Council Opinion of 17 February 2005 on the updated convergence programme of Malta, 2004-2007
Date: 2005-02-17
Institutions: Council of the European Union
Subjects: Malta, code of conduct, economic convergence, stability programme

3.6.2005

EN

Official Journal of the European Union

C 136/21

COUNCIL OPINION

of 17 February 2005

on the updated convergence programme of Malta, 2004-2007

(2005/C 136/08)

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 surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 9(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

(5)

(6)

On 17 February 2005 the Council examined the updated convergence programme of Malta, which
covers the period 2004 to 2007. The programme broadly complies with the Code of Conduct
except for the breakdown of forecasted public expenditure figures. The price data are not consistent
with the Maastricht harmonised definitions. Accordingly, Malta is invited to achieve compliance
with the data requirements.

The macroeconomic scenario underlying the programme envisages real GDP growth to pick up
from 0.6 % in 2004 to 1.8 % on average over the rest of the programme period. On the basis of
currently available information, this scenario seems to reflect plausible growth assumptions. The
programme's projections for inflation also appear realistic.

On 5 July 2004, the Council decided that an excessive deficit existed in Malta and recommended to
correct it by 2006.

The programme aims at reducing the deficit below the 3 % of GDP reference value in 2006. Fiscal
consolidation is based on both revenue-rising measures and expenditure cuts. The general govern-
ment deficit is projected to fall from 5.2 % in 2004 to 2.3 % of GDP in 2006 and to decline further
in 2007 to 1.4 % of GDP. Compared with the previous programme, the current update broadly
confirms the planned adjustment against a broadly unchanged macroeconomic scenario.

The risks to the budgetary projections in the programme appear broadly balanced. In particular, on
the one hand, the fiscal target of a general government deficit of 5.2 % in 2004 seems within reach,
on the other, concerning 2005 and beyond, the prudent underlying macroeconomic scenario and
the nature of the announced measures aiming at reducing the deficit, as well as budgetary projec-
tions set up in the programme make the consolidation path broadly plausible within the currently
projected external environment.

In view of this risk assessment the budgetary stance in the programme seems sufficient to reduce
the deficit to below 3 % of GDP by 2006 and seems to provide a sufficient safety margin against
breaching this threshold with normal macroeconomic fluctuations in the programme period.
However, it may not be sufficient to ensure that the Stability and Growth Pact's medium-term objec-
tive of a budgetary position of close to balance is achieved within the programme period.

(1) OJ L 209, 2.8.1997, p. 1

C 136/22

EN

Official Journal of the European Union

3.6.2005

(7)

(8)

(9)

According to the programme the debt ratio is likely to reach 73.2 % of GDP in 2004, up from
70.4 % of GDP in 2003. Thereafter, it is projected to decline to 70.4 per cent of GDP at the end of
the programme period. The Maltese authorities foresee that economic growth, progressive improve-
ments in the primary balance and the sale of assets will drive the reduction of the debt-to-GDP ratio
as of 2005. However, a number factors, which partially offset the effects of significant privatization
proceeds (more than 2 % of GDP in 2005 and 2006), call for a more detailed information on, and
closer monitoring of, below-the-line operations.

There are risks with regard to the long-term sustainability of public finances, reflecting the projected
cost of an ageing population. The strategy for ensuring sustainability outlined in the programme is
dependent on the achievement of the budgetary targets. It also includes reforms of the pension and
healthcare systems that have not yet been defined or implemented. While failure to achieve
budgetary targets would clearly put sustainability at risk, the pursuit of the reform process is also
important for the containment of the increase in age-related public expenditure in the long term.

Overall, the economic policies outlined in the update are broadly consistent with the country-
specific broad economic policy guidelines in the area of public finances.
the
programme is in line with the reduction of the general government deficit recommended by the
Council.

In particular,

In view of the above assessment, the Council is of the opinion that Malta should:

(i) do the necessary to ensure the correction of the excessive deficit in 2006;

(ii) ensure that the debt ratio is declining towards the 60 % of GDP Treaty reference value at a satisfactory

pace;

(iii) make further progress in the design and implementation of the pension and health care reforms.

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

Real GDP
(% change)

HICP inflation
(%)

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Government gross debt
(% of GDP)

CP Dec. 2004

COM Oct 2004

CP May 2004

CP Dec. 2004

COM Oct 2004

CP May 2004

CP Dec. 2004

COM Oct 2004

CP May 2004

CP Dec. 2004

COM Oct 2004

CP May 2004

CP Dec. 2004

COM Oct 2004

CP May 2004

0,6

1,0

1,1

2,9

3,7

3,4

-5,2

-5,1

-5,2

-1,4

-1,3

-1,4

73,2

72,4

72,1

1,5

1,5

1,7

2,4

3,1

2,1

-3,7

-4,0

-3,7

0,3

-0,2

0,1

72,0

73,7

72,4

1,8

1,8

2,1

1,9

2,6

2,1

-2,3

-3,3

-2,3

1,6

0,4

1,4

70,5

74,2

70,5

2,2

n.a.

2,1

1,9

n.a.

2,0

-1,4

n.a.

-1,4

2,4

n.a.

2,2

70,4

n.a.

70,4

Sources:
Convergence programme (CP); Commission services 2004 economic forecasts (COM)