COMMISSION STAFF WORKING PAPER Analysis by the Commission's services 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, budgetary assessment, budgetary control, economic recession, public debt, public finance

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EUROPEAN COMMISSION 

Brussels, 6.1.2011 
SEC(2010) 1630 final  

COMMISSION STAFF WORKING PAPER 

Analysis by the Commission's services 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  

COM(2010) 809 final 

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Introduction 

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%  in  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 the situation of an excessive government deficit 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. 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 pp. 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 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 expected. In addition, the Maltese authorities were recommended 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, a strengthening of the binding nature of Malta's medium-term 
budgetary  framework  and  better  monitoring  of  budget  execution  throughout  the  year  were 
requested. 

The  present  paper  reviews  the  actions  taken  by  the  Maltese  authorities  to  meet  the  above 
recommendations,  in  light  of  the  economic  and  budgetary  developments  since  the  Council 
recommendations  were  issued  on  16  February  2010.  In  particular,  it  reviews  budgetary 
implementation  in  2010  by  comparing  the  projected  budgetary  developments  in  2010 
according  to  the  Commission  services’  autumn  2010  forecast  with  the  economic  and 
budgetary scenario underpinning the Council recommendations. That scenario was based on 
the Commission services’ autumn 2009 forecast and the budgetary projections underlying the 
2010 budget2, which was adopted soon after the publication of that forecast (and subsequently 
fully  incorporated  in  the  stability  programme  update  of  19  February  2010).  For  2011,  the 
basis for the assessment of action taken towards the correction of the excessive deficit is again 
the Commission services’ autumn 2010 forecast, which incorporates the 2011 budget, adopted 
by the Maltese government on 25 October.  

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2 

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 
The publication of the budgets for 2010 and 2011 can be found at: http://www.finance.gov.mt/ 

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Economic developments 

The impact of the global crisis on the Maltese economy has been rather mild and short-lived. 
Following  a  contraction  of  real  GDP  by  2.1%  in  2009,  compared  to  4.1%  for  the  euro-area 
average,  the  first  half  of  2010  witnessed  a  stronger-than-expected  rebound  of  economic 
activity.  The  Commission  services'  autumn  2010  forecast  expects  real  GDP  in  2010  as  a 
whole to expand by 3.1%. Real GDP is then projected to grow by 2% in 2011 and 2.2% in 
2012, driven by domestic demand.  

the  Commission  services'  autumn  2009  forecast  underpinning 

The  outlook  for  the  Maltese  economy  for  the  period  2010-11  has  progressively  improved 
since 
the  Council 
recommendations  of  16  February  2010  (Table  1).  Also  the  national  authorities  have  revised 
their economic projections upwards during the course of the year: in the stability programme 
update  of  February  2010,  economic  activity  was  expected  to  expand  by  1.1%  and  2.3%  in 
2010 and 2011, respectively; the projections underlying the 2011 budget were higher, at 3.4% 
and  3%,  respectively.  The  main  factors  contributing  to  the  improved  economic  outlook  are 
investment and net exports, that is, components that are less tax-rich than others.  

Table 1: Comparison of macroeconomic developments and forecasts 

2009

2010

2011

outturn COM AF09 COM AF10 COM AF09 COM AF10

Real GDP (% change)
Contributions to real GDP growth:
Final domestic demand
Changes in inventories
Net exports
Employment (% change)
GDP deflator (% change)

-2.1

-2.7
-2.5
3.1
-0.5
2.3

0.7

0.9
0.2
-0.3
0.3
2.3

3.1

2.4
0.1
0.6
1.1
3.0

1.6

1.5
0.0
0.1
0.6
2.4

2.0

2.3
0.0
-0.3
1.2
2.7

Source : COM AF09 - Commission services' autumn 2009 forecast; COM AF10 - Commission services' 
autumn 2010 forecast.

Budgetary implementation in 2010 

After  reaching  3.8%  of  GDP  in  2009,  the  Maltese  authorities  project  the  deficit  ratio  to 
increase  slightly  to  3.9%  of  GDP  in  2010,  in  line  with  the  target  set  with  the  2010  budget 
underpinning  the  Council  recommendation,  later  confirmed  in  the  stability  programme 
update.  The  Commission  services'  autumn  2010  forecast  projects  a  higher  deficit  ratio  in 
2010, of 4.2% of GDP, mainly due to expected shortfalls in tax collection.  

The  increase  of  excise  duty  rates  on  tobacco  and  of  the  registration  tax  on  commercial 
vehicles  was  implemented  as  planned  in  the  2010  budget.  Actions  to  enhance  tax 
enforcement,  especially  addressing  evasion  of  excise  in  petroleum,  were  also  put  in  place 
according  to  the  2010  budget  plans.  However,  cash  data  for  the  first  ten  months  of  2010 
pointed to shortfalls in both direct and indirect tax revenue, particularly when removing the 
effect  of  a  tax  amnesty  (estimated  to  have  yielded  around  0.7%  of  GDP)  that  is  mainly 
attributable  (some  0.5%  of  GDP)  to  2009  in  ESA95  terms.  In  light  of  this,  the  national 
authorities revised their revenue projections down in the 2011 budget when compared to the 
stability programme update, but they anticipate an acceleration in tax collection over the last 
two  months  of  2010,  due  to,  among  other  factors,  higher  corporate  income  taxes  related  to 
improving profitability, the payment of over-due excise duties by the state-owned electricity 
provider  (Enemalta)  and  a  shift  in  the  timing  of  payment  of  VAT  for  those  making  intra-

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community transactions. The Commission services’ forecast incorporates part of this expected 
acceleration, which, according to preliminary data for November, appears to be materialising.  

It should be noted that, in its opinion on the stability programme update, the Council stated, 
following  a  recommendation  from  the  Commission,  that  the  expected  contribution  from  tax 
buoyancy  and  enhanced  tax  compliance  to  the  budgeted  increase  in  the  tax  ratio  in  2010 
seemed optimistic and represented a risk for the programme’s projections. This risk seems to 
have materialised, even in the context of a more favourable economic environment.  

With  regard  to  expenditure,  the  Commission  services  project  lower  overall  growth  than  the 
Maltese authorities, both in the stability programme update of February 2010 and in the more 
recent  projections  underpinning  the  2011  budget.  This  is  explained  by  lower  capital 
expenditure3  in  the  Commission  services  projections,  partly  compensated  for  by  slightly 
higher growth of current primary expenditure. In particular, there appears to have been some 
slippages  in  the  area  of  compensation  of  employees  and  intermediate  consumption,  as  also 
acknowledged by the authorities in the latest projections for the 2011 budget.  

Table 2: Composition of the budgetary adjustment 

2009

outturn

SP Feb 
2010

2010

2011

SP Feb 2010

Budget 2011

COM AF 2010  

Budget 2011

COM AF 2010  

% of GDP

% of 
GDP

% ch   
yoy

% of 
GDP

% ch   
yoy

% of 
GDP

% ch   
yoy

% of 
GDP

% ch   
yoy

% of 
GDP

% ch   
yoy

% of 
GDP

Current primary expenditure
Capital expenditure    
Primary expenditure
Interest expenditure
Current expenditure
Total expenditure

Current taxes on income and wealth
Taxes on production and imports
Total current taxes
Social contributions
Total current revenues
Capital revenues
Total revenues

Primary balance
Budget balance
One-offs
Real GDP growth
GDP deflator
Nominal GDP

37.7
3.1
40.7
3.2
40.8
43.9

13.8
14.1
28.0
7.6
39.0
1.1
40.1

-0.6
-3.8
0.7
-2.1
2.3
0.1

2.7
23.7
5.2
6.0
3.0
5.2

3.3
9.2
6.2
6.2
5.6
40.6
7.9

38.0
4.0
41.9
3.3
41.3
45.2

14.8
13.7
28.5
7.6
39.9
1.5
41.4

-0.5
-3.8
0.1
-2.0
3.0
1.0

4.1
62.6
9.6
4.7
4.1
9.2

4.8
10.5
7.5
3.6
5.2
120.6
9.4

38.2
6.2
44.4
3.3
41.5
47.7

15.0
14.6
29.7
7.6
40.6
3.2
43.8

-0.6
-3.9
0.2
1.1
2.4
3.5

4.7
67.1
9.4
3.6
4.6
9.0

5.3
4.9
5.1
3.8
4.5
162.5
8.9

4.6
54.3
8.3
3.6
4.5
8.0

3.2
3.9
3.6
3.9
3.4
134.0
7.0

36.9
4.8
41.8
3.1
40.0
44.9

13.7
13.9
27.6
7.4
38.3
2.7
41.0

-0.8
-3.9
0.6
3.4
3.3
6.7

37.1
4.5
41.5
3.1
40.2
44.6

13.4
13.8
27.3
7.4
38.0
2.4
40.5

-1.1
-4.2
0.6
3.1
3.0
6.2

1.7
15.7
3.2
6.0
2.1
3.4

4.3
7.3
5.8
3.6
4.8
30.9
6.4

35.9
5.6
41.6
3.1
39.1
44.7

13.4
14.4
27.7
7.4
38.3
3.6
41.9

0.3
-2.8
0.2
3.0
2.6
5.6

36.0
4.9
40.9
3.1
39.2
44.1

13.4
14.2
27.6
7.3
38.0
3.0
41.1

0.2
-3.0
0.4
2.0
2.7
4.7

Source : SP Feb 2010 - Stability Programme February 2010; Budget 2011 - Malta's Budget for 2011; COM AF10 - Commission services' autumn 2010 
forecast.

Projected budgetary developments in 2011 and 2012 

According to the 2011 budget, the authorities target a deficit of 2.8% of GDP for 2011, i.e. 1.1 
pps.  lower  than  in  2010.  This  objective  is  slightly  lower  than  that  set  in  the  February  2010 
update of the stability programme of 2.9% of GDP.  

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Capital expenditure in 2010 was curbed by the sale of equipment pertaining to the shipyards (amounting 
to 0.3% of GDP), accounted for both in the Commission services' forecast and 2011 budget. 

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The authorities plan to reach this target mainly through revenue-enhancing measures, namely 
by  increasing  excise  taxes  on  energy  products,  alcoholic  beverages,  cigarettes  and  tobacco, 
and cement (0.3% of GDP) and the VAT rate on collective and private accommodation (0.1% 
of  GDP).  In  addition,  the  authorities  plan  to  raise  0.2%  of  GDP  from  enhanced  tax 
enforcement  and  collection  of  tax  arrears  and  0.1%  of  GDP  from  annual  lease  concessions. 
On the expenditure side, the planned phasing out of most of the stimulus measures introduced 
in  2010  should  result  in  savings  amounting  to  0.4%  of  GDP.  Additional  expenditure-
containment  measures  are  also  planned,  namely 
improved  spending  efficiency and 
limiting the  number  of  new  recruits in  the  public  sector,  which  are  estimated  to  yield  up  to 
0.4% of GDP. At the same time, the 2011 budget also incorporates a number of expansionary 
measures, amounting to 0.3% of GDP, particularly targeting education, training, employment 
policies, R&D, environment, infrastructure and health.  

The Commission services' autumn 2010 forecast projects a slightly higher deficit for 2011, at 
3% of GDP. The forecast assumes a strict implementation of the 2011 budget, including the 
planned  spending  efficiency  gains.  It  is  therefore  the  higher  deficit  base  from  2010  that 
explains  the  Commission  services'  higher  deficit  forecast  for  2011  compared  to  the  official 
one.  The  forecast  also  points  to  an  improvement  in  the  structural  balance  (the  cyclically-
adjusted balance net of one-off and other temporary measures) relative to GDP by 1¼ pps. in 
2011,  after  a  worsening  of  around  1  pp.  anticipated  in  2010.  The  budgetary  targets  put 
forward  in  the  stability  programme  implied  a  ¾  %  of  GDP  improvement  in  the  structural 
balance in 2011, after a ¼ pp. worsening in 2010. 

However,  the  Commission  services  see  risks  to  the  achievement  of  the  2011  deficit  target, 
mainly stemming from the possible support provided to Air Malta. In addition to the risk that 
the  Commission  services  see  pertaining  to  the  repayment  of  the  rescue  loan  by  the  national 
airline4, the government deficit in 2011 could also be affected by measures introduced in the 
forthcoming restructuring plan. The public sector wage bill may also be affected by the new 
collective  agreement  to  come  into  force  in  January  2011,  details  of  which  are  not  yet 
available.  

For  2012,  the  authorities  target  the  deficit  to  decline  to  2.1%  of  GDP,  thanks  to  additional 
consolidation  measures  still  to  be  adopted.  Based  on  a  no-policy-change  assumption,  the 
Commission  services'  autumn  2010  forecast  project  the  deficit  to  widen  again  to  3.3%  of 
GDP,  mainly  due  to  the  projected  lower  impact  of  one-off  deficit-reducing  measures  and 
substantial increases in capital spending, although partly financed with EU funds. 

Debt developments 

In the 2011 budget, the Maltese authorities project the government debt to increase slightly to 
69.0% of GDP in 2010, from 68.6% in 2009. The positive impact of the significant projected 
acceleration  in  nominal  GDP  growth  is  partly  offset  by  a  debt-increasing  stock-flow 
adjustment – of around ¾ % of GDP, of which ½ % of GDP due to the need to finance the 
loan  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. The 
stock-flow adjustment is projected to partly offset the decline of the debt ratio.  

4 

On 15 November, the Maltese Parliament adopted a Bill authorising the government to grant a rescue 
loan to Air Malta. The rescue loan will be in place for a period not exceeding six months so as to meet 
the short term cash-flow requirements of Air Malta. By the end of these six months, a restructuring plan 
for the company is likely to be put into operation.  

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In  the  autumn  2010  forecast,  the  Commission  services  estimate  Malta's  gross  government 
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 amounting to EUR 52m (or more than ¾ % of GDP) to Air 
Malta, adopted after the presentation of the 2011 budget. In addition, both the primary balance 
and  nominal  GDP  growth  are  expected  to  remain  below  the  government  projections,  thus 
providing a smaller debt-decreasing contribution. 

Table 3: Debt Developments 

2009

outturn

68.6
5.5

SP Feb 
2010
66.8
3.0

SP Feb 
2010
68.6
1.8

2010
Budget 
2011
69.0
0.3

2011

COM 
AF10
70.4
1.8

Budget 
2011
68.7
-0.3

COM 
AF10
70.8
0.3

0.6

3.1

3.2
-0.1

1.8

0.9
0.9
0.0

0.5

2.6

3.3
-0.6

-0.1

n.a.
n.a.
n.a.

0.6

1.1

3.3
-2.2

0.1

n.a.
n.a.
n.a.

0.8

-1.2

3.1
-4.3

0.8

n.a.
n.a.
n.a.

1.1

-0.9

3.1
-4.0

1.6

0.2
1.4
0.0

-0.3

-0.5

3.1
-3.7

0.5

n.a.
n.a.
n.a.

-0.2

0.0

3.1
-3.2

0.5

0.0
0.5
0.0

(% of GDP)

Gross debt ratio
Change in debt ratio

Primary balance effect 

"Snow Ball" effect 
of which:
Interest expenditure 
Nominal GDP growth effect

Stock-Flow Adjustment 
of which : 
Cash/accrual diff.
Acc. financial assets
Valuation effects & residual

Source : SP Feb 2010 - Stability Programme February 2010; Budget 2011 - Malta's Budget for 2011; COM AF10 - 
Commission services' autumn 2010 forecast; Commission services' calculations

Fiscal governance and the quality of the public finances 

No specific measures have been outlined by the authorities to strengthen the binding nature of 
Malta's  medium-term  budgetary  framework.  The  Commission’s  assessment  of  the  stability 
programme  update  of  February  20105  highlighted  the  importance  of  addressing  expenditure 
overruns resulting from the absence of binding expenditure ceilings, shortcomings related to 
intra-year  monitoring  of  adherence  to  the  budgetary  targets  and  the  possibility  of 
increasing/reducing  spending  even  after  budget  approval  in  Parliament.  This  is  particularly 
important since budgetary targets are often met through unplanned expenditure cuts, often at 
the expense of investment, as was the case in 2009. In addition, no independent institution is 
involved  in  the  formulation  of  the  macroeconomic  assumptions  underlying  the  budgetary 
projections.  

On 16 February 2010, 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. In addition, the Council called for 
reforms of the social security system and measures to reduce the budgetary costs of ageing, 
with  a  view  to  reducing  risks  to  the  long-term  sustainability  of  the  public  finances.  The 
authorities  are  currently  preparing  a  proposal  for  further  reforming  the  pension  system.  The 
government  also  envisages  enhanced  controls  with  the  aim  of  combating  abuse  of 
pharmaceuticals and improved procurement methods and processes in the public sector. 

5 

Malta's Macro Fiscal Assessment can be found at: 
http://ec.europa.eu/economy_finance/sgp/pdf/20_scps/2009-10/02_technical_assessment/mt_2010-04-
07_ta_en.pdf  

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Table 4: 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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