COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of the action taken  by Malta  in response to the Council Recommendation of 16 February 2010 with a view to bringing an end to the situation of excessive government deficit
Date: 2011-01-06
Institutions: European Commission
Subjects: Malta, budget deficit, budget policy, budgetary control, economic recession, public debt, public expenditure, public finance, reflation, stability programme

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EUROPEAN COMMISSION 

Brussels, 6.1.2011 
COM(2010) 809 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken 

by Malta 

in response to the Council Recommendation of 16 February 2010 with a view to bringing 
an end to the situation of excessive government deficit  

SEC(2010) 1630 final 

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1. 

EXCESSIVE DEFICIT PROCEDURE AND MOST RECENT RECOMMENDATIONS 

The impact of the economic downturn and some discretionary expenditure increases in 2008 
led  to  a  widening  of  the  general  government  deficit  in  Malta  to  4.8%  of  GDP  in  2008  and 
3.8%  on  2009  compared  to  2.3%  in  2007.  Against  this  background,  on  7  July  2009,  the 
Council decided that an excessive deficit existed and addressed recommendations to Malta in 
accordance with Article 104(7) of the Treaty establishing the EC with a view to bringing an 
end to this situation by 2010.1 In its recommendations, the Council established a deadline of 7 
January 2010 for effective action to be taken. 

On  16  February  2010,  the  Council  concluded  that  effective  action  had  been  taken  in 
compliance  with  the  above  recommendations  but  unexpected  adverse  economic  events  with 
major unfavourable consequences for the government finances were also considered to have 
occurred  in  Malta.  As  a  result,  the  Council  recommended  that  the  deadline  for  the  Maltese 
authorities  to  put  an  end  to  the  excessive  deficit  be  extended  by  one  year,  to  2011,  in 
accordance with Article 3(5) of Regulation (EC) No 1467/97.  

In  particular,  the  Maltese  authorities  were  recommended  by  the  Council  to  (a)  achieve  the 
2010  deficit  target  set  in  the  budget,  if  necessary  by  adopting  additional  consolidation 
measures, and ensure in 2011 a fiscal effort of ¾ p.p. of GDP. This should also contribute to 
bringing the general government gross debt ratio back on a declining path that approaches the 
60%  of  GDP  reference  value  at  a  satisfactory  pace  by  restoring  an  adequate  level  of  the 
primary surplus; and (b) specify the measures that are necessary to achieve the correction of 
the excessive deficit by 2011, cyclical conditions permitting, and accelerate the reduction of 
the  deficit  if  economic  or  budgetary  conditions  turn  out  better  than  currently  expected.  In 
addition,  the  Maltese  authorities  were  requested  to  seize  any  opportunity  beyond  the  fiscal 
effort, including from better economic conditions, to accelerate the reduction of the gross debt 
ratio  back  towards  the  60%  of  GDP  reference  value.  To  limit  risks  to  the  adjustment,  they 
were recommended to strengthen the binding nature of its medium-term budgetary framework 
and improve the monitoring of budget execution throughout the year. 

The Council established the deadline of 16 August 2010 for the Maltese government to take 
effective  action  to  achieve  the  2010  deficit  target  and  to  outline  the  measures  that  will  be 
necessary to progress towards the correction of the excessive deficit.  

Finally, the Council also invited the Maltese authorities to introduce reforms to enhance the 
quality  of  public  finances,  namely  through  enhanced  efficiency  of  government  expenditure, 
especially in the areas of health and education.  

The Commission makes its assessment of action taken after the adoption by the government 
of  the  2011  budget,  on  25  October,  and  based  on  the  Commission  services'  autumn  2010 
forecast, which incorporates the budgetary measures therein. 

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All EDP-related documents for Malta can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/malta_en.htm 

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2. 

ASSESSMENT OF ACTION TAKEN 

After  reaching  3.8%  of  GDP  in  2009,  the  deficit  ratio  is  projected  by  the  authorities  to 
increase  slightly  to  3.9%  of  GDP  in  2010,  in  line  with  the  target  set  in  the  2010  budget 
underpinning the Council recommendation. This projection is made against the background of 
a  higher  real  GDP  growth  than  in  the  Commission  services'  autumn  2009  forecast,  which 
underpinned  the  Council  recommendations  of  16  February  2010.  Furthermore,  it  includes 
one-off  deficit-reducing  items  resulting  from  a  tax  amnesty  (0.2%  of  GDP)  and  the  sale  of 
equipment  pertaining  to  the  shipyards  by  0.3%  of  GDP,  while  it  incorporates  overruns  in 
current primary  expenditure  and a  shortfall in current taxes when compared to the plans set 
out  in  the  2010  budget.  The  Commission  services'  autumn  2010  forecast  projects  a  higher 
deficit  ratio  in  2010,  at  4.2%  of  GDP,  mainly  due  to  larger  expected  shortfalls  in  tax 
collection  than  those  already  accounted  for  by  the  authorities.  The  autumn  2010  forecast 
points to a worsening of the structural balance by around 1% of GDP in 2010.  

The  Commission  therefore  points  to  some  deviation  from  the  Council  recommendation  to 
achieve the 2010 deficit target of 3.9% of GDP that was set in the 2010 budget. Furthermore, 
although  economic  conditions  are  turning  out  better  than  expected  at  the  time  the  Council 
issued its recommendations, there was no acceleration in the reduction of the deficit.  

For  2011,  the  authorities  target  a  deficit-to-GDP  ratio  of  2.8%,  which  they  aim  to  achieve 
through an acceleration in tax collection related to the ongoing economic recovery as well as 
revenue-increasing measures, the planned phasing out of most stimulus measures introduced 
in  2010  and  improved  spending  efficiency.  However,  the  budgeted  expenditure  savings  are 
expected  to  be  partially  offset  by  a  number  of  expenditure-increasing  measures.  The 
Commission services' autumn 2010 forecast projects a slightly higher deficit, at 3% of GDP 
for  2011,  mainly  explained  by  the  higher  deficit  anticipated  for  2010.  The  1.2  pps  of  GDP 
annual deficit reduction forecast in 2011 is based on the assumption of a strict implementation 
of the 2011 budget, including the planned efficiency gains that are expected to curb growth in 
current primary expenditure. The Commission services' forecast points to an improvement in 
the structural balance of 1¼% of GDP in 2011.  

Against this background, the Commission concludes that Malta has ensured a fiscal effort of 
¾  pp.  of  GDP  and  taken  effective action  to  put  an  end  to  the  present  situation  of  excessive 
deficit by 2011. 

The  Maltese  authorities  project  the  general  government  debt  to  increase  to  69%  of  GDP  in 
2010,  from  68.6%  in  2009,  mainly  due  to  a  debt-increasing  stock-flow  adjustment,  partly 
related to the financial support to Greece. For 2011, the authorities project a slight decline in 
the debt ratio, to 68.7%, thanks to the achievement of a small primary surplus and dynamic 
nominal  GDP  growth  that  outweighs  the  expected  debt-increasing  stock-flow  adjustment 
mainly  related  to  the  financial  support  to  Greece.  In  the  autumn  2010  forecast,  the 
Commission services estimate Malta's gross debt-to-GDP ratio to increase to 70.8% by 2011, 
also  due  to  the  incorporation  of  the  financial  needs  related  to  the  rescue  loan  to  Air  Malta 
adopted after the presentation of the 2011 budget.  

In  light  of  the  Commission  services'  projections,  Malta  is  not  expected  to  bring  the  general 
government gross debt ratio back on a declining path within the forecast horizon. 

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Finally, no progress has been reported in the area of fiscal governance, while some initiatives 
have been taken to improve spending efficiency and plans for further reforms to the pension 
system are under discussion.  

3. 

CONCLUSIONS  

On current information it appears that Malta has taken action representing adequate progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular, Malta has taken measures to correct the excessive deficit by 2011, while ensuring 
an adequate fiscal effort in 2011, in line with the Council’s recommendations.  

However,  the  2010  deficit  target  of  3.9%  of  GDP  set  in  the  2010  budget  is  unlikely  to  be 
achieved, in spite of a more favourable economic outlook for Malta than that foreseen in the 
Council recommendations. Risks to the achievement of the 2011 deficit target mainly pertain 
to the repayment of the rescue loan to Air Malta and the forthcoming restructuring plan. The 
public sector wage bill may also be affected by a new collective agreement to come into force 
in  January  2011,  details  of  which  are  not  yet  available.  In  light  of  these  risks,  the  Maltese 
authorities  must  closely  monitor  budgetary  developments  and  be  ready  to  take  corrective 
measures should any of these risks materialise.  

Furthermore,  the  Commission  is  of  the  opinion  that  Malta  needs  to  be  more  effective  in 
strengthening  the  binding  nature  of  its  medium-term  budgetary  framework  and  introducing 
measures aimed at addressing the long-term sustainability of Malta's public finances, in line 
with Council recommendations and invitations.  

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Malta are needed at present. The Commission will continue to 
closely monitor budgetary developments in Malta in accordance with the Treaty and the SGP.  

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Table: Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 

Primary balance 
(% of GDP) 

Output gap 
(% of potential GDP) 

General government 
balance 
(% of GDP) 

2012 
2.2 
2.9 
2.9 
0.5 
n.a. 
1.4 
-3.3 
-2.1 
-2.8 
-0.2 
0.9 
0.4 
-3.5 
n.a. 
-3.3 
-3.5 
n.a. 
-3.3 
70.9 
67.8 
67.3 
Source:  COM  -  Commission  services’  2010  autumn  forecast;  MT  -  Malta's  Budget  for  2011;  SP  -  Stability 
Programme February 2010. 

COM 
MT 
SP 
COM 
MT 
SP 
COM 
MT 
SP 
COM 
MT 
SP 
COM 
MT 
SP 
COM 
MT 
SP 
COM 
MT 
SP 

2009 
-2.1 
-2.1 
-2.0 
-2.6 
n.a. 
-1.5 
-3.8 
-3.8 
-3.8 
-0.6 
-0.6 
-0.5 
-2.9 
n.a. 
-3.2 
-3.5 
n.a. 
-3.3 
68.6 
68.8 
66.8 

2010 
3.1 
3.4 
1.1 
-0.8 
n.a. 
-1.6 
-4.2 
-3.9 
-3.9 
-1.1 
-0.8 
-0.6 
-3.9 
n.a. 
-3.4 
-4.5 
n.a. 
-3.6 
70.4 
69.1 
68.6 

2011 
2.0 
3.0 
2.3 
-0.2 
n.a. 
-0.4 
-3.0 
-2.8 
-2.9 
0.2 
0.3 
0.3 
-2.9 
n.a. 
-2.8 
-3.3 
n.a. 
-2.9 
70.8 
68.8 
68.0 

2008 
2.6 
2.6 
2.1 
0.6 
n.a. 
1.2 
-4.8 
-4.8 
-4.7 
-1.5 
-1.5 
-1.4 
-5.0 
n.a. 
-5.1 
-5.3 
n.a. 
-5.4 
63.1 
63.1 
63.6 

Cyclically-adjusted 
balance 
(% of GDP) 

Government gross 
debt 
(% of GDP) 

Structural balance 
(% of GDP) 

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