COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta in response to the Council Recommendation of 16 February 2010 with a view to bringing an end to the situation of excessive deficit
Date: 2012-01-11
Institutions: European Commission
Subjects: Malta, budget deficit, budget policy, public debt, stability pact

EUROPEAN COMMISSION 

Brussels, 11.1.2012 
SEC(2012) 51 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Malta in response to 
the Council Recommendation of 16 February 2010 with a view to bringing an end to the 
situation of excessive deficit 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of budgetary implementation in the context of the ongoing Excessive Deficit 
Procedures after the Commission services' 2011 Autumn Forecast 

{COM(2012) 4 final} 
{SEC(2012) 49 final} 
{SEC(2012) 50 final} 
{SEC(2012) 52 final} 
{SEC(2012) 53 final} 

 
 
 
 
  
 
COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Malta in response to 
the Council Recommendation of 16 February 2010 with a view to bringing an end to the 
situation of excessive deficit 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of budgetary implementation in the context of the ongoing Excessive Deficit 
Procedures after the Commission services' 2011 Autumn Forecast 

1. 

INTRODUCTION 

The  impact  of  the  economic  downturn,  together  with  some  discretionary  expenditure 
increases in  2008, led to  a widening of  the  general government deficit in Malta, to 4.6% of 
GDP  in  2008  and  3.7%  in  2009,  compared  to  2.4%  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 
European Community (TEC)1 with a view to bringing an end to the situation of an excessive 
government  deficit  by  20102.  In  its  recommendations,  the  Council  established a  deadline  of 
7 January 2010 for effective action to be taken. 

On 16 February 2010, on the basis of a Commission recommendation, 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  126(7)  of  the  Treaty. 
Specifically, Malta was recommended to achieve the 2010 deficit target set in the budget, if 
necessary  by  adopting  additional  measures,  and  to  ensure  in  2011  a  fiscal  effort  of  ¾%  of 
GDP, which should also contribute to bringing the government debt ratio back on a declining 
path.  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. 

On  6  January  2011,  the  Commission  adopted  a  Communication  to  the  Council  concluding 
that,  on  information  available  at  the  time,  Malta  appeared  to  have  taken  action  representing 
adequate progress towards the correction of the excessive deficit by 2011 and that no further 
steps under the excessive deficit procedure were needed at that stage. At the same time, the 
Maltese  authorities  had  to  monitor  budgetary  developments  closely  and  be  ready  to  take 

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The corresponding article in the Treaty on the Functioning of the European Union, which entered into 
force on 1 December 2009, is Article 126(7). 
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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corrective  measures  should  risks  (related  to  the  upcoming  restructuring  of  Air  Malta  and  a 
new  public  sector  collective  agreement)  materialise.  On  18  January  2011,  the  Council 
concluded that it shared these views. 

This paper examines progress made by Malta towards a timely and sustainable correction of 
the excessive deficit. In particular, it examines budgetary developments since the Commission 
Communication to the Council on action taken of 6 January 2011. The assessment takes into 
account  all  decisions  publicly  announced  by  the  government  on  budgetary  developments  in 
Malta.  

2. 

ECONOMIC DEVELOPMENTS AND OUTLOOK 

The Maltese economy rebounded relatively strongly after the global crisis and real GDP grew 
by 2.7% in 2010, compared to the euro area average of 1.9%, supported by external demand 
and business investment (see Table 1). Relatively robust growth continued in the first half of 
2011 on the back of net exports but the positive momentum is expected to largely disappear in 
the  second  half  of  the  year.  For  2011  as  a  whole,  real  GDP  growth  is  thus  forecast  to 
decelerate somewhat, to 2.1% according to the Commission services' 2011 Autumn Forecast. 
This forecast is slightly lower than that of the national authorities (2.3%), reflecting different 
assumptions about global trade as well as a different outlook for private investment and the 
depletion of inventories. 

Table 1: Comparison of macroeconomic developments and forecasts 

2010 

Outturn 

2.7 

2011 

2012 

National 
projections 
2.3 

COM AF 
2011 
2.1 

National 
projections 
2.1 

COM AF 
2011 
1.3 

2013 
COM AF 
2011 
2.0 

Real GDP (% change) 
Contributions to real GDP 
growth 

Final domestic demand 
Changes in inventories 
Net exports 

0.9 
-2.7 
4.6 
2.9 
5.7 
2.3 

0.8 
-2.5 
4.0 
2.6 
4.9 
1.3 

0.0 
0.2 
1.9 
2.5 
4.6 
1.0 

0.3 
0.0 
1.8 
2.7 
4.8 
1.2 

0.7 
0.0 
0.6 
2.5 
3.9 
0.8 

1.4 
0.0 
0.6 
2.7 
4.8 
1.4 

GDP deflator (% change) 
Nominal GDP (% change) 
Employment (% change) 
Total compensation per 
employee (% change) 
Note: COM AF 2011 – Commission services’ 2011 Autumn Forecast; national projections – information received from the 
national authorities complementing the 2012 Budget speech 
Sources: National Statistics Office, Commission services, national authorities 

-0.4 

0.8 

2.0 

1.2 

2.4 

2.3 

In  2012,  real  GDP  growth  is  projected  to  moderate  further  to  1.3%,  according  to  the 
Commission  services'  2011  Autumn  Forecast,  on  the  back  of  a  lower  contribution  from  net 
exports,  resulting  from  the  projected  economic  slowdown  in  the  euro  area  as  a  whole.  The 
growth forecast underpinning the Maltese budget for 2012 is notably higher (2.1%), mainly as 
a result of a more optimistic outlook for exports, itself reflecting more positive assumptions 
for growth in Malta’s main trading partners. At the same time, the contribution to real GDP 
growth from domestic demand is higher in the autumn forecast given a more positive outlook 
for  private  investment,  which  more  than  compensates  for  the  weaker  outlook  for  private 
consumption.  Differences  in  the  macroeconomic  outlook  for  2012  are  markedly  less 
pronounced in terms of the underlying tax bases for the main tax categories such as nominal 
private consumption and economy-wide compensation of employees. 

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In  2013,  economic  growth  is  projected  to  increase  to  2.0%  according  to  the  Commission 
services'  2011  Autumn  Forecast.  This  acceleration  reflects  a  more  positive  outlook  for 
domestic demand, while the contribution from net exports is projected to remain unchanged. 

It  should  be  noted  that  real  GDP  growth  in  the  period  since  the  adoption  of  the  Council 
recommendation to Malta under Article 126(7) of the Treaty generally turned out better than 
expected at the time (namely in the Commission services' 2009 Autumn Forecast). While the 
decline in real GDP in 2009 was somewhat more acute according to the latest estimate than 
foreseen  in  the  Commission  services'  2009  Autumn  Forecast  (-2.6%  as  opposed  to  -2.2%), 
growth  in  2010  and  2011  exceeded  expectations  at  the  time  of  the  adoption  of  the  Council 
recommendation.  The  recovery  in  2010  was  notably  more  vigorous  (+2.9%  as  opposed  to 
0.7% in the 2009 Autumn Forecast) and for 2011, the 2011 Autumn Forecast projects growth 
of 2.1% as opposed to 1.6% in the 2009 Autumn Forecast. 

3. 

BUDGETARY SITUATION AND OUTLOOK 

3.1. 

Estimated outturn for 2011 

In the budget for 2011, presented in November 2010, the authorities targeted a deficit of 2.8% 
of GDP for 2011, i.e. 1.1pp. lower than in 2010, based on revenue-enhancing measures, the 
phasing-out  of  most  of  the  stimulus  measures  introduced  in  2010  as  well  as  expenditure-
containment measures, namely improved spending efficiency and limits on recruitment in the 
public sector. This target was confirmed in the 2011 update of Malta's Stability Programme 
(SP). The October 2011 EDP notification and budget for 2012 estimate the deficit outturn to 
be  fully  in  line  with  the  target,  although  with  a  changed  composition:  a  strong  upward 
revision in current taxes by 1 pp. of GDP is estimated to offset an upward revision in current 
expenditure by 0.7 pp. of GDP and of net capital expenditure by 0.3 pp. of GDP. 

The  Commission  services'  2011  Autumn  Forecast  estimates  the  deficit  for  2011  at  3.0%  of 
GDP, slightly higher than the estimate of the authorities because of less dynamic direct taxes 
and social contributions, which is partly offset by lower public investment than budgeted. The 
structural  balance  (i.e.  the  cyclically-adjusted  balance  net  of  one-off  and  other  temporary 
measures) is estimated to improve by 1% of GDP in 2011, above the fiscal effort of ¾% of 
GDP  recommended  under  the  EDP  for  that  year  (see  Table  2).  However,  when  taking  into 
account  the  change  in  the  macroeconomic  scenario  between  the  projections  underlying  the 
EDP recommendations and the 2011 Autumn Forecast, it appears that the current estimate of 
the fiscal effort has benefited from an upward revision of underlying growth prospects; when 
correcting for this upward revision, the estimated fiscal effort in 2011 would nonetheless still 
be in line with the one recommended by the Council. 

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Table 2: Comparison of fiscal effort 
and change in the structural balance 
(% of GDP) based on the Commission 
services' 2011 Autumn ForecastChange 
in the structural balance in 2011 
Corrected 
Uncorrected 
0.7 
1.0 

Fiscal effort recommended 
by the Council 

Deadline for the 
correction 

¾% in 2011 

2011 

Note:  The  uncorrected  annual  change  in  the  structural  balance  is  the  estimated  change  in  the  structural  balance  from  the 
Commission  services'  2011  Autumn  Forecast.  The  corrected  annual  change  in  the  structural  balance  is  the  uncorrected  annual 
change in the structural balance plus a correction factor capturing the effect of revisions to potential output growth between the 
projections  at  the  time  of  the  EDP  recommendations  and  the  Commission  services’  2011  Autumn  Forecast  (see  European 
Commission  (2004)  Public  Finances  in  EMU  –  2004,  European  Economy,  Brussels;  and  European  Commission  (2006)  Public 
Finances in EMU – 2006, European Economy, Brussels). 
Source: Commission services 

3.2. 

Deficit projections for 2012-13 

The  public  finance  projections  in  the  Commission  services'  2011  Autumn  Forecast  were 
finalised  before  the  draft  budget  for  2012  was  presented.  Under  the  no-policy-change 
assumption, the deficit is forecast to exceed the 3% of GDP reference value again in 2012 and 
2013  (at  3.5%  and  3.6%  of  GDP  respectively),  while  also  in  structural  terms  there  is 
deterioration (see Table 3). 

Table 3: Comparison of budgetary developments and projections 

2010 

Outturn 

2011 

National 
projections 

COM AF 2011 

 Total current revenue 

% GDP  % ch  % GDP  % ch  % GDP  % ch  % 
3

37.5 

38.3 

37.4 

2.8 

7.1 

4.4 

of which: 
14.1 
Taxes on production and imports 
12.9 
Current taxes on income and wealth 
7.2 
Social contributions 
2.0 
 Capital Transfers, received 
39.4 
 Total government revenue 
39.3 
 Total current expenditure 
3.1 
 Capital expenditure 
42.4 
 Total government expenditure 
-3.0 
 Net lending (+) / net borrowing (-)  
0.2 
 - primary balance  
 General government debt 
69.6 
Notes: COM AF 2011 – Commission services’ 2011 Autumn Forecast (finalised before the presentation of the budget for 2012). National projections –  
2012 budget and additional information provided by the authorities (revenue and expenditure projections for 2012 do not add up to the deficit target  
of 2.3% of GDP because expenditure reflects the review of spending allocations of 6 January 2012 that was undertaken as a precautionary measure). 

13.6 
13.1 
7.4 
1.8 
39.3 
39.4 
3.5 
42.9 
-3.6 
-0.6 
69.0 

14.3 
13.4 
7.4 
2.0 
40.3 
39.2 
3.9 
43.1 
-2.8 
0.4 
70.1 

10.7 
7.3 
4.8 
16.0 
7.5 
4.4 
15.7 
5.3 

2.8 
1.6 
4.9 
76.0 
4.8 
3.4 
20.5 
4.6 

8.5 
3.2 
2.4 
16.0 
4.9 
4.5 
-7.4 
3.5 

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Sources: Commission services, national authorities 

The draft budget for 2012 was presented on 14 November 2011 and adopted by Parliament on 
15 December 2011. It targets a deficit of 2.3% of GDP, slightly higher than the one set in the 
2011 update of the SP (2.1%). The upward revision of the deficit target must be seen against 
the background of only a mild downward revision of real GDP growth (to 2.1% from 2.3% in 
the SP), while nominal GDP growth has actually been revised slightly up (4.8% compared to 
4.5% in the SP). 

Taking  the  official  budgetary  targets  for  2011-2012  from  the  budget  for  2012  at  face  value 
and  using  the  output  gap  series  from  the  Commission  services’  2011  Autumn  Forecast,  the 

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fiscal  effort  would  amount  to  around  ¼%  of  GDP  in  2012  (the  incentives  to  reduce  tax 
arrears, see below, are treated by the Commission services as one-off). 

The  main  budgetary  measures  for  2012,  based  on  official  information,  are  presented  in 
Table 4. They include the impact of the review of spending allocations of 6 January 2012 that 
was undertaken as a precautionary measure to support the deficit  target set in the budget in 
view  of  “increasing  risks  in  the  international  economic  situation  as  well  as  developments 
within  the  public  finance  sector”;  current  primary  expenditure  was  thus  adjusted  downward 
by  0.6%  of  GDP,  especially  in  the  areas  of  compensation  of  employees  and  intermediate 
consumption. 

Taken  together,  these  measures  have  a  net  deficit-reducing  impact  of  around  1%  of  GDP. 
Contrary to the expenditure-based consolidation strategy laid down in the 2011 update of the 
SP, the consolidation is to a large extent based on revenue-increasing measures that are partly 
compensated by an increase in especially net capital expenditure, including the planned equity 
injection  into  Air  Malta3.  The  revenue  measures  taken  together  are  estimated  to  generate 
around  1.4%  of  GDP  in  net  terms,  more  than  one-third  of  which  is  due  to  “increased 
efficiency in revenue collection”, which includes pecuniary incentives to reduce tax arrears, 
expected  to  yield  around  0.4%  of  GDP.  Total  revenues  are  thus  projected  to  increase  by 
1¾pps in 2012 (to  42.1% of  GDP from 40.3% in 2011), which should more than offset the 
planned increase in total expenditure by ¾pp (to 43.9% of GDP in 2012 from 43.1% in 2011). 

Table 4: Main budgetary measures for 2012 

Revenue 

Increased  efficiency  in  revenue  collection 
(0.5%  of  GDP),  mostly  pecuniary  incentives  to 
reduce  VAT  and  car  license  arrears  (0.4%  of 
GDP) 

Higher  concession  fees  from  the  local 

lottery operator (0.4% of GDP) 

Pension reform  initiatives  and enforcement 

(0.3% of GDP) 

Increase  in  registration  tax  for  vehicles 

Euro 1 to 3 and older (0.1% of GDP) 

Expenditure 

Restraint  in  compensation  of  employees 
(i.a.  tightened  recruitment  policy)  (-0.1%  of 
GDP) 

Net  savings  in  social  transfers  (-0.2%  of 
GDP)  resulting  from  increased  efforts  to  curb 
benefit  fraud  and  the  gradual  impact  from  the 
2006  pension reform,  partly  offset  by  measures 
targeted at supporting families with children and 
elderly  aged  over  80  and  a  cost-of-living 
adjustment  

Increase  in  customs  duty  on  fuel  for 
bunkering of ships outside territorial waters (0.1% 
of GDP) 

Increase in net capital expenditure (0.6% 
of  GDP),  including  Air  Malta  restructuring 
(equity acquisition) (0.3% of GDP) 

Increase  in  excise  duty  rates  on  mobile 
telephony, cement and tobacco products (0.1% of 
GDP) 

New 

income 

('parent 
computation') for parents supporting children who 
are not gainfully employed (-0.2% of GDP) 

category 

tax 

Note: Budgetary impact according to national sources. A positive sign implies that revenue / expenditure increases as a 
consequence of this measure. 
Source: Budget for 2012 and additional information provided by the national authorities 

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The  Commission  services’  2011  Autumn  Forecast  did  not  make  provisions  for  the  upcoming 
restructuring  of  Air  Malta,  stating  that  this  might  give  rise  to  additional  government  expenditure  and 
thus entailed risks for both the deficit and debt projections in the forecast. 

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Based on a prudent assessment of the budgetary measures for 2012 and using the Commission 
services' 2011 Autumn Forecast's weaker estimated 2011 deficit outturn and macroeconomic 
scenario, the Commission services project the deficit for 2012 at 2.6% of GDP (see Table 5). 
The difference with the budget target, amounting to 0.3% of GDP, can be mainly explained 
by  a  higher  deficit  outcome  estimated  for  2011.  Looking  at  budget  components,  the 
Commission services project current revenue growth in 2012 to be lower than the authorities 
(6.3% vs 7.3% in the national projections). This is explained mainly by less dynamic indirect 
taxes,  especially  from  a  more  prudent  assessment  by  the  Commission  services  of  the  item 
“increased  efficiency  in  revenue  collection”.  The  Commission  services  also  project  current 
expenditure  growth  in  2012  to  be  lower  than  the  authorities  after  the  January  2012  review 
(3.4% vs 2.6% in the national projections). This reflects more dynamic social transfers other 
than  in  kind  including  from  a  more  prudent  assessment  by  the  Commission  services  of 
increased efforts to curb benefit fraud. Finally, while projecting a very significant increase on 
2011, the Commission services foresee much lower net capital expenditure given issues with 
absorption capacity (1.7% of GDP vs 2.5% in the national projections). Using the output gap 
series from the Commission services’ 2011 Autumn Forecast and the Commission services’ 
assessment of the budget measures, the fiscal effort in 2012 would amount to ½% of GDP. 

In 2013, the Commission services project that the deficit would widen further on a no-policy-
change basis, to 2.9% of GDP, partly as a result of a further, higher capital injection into Air 
Malta. The budget for 2012 presents a deficit target of 1.8% of GDP for 2013 based on an as 
yet unspecified additional consolidation effort of 0.7% of GDP. 

Table 5: Comparison of budgetary projections, including impact of  
measures announced post Commission services' 2011 Autumn Forecast,  
general government balance (% of GDP) 

2013 

2011 
-3.0
-2.8
-3.0

2010 
-3.6
COM AF 2011  
-3.6
National projections 
COM Jan 2012 
-3.6
Notes: COM AF 2011 – Commission services' 2011 Autumn Forecast. National 
projections – information provided by the authorities complementing the budget 
2012 speech. COM Jan 2012 – Commission services' assessment of January 
2012. National projections and COM Jan 2012 take into account the measures 
in the 2012 draft budget.  
Sources: Commission services, national authorities 

2012 
-3.5
-2.3
-2.6

-3.6 
-1.8 
-2.9 

3.3. 

Debt developments 

According to the budget for 2012, gross general government debt is projected to peak in 2011, 
at  around  70%  of  GDP,  and  decline  by  just  over  1 pp.  in  2012,  thanks  to  an  increasing 
primary surplus and a debt-decreasing stock-flow adjustment. 

The Commission services' 2011 Autumn Forecast projects the debt ratio to continue to slowly 
increase  on  a  no-policy-change  basis  from  almost  70%  in  2010  to  71.5%  by  the  end  of  the 
forecast horizon. Debt projections include the impact of the guarantees to the EFSF, bilateral 

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loans to Greece and the participation in the capital of the ESM, but not the rescue loan to Air 
Malta4.  

Beyond  2013  and  under  the  assumption  of  no  further  policy  changes  on  top  of  the 
Commission services' 2011 Autumn Forecast, the debt ratio would be on an increasing path 
and reach 90% of GDP by 2020. An additional annual structural fiscal consolidation of 0.5 pp 
of GDP from 2014 onwards in order to reach the Medium-Term Budgetary Objective (MTO) 
– in the case of Malta a balanced budget in structural terms - would limit the rise in the debt 
ratio,  reaching  77%  of  GDP  in  2020.  A  more  ambitious  consolidation  effort  (of  1  pp.  per 
annum) would set the debt ratio on a declining path from 2017 onwards in Malta. 

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In November 2010, the Maltese government agreed to provide Air Malta with a rescue loan to meet its 
cash-flow  requirements  until  May  2011,  after  which  a  restructuring  plan  has  been  presented  to  the 
Commission. The loan was granted at market conditions and no debt financing was allegedly required, 
with  government  deposits  used  to  make  the  necessary  payments.  Therefore  the  rescue  loan  is  not 
incorporated in the Commission services’ 2011 Autumn Forecast deficit and debt projections. 

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