Council opinion of 27 February 2007 on the updated convergence programme of Malta, 2006-2009
Date: 2007-02-27
Institutions: Council of the European Union
Subjects: Malta, budget estimate, economic convergence, economic forecasting, public finance, stability programme

29.3.2007

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 surveil-
lance 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)

(2)

(3)

(4)

(5)

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

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.

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.

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 3¼ % of GDP by
2009. The adjustment is to be achieved through a cut in the primary expenditure ratio by almost 5¾
percentage points of GDP, which more than offsets a decline in the revenue ratio by almost 3¾
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.

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 ½ % 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 1¾ % of GDP), achieving it should fulfil the aim of

(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

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(6)

(7)

(8)

(9)

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.

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.

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 exces-
sive 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.

Government gross debt is estimated to have reached 68¼ % of GDP in 2006, above the 60 % of
GDP Treaty reference value. The programme projects the debt ratio to decline by 8¾ percentage
points of GDP over the programme period. The evolution of the debt ratio is likely to be less favour-
able 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.

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 expendi-
tures 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 1¾ 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
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.

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 (1).

(1) 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.

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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 assess-
ment, 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)

HICP inflation
(%)

CP Dec 2006

COM Nov 2006

CP Jan 2006

CP Dec 2006

COM Nov 2006

CP Jan 2006 (6)

2,2

2,2

0,9

2,5

2,5

2,8

2,9

2,3

1,1

3,1

3,0

3,1

3,0

2,1

1,2

2,2

2,6

2,5

3,1

2,2

2,0

2,1

2,4

1,9

Output gap
(% of potential GDP)

CP Dec 2006 (1)

– 2,8

– 2,1

– 1,3

– 0,3

COM Nov 2006 (5)

– 2,1

– 1,4

– 1,1

– 0,5

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

CP Jan 2006 (1)

– 2,9

– 3,7

– 4,2

– 4,4

CP Dec 2006

– 3,2

– 2,6

– 2,3

– 0,9

COM Nov 2006

– 3,2

– 2,9

– 2,7

– 2,9

CP Jan 2006

– 3,9

– 2,7

– 2,3

– 1,2

CP Dec 2006

COM Nov 2006

CP Jan 2006

0,8

0,8

0,3

1,1

0,9

1,4

1,1

0,7

1,5

2,5

0,6

2,4

CP Dec 2006 (1)

– 2,2

– 1,8

– 1,8

– 0,8

– 0,2

COM Nov 2006

– 2,4

– 2,3

– 2,3

– 2,7

CP Jan 2006 (1)

– 2,8

– 1,3

– 0,7

0,4

n.a.

n.a.

3,1

n.a.

n.a.

2,0

n.a.

n.a.

0,9

n.a.

n.a.

0,1

n.a.

n.a.

3,2

n.a.

n.a.

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Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

CP Dec 2006 (3)

COM Nov 2006 (4)

CP Jan 2006

CP Dec 2006

COM Nov 2006

CP Jan 2006

2005

2006

2007

2008

2009

– 3,8

– 4,0

– 3,8

74,2

74,2

76,7

– 2,9

– 3,5

– 2,3

68,3

69,6

70,8

– 2,0

– 2,5

– 1,4

66,7

69,0

68,9

– 1,0

– 2,7

0,3

63,2

68,6

67,3

– 0,4

n.a.

n.a.

59,4

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme.
(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(3) 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).

(4) 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).

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