REPORT FROM THE COMMISSION Malta Report prepared in accordance with Article 126(3) of the Treaty
Date: 2013-05-21
Institutions: European Commission
Subjects: Malta, budget deficit, economic situation, medium-term forecast, public debt, stability pact, stability programme

EUROPEAN 
COMMISSION 

Brussels, 21.5.2013  
COM(2013) 294 final 

REPORT FROM THE COMMISSION 

Malta  

Report prepared in accordance with Article 126(3) of the Treaty 

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REPORT FROM THE COMMISSION 

Malta  

Report prepared in accordance with Article 126(3) of the Treaty 

1. 

LEGAL BACKGROUND 

Article 126 TFEU lays down the excessive deficit procedure (EDP). This procedure is further 
specified  in  Council  Regulation  (EC)  No  1467/97  “on  speeding  up  and  clarifying  the 
implementation of the excessive deficit procedure”1, which is part of the Stability and Growth 
Pact. According to Article 126(2) of the Treaty, the Commission has to monitor compliance 
with  budgetary  discipline  on  the  basis  of  two  criteria,  namely:  (a)  whether  the  ratio  of  the 
planned or actual government deficit to gross domestic product (GDP) exceeds the reference 
value of 3% (unless either the ratio has declined substantially and continuously and reached a 
level that comes close to the reference value; or, alternatively, the excess over the reference 
value is only exceptional and temporary and the ratio remains close to the reference value); 
and  (b)  whether  the  ratio  of  government  debt  to  GDP  exceeds  the  reference  value  of  60% 
(unless  the  ratio  is  sufficiently  diminishing  and  approaching  the  reference  value  at  a 
satisfactory pace). 

Article 126(3) stipulates that, if a Member State does not fulfil the requirements under one or 
both  of  the  above  criteria,  the  Commission  has  to  prepare  a  report.  This  report  also  has  to 
“take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”. 

This  report,  which  represents  the  first  step  in  the  “excessive  deficit  procedure”  (EDP), 
analyses the reasons for a breach of the deficit and debt criterion of the Treaty with due regard 
to the economic background and all other relevant factors. The amendments to the Stability 
and  Growth  Pact  in  2011  addressed  some  weaknesses  in  the  surveillance  framework.  In 
particular,  the  corrective  arm  was  strengthened by putting the debt requirement on an equal 
footing with the deficit requirement in order to ensure that, for countries with a debt-to-GDP 
ratio  above  the  60%  reference  value,  the  ratio  is  brought  below  (or  sufficiently  declining 
towards) that value. The Stability and Growth Pact2 stipulates that Member States that were 
subject  to  an  excessive  deficit  procedure  on  8  November  2011  benefit  from  a  three-year 
transition period, starting in the year following the correction of the excessive deficit, during 
which  they  are  expected  to  ensure  a  sufficient  improvement  of  their  structural  balance,  as 
measured by the cyclically adjusted balance net of one-offs and temporary measures, in order 
to  comply  with  the  debt  reduction  benchmark  by  the  end  of  the  three-year  period.  The 
"Specifications on the implementation of the Stability and Growth Pact and guidelines on the 
format and content of stability and convergence programmes" of 3 September 2012 spell out 
how the requirement for the structural balance is defined and assessed. 

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2 

OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by the ECOFIN Council of 3 September 2012, available at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm.  
Council Regulation (EC) No 1467/97 Article 2(1a), available at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm. 

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Since accession to the EU, Malta has been subject to two EDPs3. The first was launched by 
the Council decision of 7 July 2004 and was abrogated by the Council on 5 June 2007. The 
second  was  launched  on  7  July  2009  and  abrogated  on  4  December  2012,  following  a  one-
year  extension,  to  2011,  of  the  deadline  for  correcting  the  excessive  deficit  on  account  of 
unexpected  adverse  economic  events  with  major  unfavourable  consequences  for  the 
government finances that occurred in 2010.  
Data  notified  by  the  authorities  in  April  20134  show  that  the  general  government  deficit  in 
Malta reached 3.3% of GDP in 2012 (see Table 1), thus exceeding the 3% of GDP reference 
value.  In  addition,  the  general  government  gross  debt  was  still  above  the  60%  of  GDP 
reference value and Malta did not make sufficient progress towards compliance with the debt 
reduction benchmark during the transition period (see Table 3). 

Table 1: General government deficit and debt (% of GDP) 

2008

2009

2010

2011

2012

2013

2014

COM

National 
Authorities

COM

National 
Authorities

-4.6

-3.7

-3.6

-2.8

-3.3

-3.7

-2.7

-3.6

-2.1

60.9

66.4

67.4

70.3

72.1

73.9

74.2

74.9

74.2

General
balance

government

General
gross debt

government

Source: Eurostat and Commission services’ spring 2013 forecast. 

The  Commission  has  therefore  decided  to  initiate  the  excessive  deficit  procedure  for  Malta 
with the adoption of this report. Section 3 of the report examines the deficit criterion. Section 
4  examines  the  debt  criterion.  Section  5  deals  with  public  investment  and  other  relevant 
factors. The report takes into account the Commission services’ spring 2013 forecast, released 
on 3 May. 

2. 

DEFICIT CRITERION  

In 2012, the general government deficit reached 3.3% of GDP, from 2.8% of GDP in 2011.  

While  in  excess  of  3%  of  GDP  reference  value,  the  deficit  is  close  to  the  Treaty  reference 
value. However, the excess is not exceptional. In particular, it does not result from a severe 
economic downturn in the sense of the Treaty and the Stability and Growth Pact. In 2010 and 
2011,  real  GDP  growth  was,  on  average,  above  2%  annually,  higher  than  potential  growth. 
According  to  preliminary  GDP  data  published  by  the  national  statistics  office  on  1  March 
2013,  economic  growth  slowed  down  in  2012,  but  remained  positive  at  0.8%.  Looking 
forward,  according  to  the  Commission  services'  spring  2013  forecast,  GDP  growth  is 
projected to pick up, reaching 1.8% in 2014. The positive output gap in 2011 is estimated to 
have turned slightly negative in 2012 and widen marginally in 2013-14. 

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can 

documents 

for  Malta 

at 
All  EDP-related 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/malta_en.htm. 
According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Malta can be found at:   
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/edp_
notification_tables. 

following  website: 

found 

the 

be 

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Table 2: Macroeconomic and budgetary developments a 

Real GDP (% change)

Potential GDP (% change) 

Output gap (% of potential GDP)

General government balance

other

Primary balance
and
One-off
measures
Government
formation
Cyclically-adjusted balance

gross

temporary

fixed capital

Cyclically-adjusted primary balance

b
Structural balance 
Structural primary balance b

2008

2009

2010

2011

2012

2013

2014

3.9

2.2

3.3

-4.6

-1.4

0.0

2.3

-2.8

-2.8

-5.9

-2.8

-2.6

1.7

-1.1

-3.7

-0.6

0.6

2.3

-3.3

-0.2

-3.9

-0.8

2.9

1.9

-0.1

-3.6

-0.6

1.1

2.1

-3.5

-0.6

-4.6

-1.7

1.7

1.3

0.2

-2.8

0.3

0.7

2.5

-2.9

0.2

-3.6

-0.5

COM

1.4

1.4

-0.4

-3.7

-0.5

0.3

3.1

-3.5

-0.3

-3.8

-0.6

0.8

1.4

-0.3

-3.3

-0.2

0.9

3.1

-3.2

-0.1

-4.1

-1.0

National 
Authorities
1.4

1.3

-0.5

-2.7

0.5

0.2

3.5

-2.5

0.7

-2.7

0.5

COM

1.8

1.5

-0.1

-3.6

-0.4

0.1

3.2

-3.6

-0.4

-3.7

-0.5

National 
Authorities
1.6

1.4

-0.3

-2.1

1.1

0.1

3.7

-2.0

1.2

-2.2

1.0

Notes: 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding one-off and other temporary measures. 
Source: Eurostat and Commission services’ spring 2013 forecast. 

The increase in the headline deficit in 2012 compared to 2011 reflected an increase in current 
expenditure by 1.3 pps. of GDP, which more than offset the impact of a significant amount of 
net deficit-reducing one-off measures (0.9% of GDP), mainly consisting of the proceeds from 
the concession fee on the local lottery operator.  

According to the Commission services' spring 2013 forecast, the excess over the 3% of GDP 
reference value is not temporary in the sense of the Treaty and the Stability and Growth Pact. 
The forecast  indicates  that  the  deficit  will continue to be above the reference value in 2013 
and 2014, despite the expected increase in real GDP growth. These budgetary projections are 
based on current policies, thus incorporating the 2013 budget that was endorsed by Parliament 
in  April  2013,  which  includes  expansionary  measures  on  both  the  revenue  and  expenditure 
side as well as the already planned equity injection into Air Malta (0.6% of GDP), with a net 
deficit-increasing  impact  of  0.3%  of  GDP.  The  expansionary  measures  are  only  partially 
compensated  by  increases  in  excise  duties,  the  collection  of  tax  arrears  as  well  as  the 
expenditure savings and higher social contributions stemming from the 2006 pension reform. 
In addition, the contribution of net deficit-reducing one-offs, as identified by the Commission, 
to the consolidation effort would fall sharply after 2012 (from 0.9% of GDP to 0.3% and 0.1% 
in  2013  and  2014,  respectively).  It  should  be  stressed  that  the  adopted  budget  is  broadly 
similar  to  the  one  that  was  originally  presented  in  November  20125,  which  was  based  on  a 
deficit  target  for  2012  at  2.3%  of  GDP,  1  pp  lower  than  the  notified  outturn.  After  the 
submission  of  the  2013  stability  programme,  the  Maltese  authorities  informed  the 
Commission  of  further  measures  planned  with  a  view  to  bringing  the  deficit  below  3%  of 
GDP in 2013 and 2014. The Commission will evaluate them and if appropriate will review its 
assessment of temporariness of the excess of the deficit over the 3% of GDP reference value. 

The  April  2013  stability  programme  sets  the  deficit  target  at  2.7%  of  GDP  in  2013.  The 
difference with the 3.7% of GDP projected in the Commission services' spring 2013 forecast 

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The draft 2013 budget was presented by the previous government at the end of November but failed to 
receive parliamentary endorsement. 

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reflects  higher  growth  for  current  taxes,  in  particular  driven  by  higher  elasticity  of  indirect 
taxes  to  private  consumption  growth.  For  the  remaining  years,  the  programme  targets  the 
deficit  to  continue  declining,  to  0.8%  of  GDP  by  2016,  but  only  provides  details  on  some 
specific measures.  

In sum, in the Commission's assessment the deficit is close to the 3% of GDP reference value 
in  2012,  but  the  excess  over  the  reference  value  is  neither  exceptional  nor  temporary  in  the 
sense  of  the  Treaty  and  the  Stability  and  Growth  Pact.  This  analysis  thus  suggests  that  the 
deficit criterion of the Treaty is not fulfilled. 

3. 

DEBT CRITERION  

In 2012, the general government gross debt reached 72.1% of GDP, above the 60% of GDP 
Treaty reference value. The downward trend registered between 2004 and 2007 was reversed 
in  2008,  when  the  primary  balance  turned  negative.  According  to  the  Commission  services' 
spring 2013 forecast, the expected continued primary deficits in 2013 and 2014 are projected 
to result in the general government debt rising further, to 73.9% of GDP in 2013 and to 74.9% 
of GDP in 2014. 

Following  the  abrogation  of  the  EDP  in  December  2012,  Malta  benefits  from  a  three-year 
transition period to comply with the debt reduction benchmark, starting in 2012 (see Section 
1).  In  order  to  ensure  continuous  and  realistic  progress  towards  compliance  during  the 
transition period, Member States should respect simultaneously the two conditions below: 

(i) 

(ii) 

First, the annual structural adjustment, ensuring compliance with the debt benchmark 
at the end of the transition period, should not deviate by more than ¼ % of GDP from 
the required linear structural adjustment;  

Second,  at  any  time  during  the  transition  period,  the  remaining  annual  structural 
adjustment should not exceed ¾ % of GDP. 

The structural effort implemented by Malta in 2012 is not sufficient to meet the requirements 
of  the  transition  period  for  the  debt  reduction  benchmark.  First,  the  Minimum  Linear 
Structural  Adjustment  (MLSA)  required  for  2012  was  equal  to  0.4  %  of  GDP,  while  Malta 
worsened  its  structural  deficit  by  ½  pp.  of  GDP  in  2012;  second,  the  remaining  annual 
structural adjustment exceeds ¾ % of GDP.  

This analysis, thus, suggests that the debt criterion of the Treaty is not fulfilled. 

Table 3: Compliance with the debt reduction benchmark (transition period) 

Correction 
of the 
excessive 
deficit 

Gross debt 
(% of GDP) 
at EDP 
deadline 

Gross debt (% of 
GDP) at the end 
of the 3-years 
transition period 

MLSA1 required in… 

Structural adjustment 
forecast in… 

2011 

70.3 

74.9 

0.4 

0.9 

1.6 

-0.5 

0.3 

0.1 

2012 

2013 

20142 

2012 

2013 

20142 

1

2

 Minimum linear structural adjustment.
 The budget for 2014 still needs to be adopted. 

Source: Eurostat and Commission services’ spring 2013 forecast. 

4. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that the Commission report “shall also take into account 
whether  the  government  deficit  exceeds  government  investment  expenditure  and  take  into 

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account other relevant factors, including the medium-term economic and budgetary position 
of the Member State”.  

In  view  of  the  above  provisions,  the  following  four  subsections  consider  in  turn  (1)  the 
medium-term  economic  position;  (2)  the  medium-term  budgetary  position  (including  public 
investment);  (3)  the  developments  in  the  medium-term  government  debt  position,  its 
dynamics and sustainability; (4) other factors put forward by the Member State; and (5) other 
factors considered relevant by the Commission. 

4.1.  Medium-term economic position 

Cyclical  conditions  and  potential  growth.  Even  if  Malta's  growth  outperforms  that  of  the 
euro area, the crisis negatively affected its potential growth. After averaging 2.3% in 2006-08, 
potential  growth,  as  estimated  by  the  Commission  services,  dropped  to  1.3%  by  2011  on 
account of a declining contribution from capital accumulation and total factor productivity. As 
capital  accumulation  is  projected  to  remain  modest,  potential  growth  is  forecast  to  improve 
only slightly and to average 1.6% in 2013-15. After contracting by 2.6% in 2009, real GDP 
growth  exceeded  potential  growth  in  2010-11.  However,  as  both  domestic  demand  and  net 
exports  moderated  in  2012,  real  economic  growth  slowed  down  to  below  potential  growth. 
Despite a projected domestic-demand-driven rebound, real GDP growth is forecast to remain 
below  potential  growth  in  2013  and  to  exceed  it  again  only  in  2014.  As  a  result  of  these 
developments,  the  calculated  output  gap  turned  negative  in  2012  and  is projected  to  remain 
negative in 2013-14. 

Recent  structural  reforms.  A  detailed  account  and  an  assessment  of  the  reform  actions 
undertaken  by  the  Maltese  authorities  in  response  to  the  recommendations  issued  by  the 
Council in July 2012 will be undertaken in the context of the third EU semester. Among the 
structural  reforms  that  could  have  a  positive  impact  on  the  budgetary  outcomes,  it  is  worth 
noting  that  the  2006  pension  reform  contributes  to  fostering  labour  market  participation  of 
older  workers  and  has  a  positive  short-term  impact  on  the  budgetary  position.  The 
government  has  also  undertaken  relevant  measures  in  the  energy  sector,  most  notably  the 
construction  of  the  electricity  interconnector  with  Italy,  which,  added  to  measures  to 
strengthen  the  functioning  of  the  internal  market  and  to  lower  the  administrative  burden  on 
businesses, could have a favourable impact on potential growth.  

4.2.  Medium-term budgetary position 

Structural  deficit  and  fiscal  consolidation  in  good  times.  In  2010  and  2011  Malta  was 
clearly  in  good  economic  times,  as  evidenced  by  strong  GDP  growth.  In  2011,  Malta  ran 
substantial budgetary consolidation both in nominal and structural (net of cyclical factors and 
one-off  measures)  terms,  thus  allowing  bringing  the  deficit  back  below  the  3%  reference 
value. The budgetary consolidation was also supported by the continued recourse to one-off 
measures.  In  2012  Malta  loosened  the  fiscal  stance.  In  structural  terms,  i.e.  adjusted  for  the 
cycle and one-off and other temporary measures, the deficit is estimated to have worsened by 
½ pp. of GDP, to 4.1% of GDP in 2012, reversing the declining trend towards the medium-
term  objective  (MTO)  of  a  balanced  position  in  structural  terms,  which  the  April  2013 
stability programme still does not plan to achieve within the programme period. According to 
the Commission services’ 2013 spring forecast, the structural deficit is expected to improve 
by ¼ pp. of GDP in 2013 on account of a decreasing contribution from deficit-reducing one-
off measures and, on a no-policy-change assumption, only marginally in 2014. According to 
the April 2013 stability programme, the structural balance, as recalculated by the Commission 
services' using the commonly agreed method, is estimated to improve by 1½ pp. of GDP in 
2013 and by ½ pp. of GDP in 2014.  

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Public investment. Government investment (as a share of GDP) amounted to 3.1% of GDP 
in 2012, up by 0.6 pps of GDP from 2011. The general government nominal deficit in 2012 
has therefore exceeded total public investment in that year and, according to the Commission 
services’ 2013 spring forecast, will remain above it in 2013-14. In structural terms, in 2012 
the deficit of 4.1% of GDP was higher than public investment and is forecast to remain above 
it.  

Quality of public finances. The medium-term budgetary framework is non-binding in nature, 
which  added  to  the  lack  of  numerical  fiscal  rules  and  of  an  independent  fiscal  council, 
undermines  the  credibility  of  the  government’s  consolidation  strategy.  Malta  has  not  yet 
transposed  Directive  2011/85/EU  on  budgetary  frameworks.  In  addition,  a  structural  budget 
balance rule, as provided for in the Treaty on Stability, Coordination and Governance, has not 
yet  been  introduced  in  national  law.  The  stability  programme  announces  a  reform  of  the 
budgetary framework with a view to making it more binding through the introduction of fiscal 
rules,  while  increasing  flexibility  for  reallocating  expenditure  across  different  headings  and 
functions  of  public  expenditure.  It  also  announces  the  setting  up  of  a  Fiscal  Council. 
However, concrete action has yet to be taken in these areas.  

4.3.  Medium-term government debt position 

Long-term  sustainability  of  public  finances.  The  sustainability  of  Malta's  public  finances 
appears  to  be  challenging  in  the  medium  to  long  term.  According  to  "The  2012  Ageing 
Report", pension expenditure in Malta has in the past been below the EU average (10.4% of 
GDP against 11.3% of GDP in EU27 in 2010). However, the projected growth in age-related 
expenditure  is  well  above  the  EU  average,  with  the  increase  in  pension  expenditure  – 
including the impact of the 2006 pension reform – accounting for more than half of it. Over 
the period 2010-60, pension expenditure is projected to increase by 5.5 pps. of GDP in Malta 
against 1.5 pps of GDP in the EU. Health care expenditure is projected to contribute as well to 
the projected growth in age-related expenditure, as it would increase by 2.9 pps. of GDP over 
the period 2010-60 in Malta, against 1.1 pps of GDP in the EU. 

Total  stock  of  debt  guaranteed  by  government.  The  high  level  of  contingent  liabilities 
represents  an  additional  risk  for  Malta's  public  finances.  Government-guaranteed  debt  in 
Malta is high, following a substantial increase since the start of the crisis. At 17.6% of GDP in 
2012  (from  16.3%  in  2011),  contingent  liabilities  imply  a  total  public  guaranteed  debt  of 
almost  90%  of  GDP  in  2012.  More  than  half  of  these  liabilities,  as  well  as  most  of  their 
increase  since  2008,  are  accounted  for  by  the  public  energy  utility  corporation  (Enemalta). 
Moreover, new guarantees in 2012 (for an amount equal to 3.6% of GDP) have been given to 
the special purpose vehicle set up for the restructuring of Enemalta’s debt6.  

4.4. 

Other factors put forward by the Member State  

The authorities of Malta have not presented any relevant factors as they can do according to 
Article 2(3) of Council Regulation (EC) No 1467/97.  

4.5. 

Other factors considered relevant by the Commission 

In  assessing  sufficient  progress  towards  compliance  with  the  debt  benchmark  through  the 
MLSA, financial assistance to Euro Area Member States7 with a debt or a deficit-increasing 

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A debt restructuring plan for Enemalta, adopted by the authorities in December 2012, concerns about 
half of the company's current debt (which, at end-2010 and including only bank and other borrowings, 
stood at EUR 687mn, or EUR 836mn when adding also trade-related and other payables). 
Article  2(3),  Regulation  (EC)  No  1467/97:  "[…]  particular  consideration  shall  be  given  to  financial 
contributions to fostering international solidarity and achieving the policy goals of the Union, the debt 
incurred  in  the  form  of  bilateral  and  multilateral  support  between  Member  States  in  the  context  of 

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impact must be taken into account. For Malta, the cumulative impact of Greek loan facility, 
EFSF  disbursements,  capital  contributions  to  the  ESM,  and  operations  under  Greek 
programme over the period 2011-2014 would be 3.9% of GDP on debt, and 0.1% of GDP on 
deficit. When taking into account the impact of these operations, the required MLSA for 2012 
would be lower, at 0.3% of GDP, but remains well above the structural effort implemented by 
Malta in 2012.  

5. 

CONCLUSIONS 

The general government deficit in Malta reached 3.3% of GDP in 2012, above but close to the 
3%  of  GDP  reference  value.  The  excess  over  the  reference  value  cannot  be  qualified  as 
exceptional within the meaning of the Treaty and the Stability and Growth Pact. According to 
the Commission services' spring 2013 forecast, it is not temporary either. This suggests that 
the deficit criterion in the Treaty is not fulfilled. However, after the submission of the 2013 
stability  programme,  the  Maltese  authorities  informed  the  Commission  of  further  measures 
planned  with  a  view  to  bringing  the  deficit  below  3%  of  GDP  in  2013  and  2014.  The 
Commission will evaluate them and if appropriate will review its assessment of temporariness 
of the excess of the deficit over the 3% of GDP reference value. 

General  government  gross  debt  reached  72.1%  of  GDP  in  2012,  above  the  60%  of  GDP 
reference value, and Malta has not made sufficient progress towards compliance with the debt 
reduction benchmark during the transition period. This suggests that the debt criterion in the 
Treaty  is  not  fulfilled,  even  when  taking  into  account  the  impact  of  financial  assistance  to 
Euro Area Member States. 

In line with the Treaty, this report has also examined “relevant factors”. As specified in the 
Stability and Growth Pact, these factors can only be taken into account in the steps leading to 
the decision on the existence of an excessive deficit if the general government deficit remains 
close to the reference value and its excess over the reference value is temporary, which is not 
the  case.  Considered  on  their  own  merit,  the  relevant  factors  on  balance  do  not  seem  to 
question the decision on the existence of an excessive deficit.  

safeguarding financial stability, and the debt related to financial stabilisation operations during major 
financial disturbances". 

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