COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta in view of a possible abrogation of Council Decision 2009/587/EC on the existence of an excessive deficit in Malta
Date: 2012-11-14
Institutions: European Commission
Subjects: Malta, budget deficit, public debt, stability pact

EUROPEAN 
COMMISSION 

Brussels, 14.11.2012  
SWD(2012) 384 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Malta in view of a 
possible abrogation of Council Decision 2009/587/EC on the existence of an excessive 
deficit in Malta 

Accompanying the document 

Recommendation for a Council Decision 

abrogating Decision 2009/587/EC on the existence of an excessive deficit in Malta 

{COM(2012) 676 final} 

EN 

   EN 

 
 
 
 
  
 
1. 

INTRODUCTION 

As the general government deficit in Malta increased to 4.7% of GDP in 2008, from 2.2% in 
2007,  the  Council  decided,  on  7  July  2009,  that  an  excessive  deficit  existed  in  Malta  and 
addressed  recommendations  to  the  national  authorities  in  accordance  with  Article  104(7)  of 
the  Treaty  establishing  the  European  Community  (TEC)1  with  a  view  to  bringing  an  end  to 
that  situation  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  Malta  had  taken  effective  action  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 extended 
by  one  year,  to  2011,  the  deadline  for  correcting  the  excessive  deficit,  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, so as to contribute to bringing the government debt ratio back on 
a declining path. To limit risks to the adjustment, the Council also recommended to strengthen 
the binding nature of Malta's medium-term budgetary framework  and better monitor budget 
execution throughout the year. 

On  6  January  2011,  the  Commission  adopted  a  Communication  to  the  Council  concluding 
that,  based  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 were requested to closely monitor budgetary developments 
and  be  ready  to  take  corrective  measures  should  risks  materialise.  On  18  January  2011,  the 
Council concluded that it shared these views.  

On  11  January  2012,  the  Commission  adopted  a  second  Communication  to  the  Council 
concluding  that,  based  on  the  available  information,  Malta  appeared  again  to  have  taken 
effective  action  towards  a  timely  and  sustainable  correction  of  the  excessive  deficit.  In 
particular, the Commission services' 2011 Autumn Forecast projected the general government 
deficit  for  2011  at  3%  of  GDP,  while  the  2012  budget,  adopted  by  the  Maltese  authorities 
after  the  cut-off  date  of  that  forecast,  included  measures  that  appeared  to  ensure  a  deficit 
below  the  threshold  also  in  2012.  In  view  of  the  above  assessment,  the  Commission 
considered  that  no  further  steps  in  the  excessive  deficit  procedure  of  Malta  were  needed  at 
that time.  

This paper examines budgetary developments in Malta since the Commission Communication 
to  the  Council  of  11  January  2012,  with  a  view  to  assessing  progress  towards  a  timely  and 
sustainable correction of the excessive deficit. The basis for the assessment is the Commission 
services' 2012 Autumn Forecast.  

1 

2 

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 

2 

 
 
  
 
 
                                                 
2. 

RECENT ECONOMIC AND BUDGETARY DEVELOPMENTS 

The Maltese economy has weathered the global economic and financial crisis relatively well. 
In  2009,  real  GDP  contracted  mildly  compared  to  the  euro  area,  on  the  back  of  a  resilient 
performance  by  net  exports  and  a  contained  decline  in  employment,  partly  thanks  to 
government assistance. Economic activity rebounded in 2010, to 3.4% for the year as a whole, 
due to improving external trade and a pick up in business investment. The positive momentum 
continued in 2011 but economic activity started losing pace towards the end of the year and 
slipped back into technical recession in the final quarter of 2011 and the first quarter of 2012. 
Still, in 2011 as a whole, real GDP growth expanded by 1.9%, outperforming the average for 
the euro area (1.4%). 

Table 1: Comparison of macroeconomic developments and forecasts 

Real GDP (% change) 
Contributions to real GDP 
growth 

Final domestic demand 
Changes in inventories 
Net exports 

GDP deflator (% change) 
Nominal GDP (% change) 
Employment (% change) 
Total compensation per 
employee (% change) 

2011 

2012 

2013 

2014 

Outturn 

COM 

1.9 

1.0 

0.9 
-1.6 
2.6 
2.3 
4.2 
2.5 

0.8 

-0.1 
-1.5 
0.6 
2.8 
3.9 
0.9 

1.1 

SP 

1.5 

0.9 
0.0 
0.6 
2.1 
3.6 
1.0 

0.9 

COM 

1.6 

1.3 
0.0 
0.3 
2.5 
4.2 
1.3 

2.1 

SP 

2.0 

1.1 
0.0 
0.9 
2.4 
4.4 
1.6 

0.5 

COM 

2.1 

SP 

2.0 

1.8 
0.0 
0.3 
2.4 
4.5 
1.6 

2.0 

1.2 
0.0 
0.8 
2.5 
4.4 
1.6 

0.6 

Note: COM  – Commission services’ 2012 Autumn Forecast; SP – Stability programme 2012 
Sources: National Statistics Office, Commission services, national authorities 

The  Commission  services'  2012  Autumn  Forecast  projects  real  GDP  growth  to  moderate 
further to 1.0% in 2012 on the back of weaker household consumption. Economic growth is 
projected  to  strengthen  in  2013  and  2014,  reflecting  an  improving  outlook  for  domestic 
demand. 

Data released by Eurostat in its second notification on deficit and debt for 2011, following the 
2012 October reporting by Malta, show that the general government deficit declined to 2.7% 
of  GDP,  from  3.6%  of  GDP  in  2010,  against  the  background  of  a  weakened  GDP  growth. 
This compares with a targeted deficit of 2.8% of GDP set in the 2011 stability programme. 
The  nominal  adjustment  between  2010  and  2011  was  driven  by  buoyant  current  revenues, 
coupled  with  lower  net  capital  expenditure.  Measures  in  the  2011  budget  to  increase  excise 
duties  and  VAT  boosted  indirect  revenues,  while  direct  taxes  benefitted  from  one-off 
proceeds of the extension to 2011 of a tax scheme lauched in 2010 to collect arrears of direct 
taxes  and  social  contributions.  Capital  expenditure  decreased  thanks  to  the  one-off  sale  of 
shipyards  assets  and  of  buildings  of  the  City  gate  project,  as  well  as  lower  subsidies  to 
investments,  partly  offsetting  more  dynamic  current  primary  expenditure  driven  by 
intermediate consumption. 

3 

 
 
  
 
 
 
 
 
 
 
 
 
 
Table 2: Budgetary developments, 2008-2014  

(% of GDP)

Revenue

of which:

- Taxes on production and imports

- Current taxes on income, wealth, etc.

- Social contributions

- Other (residual)

Expenditure

of which:

- Primary expenditure

of which:

Compensation of employees

Intermediate consumption

Social payments

Subsidies

Gross fixed capital formation

Other (residual)

- Interest expenditure

General government balance (GGB)

Primary balance

One-off and other temporary measures

GGB excl. one-offs
Output gap3
Cyclically adjusted balance3
Structural balance4
Change in structural balance 5
Structural primary balance4
Change in structural primary balance 5
Notes:

2008

2009

2010

2011

2012

2013

2014

39.2

39.4

38.9

39.6

14.2

12.7

7.4

5.0

43.8

13.8

13.6

7.4

4.6

43.3

13.5

13.0

7.3

5.1

42.5

13.9

13.1

7.5

5.1

42.3

COM

40.0

14.3

12.9

7.5

5.4

42.6

2

SP

42.5

15.0

13.2

7.7

6.6

44.7

1
COM

40.2

13.9

13.3

7.5

5.6

43.2

SP

42.4

14.7

13.3

7.7

6.7

44.1

1
COM

40.2

13.7

13.6

7.4

5.5

42.8

SP

41.6

14.5

13.4

7.7

6.0

42.7

40.6

40.1

39.5

39.2

39.4

42.0

39.9

40.7

39.6

39.2

14.2

6.4

12.9

2.1

2.4

2.6

3.2

-4.6

-1.4

0.0

-4.6

1.3

-5.1

-5.1

-1.9

14.2

6.1

13.8

1.1

2.3

2.7

3.1

-3.9

-0.7

0.6

-4.5

-2.3

-2.9

-3.6

1.5

-0.5

1.5

13.5

6.0

13.6

1.1

2.1

3.2

3.0

-3.6

-0.6

1.1

-4.7

-0.3

-3.5

-4.6

-1.0

-1.6

-1.1

13.4

6.3

13.5

1.0

2.5

2.4

3.1

-2.7

0.4

0.7

-3.4

0.3

-2.8

-3.5

1.0

-0.5

1.1

13.2

6.4

13.9

1.2

2.6

2.1

3.2

-2.6

0.6

1.0

-3.6

-0.1

-2.5

-3.6

0.0

-0.4

0.1

13.3

6.6

13.7

1.2

3.5

3.2

3.3

-2.2

1.0

0.2

-2.4

-0.5

-2.0

-2.2

0.7

1.1

0.9

13.1

6.5

13.6

1.2

2.6

2.9

3.3

-2.9

0.3

0.3

-3.3

-0.1

-2.9

-3.2

0.4

0.1

0.4

13.0

64.0

13.5

1.2

3.6

3.1

3.4

-1.7

1.7

0.2

-1.9

-0.3

-1.6

-1.8

0.5

1.6

0.6

12.9

6.5

13.3

1.2

2.7

2.9

3.2

-2.6

0.6

0.2

-2.8

0.1

-2.6

-2.8

0.4

0.4

0.3

12.7

6.2

13.1

1.2

3.5

2.5

3.5

-1.1

2.4

0.2

-1.3

0.0

-1.1

-1.3

0.5

2.2

0.6

1On a no-policy-change basis.
2The 2012 stability programme classified the concession fee as a revenue among the category "Taxes on production and imports". To make it possible to 
compare the Commission services' forecast and the 2012 stability programme, the concession fee has been reclassified as a negative capital asset sales in the 
2012 stability programme..
3Output gap (in % of potential GDP) and cyclically adjusted balance according to the programme as recalculated by the Commission on the basis of the 
information in the programme.
4Structural (primary) balance = cyclically adjusted (primary) balance excluding one-off and other temporary measures.
5The figure for SP uses one-offs for 2011 as estimated in the programme (0.3% of GDP), not as estimated by the Commission.
Source :

Stability programme (SP); Commission services' 2012 Autumn Forecasts (COM); Commission services' calculations.

Malta's  consolidation  strategy  continues  to  rely  on  measures  that,  according  to  the 
Commission services' methodology and in line with past practice, qualify as one-off. In 2011, 
deficit-reducing one-off measures amounted to 0.7% of GDP, mainly due to the the extension 
to 2011 of the 2010 scheme for the collection of income tax and social security contributions' 
arrears; in the absence of these measures, the 2011 deficit would have been at 3.4% of GDP, 
above the 3% of GDP reference value.  

Still,  the  structural  balance,  i.e.  the  cyclically  adjusted  budgetary  balance  excluding  one-off 
measures,  is  estimated  to  have  improved  by  1  pp.  of  GDP  in  2011.  This  exceeds  the  fiscal 
effort of at least ¾% of GDP recommended by the Council. 

4 

 
 
  
 
 
3. 

DEFICIT PROJECTIONS FOR 2012 AND BEYOND 

According  to  the  Commission  services'  2012  Autumn  Forecast,  the  general  government 
deficit  in  2012  is  projected  to  narrow  slightly  further,  to  2.6%  of  GDP.  The  forecast 
incorporates the impact of the measures adopted with the 2012 budget and the January review 
of spending allocations. Capital expenditure is set to decline as a result of one-off proceeds 
from the concession fee on the local lottery operator, which are recorded as negative capital 
asset sales3. Primary current expenditure is set to rise by 0.6 pp. of GDP compared to 2011 on 
the  back  of  higher  social  transfers  (as  the  expected  savings  from  the  gradual  impact  of  the 
2006  pension  reform  will  materialize  only  gradually)  and  subsidies  to  the  national  energy 
company  (Enemalta).  Continued  hiring  restrictions  in  the  public  sector  will  help  contain 
growth  in  the  wage  bill  despite  the  new  public  sector  agreement  and  increased  spending 
related to some components of the wage bill (i.e. allowances and overtime) especially in the 
education  and  health  sector.  As  economic  growth  in  2012  is  driven  by  net  exports,  while 
domestic demand appears to be rather weak, the current revenue ratio is projected to increase 
only  slightly  compared  to  2011  despite,  among  others,  measures  to  increase  VAT  revenue 
collection.  

According to the Commission services Autumn 2012 forecast, net of one-off measures - i.e. 
proceeds from the sale of real assets, a concession fee from the local lottery operator as well 
as the proceeds expected from the tax arrears' collection scheme - the deficit in 2012 would 
still be above the reference value, at 3.6% of GDP. 

In the April 2012 update of the stability programme of Malta, the deficit target for 2012 was 
2.2% of GDP, with real GDP growing by 1.5%, driven by stronger domestic demand. Despite 
the  better-than-estimated  2011  deficit  outturn,  the  deficit  projection  for  2012  was  revised 
slightly upwards, to 2.3% of GDP, in the October 2012 notification. The difference between 
the projected deficit in the Commission services forecast and the national projections is due to 
more dynamic revenue growth in the latter.  

For 2013, the Commission services' 2012 Autumn Forecast projects the general government 
deficit to rise to 2.9% of GDP. The forecast is based on unchanged policies, hence the 2013 
Budget  presented  at  the  end  of  November/beginning  of  December,  is  not  included.  The 
current revenue ratio is projected to decline slightly, as the one-off revenue projected for 2012 
disappears.  Primary  current  expenditure  is  forecast  to  drop  by  0.3  pp.  of  GDP,  reflecting  a 
continuation  of  the  tight  recruitment  policy  in  the  public  sector  as  well  as  less  pronounced 
growth  of  social  transfers  as  the  2006  pension  reform  gradually  kicks  in.  Net  capital 
expenditure, including the planned additional equity injection into Air Malta of 0.6% of GDP, 
is expected to grow by 0.5 pp. of GDP.  

In 2014, the deficit is projected to narrow, also due to a lower equity injection into Air Malta 
as  well  as  higher  tax  revenue  following  the  expected  domestic  demand-driven  recovery  in 
economic activity.  

The  main  downside  risks  to  the  Commission  services'  forecasts  relate  to  the  vulnerable 
financial situation of the energy provider (Enemalta), which could entail further subsidies (in 

3 

The 2012 stability programme classified the concession fee as a revenue among the category "Taxes on 
production  and  imports".  To  make  it  possible  to  compare  the  Commission  services'  forecast  and  the 
2012 stability programme, the concession fee has been reclassified as a negative capital asset sales in 
the 2012 stability programme. 

5 

 
 
  
 
                                                 
addition  to  the  planned  injection  of  21  millions  already  incorporated  in  the  Commission 
services'  forecast)  as  well  as  to  possible  overruns  in  current  primary  expenditure,  as  has 
happened in the past. Risks also arise from the economic growth outlook. 

According to the Commission services' 2012 Autumn Forecast, the projected adjustment path 
towards  the  MTO  over  2012-2013  is  not  in  line  with  the  at  least  0.5%  of  GDP  annual 
structural adjustment that is stipulated in the Stability and Growth Pact for Member States that 
have not yet reached their MTO and are faced with a debt ratio exceeding 60% of GDP. In 
fact,  the  structural  deficit  is  projected  to  remain  unchanged  in  2012,  and,  on  a  no-policy-
change basis, to improve by just ¼ pp. of GDP in 2013, before improving by ½ pp. of GDP in 
2014. 

The  real  growth  rate  of  government  expenditure,  net  of  discretionary  revenue  measures, 
according to the Commission services' 2012 Autumn Forecast, is projected to be negative and 
below  the  benchmark  reference  medium-term  rate  of  potential  GDP  growth  in  2012. 
However,  on  a  no-policy-change  basis,  the  real  growth  rate  of  expenditure  is  projected  to 
increase significantly in 2013 and 2014, thus breaching the benchmark reference rate. 

4. 

DEBT  DEVELOPMENTS  AND  PROJECTIONS  AND  COMPLIANCE  WITH  THE  DEBT 
REDUCTION BENCHMARK 

Data released by Eurostat on 22 October 2012 in its second notification on deficit and debt for 
2011 show a general government debt at 70.9% of GDP in 2011, more than 2 pps higher than 
in 2010 and about 9 pps. of GDP above the level recorded at the time of accession to the euro 
area in 2008. 

The  debt  increase  in  2011  compared  to  2010  was  driven  by  a  high  stock-flow  adjustment 
(including for the rescue loan of 0.8% of GDP that the Maltese government agreed to provide 
to  Air  Malta4  to  meet  its  cash-flow  requirements  as  well  as  for  the  EFSF  issuances  and 
bilateral  loans  to  Greece),  which  was  only  partly  offset  by  the  increasing  primary  balance, 
which in 2011 turned into a surplus for the first time since 2007.  

According to the Commission services' 2012 Autumn Forecast, the debt ratio is expected to 
increase  further  in  2012,  driven  by  the  stock-flow  adjustment  essentially  because  of  the 
impact  of  the  guarantees  to  the  EFSF,  bilateral  loans  to  Greece  and  the  participation  in  the 
capital  of  the  ESM  and  despite  the  repayment  to  the  government  of  the  rescue  loan  to  Air 
Malta.  

According to the Commission services' 2012 Autumn Forecast, on a no-policy-change basis, 
the  debt  ratio  is  projected  to  increase  further  and  peak  in  2013,  driven  by  a  debt-increasing 
stock-flow adjustment. An increasing primary surplus would result in a slight decline in the 
debt ratio  in  2014.  Risks associated with  budgetary developments also apply to the debt-to-
GDP ratio. 

It  should  be  noted  that  with  the  entry  into  force  of  the  Six-Pack  end-2011,  Member  States 
have  to  comply  with  a  debt  reduction  benchmark,  as  defined  in  Article  2(1a)  of  Regulation 

4 

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. 

6 

 
 
  
 
                                                 
(EC)  No  1467/97.  The  legislation  foresees  a  three-year  transitional  period  for  the  Member 
States  that  were  in  EDP  at  the  time  of  the  entry  into  force  of  these  new  legal  provisions  - 
which  is  the  case  of  Malta.  According  to  Article  2(1a),  the  requirement  under  the  debt 
criterion  shall  be  considered  fulfilled  if,  from  the  correction  of  the  excessive  deficit,  Malta 
makes sufficient progress towards compliance.  

7 

 
 
  
 
Table 3: Debt developments, 2008-2014  

2008

2009

2010

2011

2012

2013

2014

(% of GDP)

COM

COM

SP
72.0
3.7

1.4
-0.9

72.4
1.5

70.9
2.6

67.6
5.7

68.3
0.6

62.0
0.1

Gross debt ratio
Changes in the ratio (a) = (b) + (c) + (d)
Contributions:
Primary balance (b)
Snowball effect (c)
      of which:
      Interest expenditure
      Growth effect
      Inflation effect
Stock flow adjustment (d)
Notes:
1On a no-policy-change basis.
Source :
Stability programme (SP); Commission services' autumn 2012 forecasts (COM); Commission services' calculations.

3.2
-2.3
-1.8
-0.3

3.0
-2.2
-1.9
1.1

3.1
-1.3
-1.5
2.7

3.2
-0.7
-1.9
1.6

3.1
1.5
-1.5
1.8

3.1
-1.4
-1.5
3.9

-0.4
0.3

-0.6
0.6

0.6
-1.0

-0.4
0.3

0.7
3.1

SP
70.3
-1.7

-1.0
0.7

3.2
-1.0
-1.4
-1.4

COM1
73.1
0.7

-0.3
0.4

3.3
-1.1
-1.8
0.7

SP
68.7
-1.6

-1.7
0.5

3.4
-1.3
-1.6
-0.3

COM1
72.8
-0.4

-0.6
0.1

3.2
-1.5
-1.6
0.2

SP
67.4
-1.3

-2.4
0.6

3.5
-1.3
-1.5
0.5

8