mean that next year Malta might face tough austerity measures "which have been the kiss of death" to a number of countries including Ireland and Greece.

Scicluna said the commission is "sharpening its teeth and noted that indications will be more clear in October or November.

Asked whether his negative forecasts are irreversible, Scicluna said "I cannot see a government entering an electoral campaign lowering its expenditure or drastically increasing its income."

He added that the Labour Party is taking these forecasts into account in the run-up to the forthcoming election and said "the first thing which must be done by a new government is to stop the haemorrhage by controlling waste."

In regards to the Commission's country specific recommendations in which Malta is being asked to reform the COLA (cost of living adjustment) mechanism and to raise the pensionable age, Scicluna maintained that Malta's opposition carries no weight as the negative qualified majority voting procedure enacted through the six-pack last year ensures that single countries carry no political clout.

He said these recommendations could have been avoided if Malta has voiced its opposition earlier, before the commission formulated the recommendations.

"Had the government engaged with commission during the behind closed doors meetings and explained its position and committed itself to carry out the neccessary reforms of the COLA mechanism and pensions I believe that the situation would have been avoided."

Later today, the ministry of finance issued a statement to rebut Scicluna's claims and said the MEP's statement was "insensitive" and "proof that power comes before families for the Opposition".
The ministry added that such messages discourage investors and investment as well as the creation of jobs.

It described Scicluna's analysis as "superficial" analysis and said his analysis assumes that the budget deficit will increase because Malta registered a marginal drop in economy growth in the first quarter.
"Scicluna failed to observe an important factor, that this statistical result is primarily due to the government's decision to absorb the increases in tariffs and the reduction in exports from the parent company."

The ministry said that on the contrary, the overwhelming majority of economic sectors in Malta are showing growth, investment, and an increase in exports and wages. It said this is reflected in the fact that government revenues remained consistent with the government's objectives.

"For this reason, Scicluna's conclusion that this will lead to an increase in the deficit is flawed and built on a false premise."

The ministry added "Scicluna conveniently ignored the fact that the difference in the deficit in the first quarter is also due to the government's decision to absorb increases in international oil prices to avoid raising tariffs for families, business and Maltese industry as well as to provide assistance to Air Malta with the aim of giving the company a viable future," the Ministry said.

On the Commission's country specific recommendations, the ministry noted that the government's position has remained clear and consistent with that it held last year.