EN Official Journal of the European Union C 72/9

COUNCIL OPINION

of 27 February 2007

on the updated convergence programme of Malta, 2006-2009

(2007/C 72/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1) On 27 February 2007 the Council examined the updated convergence programme of Malta, which covers the period 2006 to 2009.

(2) The macroeconomic scenario underlying the programme envisages that real GDP growth will hover around 3 % over the programme period. Assessed against currently available information, this scenario appears to be based on favourable growth assumptions for 2007 and markedly favourable ones thereafter, especially due to the optimistic medium-term evolution of the external sector. Less favourable net exports in the medium term than foreseen in the programme could heighten the external imbalance recorded in recent years. Inflation projections appear plausible.

(3) For 2006, the general government deficit is estimated at 2,9 % of GDP in the Commission services' autumn 2006 forecast, against a target of 2,7 % of GDP set in the previous update of the convergence programme. The estimated outturn for 2006 in the new update (2,6 % of GDP) is below that projected in the Commission services' autumn 2006 forecast and seems plausible in the light of recent information on GDP growth and government finance cash data.

(4) The budgetary strategy outlined in the update aims at reducing the deficit below the 3 % of GDP reference value in 2006 and at pursuing fiscal consolidation thereafter. The update foresees a gradual reduction in the general government deficit leading to a broadly balanced budget by 2009. With a projected decline in the interest burden, the primary surplus is expected to reach 3 % of GDP by 2009. The adjustment is to be achieved through a cut in the primary expenditure ratio by almost 5 percentage points of GDP, which more than offsets a decline in the revenue ratio by almost 3 percentage points of GDP. Despite the success in restraining overall spending, healthcare expenditure followed an upward trend in the past years. Lower recourse will be made to deficit-reducing one-off measures than in the recent past. The programme broadly confirms the planned nominal budgetary adjustment in the previous update against a much more favourable macroeconomic scenario.

(5) The structural deficit (i.e. the cyclically-adjusted deficit net of one-off and other temporary measures) calculated according to the commonly agreed methodology is planned to improve from around 3 % of GDP in 2006 to % of GDP at the end of the programme period. As in the previous update of the convergence programme, the medium-term objective (MTO) for the budgetary position presented in the programme is a balanced position in structural terms but the new programme does not aim to achieve the MTO within the programme period. As the MTO is more demanding than the minimum benchmark (estimated at a deficit of around 1 % of GDP), achieving it should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The MTO lies within the range indicated for euro-area and ERM II Member States in the Stability and Growth Pact and the code of conduct and adequately reflects the debt ratio and average potential output growth in the long term.

(6) The risks to the budgetary projections in the programme appear broadly balanced for 2007 but the budgetary outcomes could be worse than projected in the programme thereafter. This is due to a favourable GDP growth projected for 2007 and a markedly favourable macroeconomic scenario in 2008-2009 underlying the update's projections (although tax projections for these years seem cautious). In addition, after 2007 no details are given on the adjustment strategy increasing the risks attached to the planned fiscal consolidation.

(7) In view of this risk assessment, the budgetary stance in the programme seems consistent with a correction of the excessive deficit by 2006 as recommended by the Council. In addition, it seems to provide a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations from 2008 onwards. In the years following the correction of the excessive deficit, the pace of the adjustment towards the MTO implied by the programme is broadly in line with the Stability and Growth Pact, which specifies that, for euro-area and ERM II Member States, the annual improvement in the structural balance should be 0,5 % of GDP as a benchmark and that the adjustment should be higher in good economic times and could be lower in bad economic times.

(8) Government gross debt is estimated to have reached 68 % of GDP in 2006, above the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by 8 percentage points of GDP over the programme period. The evolution of the debt ratio is likely to be less favourable than projected in the programme given the risks to the budgetary targets mentioned above. In view of this risk assessment, the debt ratio seems to be sufficiently diminishing towards the reference value over the programme period.

(9) Malta has recently enacted a pension reform aimed at increasing the effective retirement age, while raising the level of pensions. As a result estimates in the programme suggest that pension expenditures will be higher, leading to a higher increase in age-related expenditure, close to the EU average. Although at a somewhat slower pace than historical trends, projections for healthcare spending show an increase of around 1 percentage points of GDP in the long term, if current trends persist. The current budgetary position would not ensure a steady reduction of debt to below the Treaty reference value. Therefore, improving the budgetary position, as projected in the programme, would contribute to reducing the risks to the sustainability of public finances. Overall, Malta appears to be at medium risk with regard to the sustainability of public finances.

(10) The convergence programme does not contain a qualitative assessment of the overall impact of the October 2006 implementation report of the national reform programme within the medium-term fiscal strategy. However, it provides systematic information on the direct budgetary costs or savings of the main reforms envisaged in the national reform programme and its budgetary projections explicitly take into account the public finance implications of the actions outlined in the national reform programme. The measures in the area of public finances envisaged in the convergence programme seem consistent with those foreseen in the national reform programme. In particular, both programmes envisage the implementation of the pension reform while the convergence programme provides details of the tax reform announced in the national reform programme.

(11) The budgetary strategy in the programme is broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme has some gaps in the required and optional data (2).

The Council considers that the programme is consistent with a correction of the excessive deficit by 2006 and, in a context of strong growth prospects, envisages adequate progress towards the MTO thereafter. The debt ratio as envisaged by the programme seems to be diminishing at a satisfactory pace towards the 60 % of GDP reference value. However, there are risks to the achievement of the budgetary targets after 2007. Maintaining a budgetary position that is robust to possible reversals of the projected strong growth pattern is important especially in light of the recent build-up of external imbalances. In view of the above assessment, the Council invites Malta to:

(i) pursue adequate progress towards the MTO as foreseen in the programme and ensure that the debt-to-GDP ratio is reduced accordingly, while spelling out the budgetary strategy, especially on the expenditure side, with a longer time perspective.

(ii) in view of the level of debt and the projected increase in age-related expenditure, improve the long-term sustainability of public finances by achieving the MTO and making further progress in the design and implementation of the healthcare reform.

Comparison of key macroeconomic and budgetary projections

2005 2006 2007 2008 2009 Real GDP (% change) CP Dec 2006 2,2 2,9 3,0 3,1 3,1 COM Nov 2006 2,2 2,3 2,1 2,2 n.a. CP Jan 2006 0,9 1,1 1,2 2,0 n.a. HICP inflation (%) CP Dec 2006 2,5 3,1 2,2 2,1 2,0 COM Nov 2006 2,5 3,0 2,6 2,4 n.a. CP Jan 2006 (8) 2,8 3,1 2,5 1,9 n.a. Output gap (% of potential GDP) CP Dec 2006 (3) – 2,8 – 2,1 – 1,3 – 0,3 0,9 COM Nov 2006 (7) – 2,1 – 1,4 – 1,1 – 0,5 n.a. CP Jan 2006 (3) – 2,9 – 3,7 – 4,2 – 4,4 n.a. General government balance (% of GDP) CP Dec 2006 – 3,2 – 2,6 – 2,3 – 0,9 0,1 COM Nov 2006 – 3,2 – 2,9 – 2,7 – 2,9 n.a. CP Jan 2006 – 3,9 – 2,7 – 2,3 – 1,2 n.a. Primary balance (% of GDP) CP Dec 2006 0,8 1,1 1,1 2,5 3,2 COM Nov 2006 0,8 0,9 0,7 0,6 n.a. CP Jan 2006 0,3 1,4 1,5 2,4 n.a. Cyclically-adjusted balance (% of GDP) CP Dec 2006 (3) – 2,2 – 1,8 – 1,8 – 0,8 – 0,2 COM Nov 2006 – 2,4 – 2,3 – 2,3 – 2,7 n.a. CP Jan 2006 (3) – 2,8 – 1,3 – 0,7 0,4 n.a. Structural balance (4) (% of GDP) CP Dec 2006 (5) – 3,8 – 2,9 – 2,0 – 1,0 – 0,4 COM Nov 2006 (6) – 4,0 – 3,5 – 2,5 – 2,7 n.a. CP Jan 2006 – 3,8 – 2,3 – 1,4 0,3 n.a. Government gross debt (% of GDP) CP Dec 2006 74,2 68,3 66,7 63,2 59,4 COM Nov 2006 74,2 69,6 69,0 68,6 n.a. CP Jan 2006 76,7 70,8 68,9 67,3 n.a. Source: Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:

http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2) In particular, the data on sectoral balances in particular forecasts for net lending/borrowing vis-à-vis the rest of the world for 2006-2009 and employment and labour productivity in hours worked are not provided.

(3) Commission services calculations on the basis of the information in the programme.

(4) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.

(5) One-off and other temporary measures taken from the programme (1,6 % of GDP in 2005, 1,1 % of GDP in 2006, 0,2 % of GDP in 2007, 0,2 % of GDP in 2008 and 0,2 % of GDP in 2009; all deficit-reducing).

(6) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (1,6 % of GDP in 2005, 1,1 % of GDP in 2006, 0,2 % of GDP in 2007, 0 % of GDP in 2008; all deficit-reducing).

(7) Based on estimated potential growth of 2,2 %, 1,7 %, 1,7 % and 1,6 % respectively in the period 2005-2008.

(8) The January 2006 CP figures correspond to the Retail Price Index.

Source:

Convergence programme (CP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations