COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Malta
Date: 2013-05-29
Institutions: European Commission
Subjects: Malta, budget deficit, budgetary equilibrium, economic statistics, gross domestic product, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 389 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Malta 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Malta 

{COM(2013) 391 final} 

EN 

   EN 

 
 
 
 
  
 
 
1. 

INTRODUCTION  

Since accession to the EU, Malta has been subject to two excessive deficit procedures (EDP)1. 
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.  

According to data notified by the Maltese authorities in April 20132, the general government 
deficit in Malta reached 3.3% of GDP in 2012, up from 2.8% of GDP in 2011. In addition, in 
2012  the  general  government  gross  debt  was  above  the  60%-of-GDP  reference  value  and 
Malta  did  not  make  sufficient  progress  towards  compliance  with  the  debt  reduction 
benchmark, in line with the requirements of the transition period3 following the correction of 
its excessive deficit. 

The report prepared by the European Commission under Article 126(3) of the Treaty on the 
Functioning of the European Union ('the Treaty'), which represents the first step in the EDP, 
analysed  the  reasons  for  the  breach  of  the  deficit  and  debt  criteria  of  the  Treaty,  with  due 
regard  to  the  economic  background  and  all  other  relevant  factors.  According  to  the  report, 
both the deficit and debt criteria of the Treaty are not fulfilled, and, according to the Article 
126(6) of the Treaty, the Council decided that an excessive deficit exists in Malta.  

2. 

RECENT MACRO-ECONOMIC DEVELOPMENTS  

The  Maltese  economy  demonstrated  resilience  throughout  the  crisis.  In  2009,  real  GDP 
declined by 2.4%, better than the 4.4% contraction in the euro area. The subsequent rebound 
was more pronounced, averaging 2.4% as opposed to 1.7% in the euro area, mainly driven by 
net exports. Job creation was strong and the unemployment rate remained at a low level, but 
against a background of still very low participation rates, especially among women and older 
workers.  

In  2012,  real  GDP  grew  by  0.8%  (see  Table  1),  driven  by  exports  and  public  spending. 
International  trade  remained  a  key  driver  of  economic  growth,  despite  the  challenging 
environment,  contributing  to  the  correction  of  Malta’s  current  account  deficit.  The  labour 

1 

2 

3 

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. 
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  the  abrogation  of  the  EDP  in  December  2012,  in  line  with  the  Stability  and  Growth  Pact, 
Malta benefits from a three-year transition period to comply with the debt reduction benchmark, starting 
in 2012. The structural effort implemented by Malta in 2012 was not sufficient to meet the requirements 
of the transition period for the debt reduction benchmark. The Minimum Linear Structural Adjustment 
(MLSA) required for 2012 was equal to 0.4 pps of GDP, while Malta worsened its structural deficit by 
½ pp. of GDP in 2012. 

2 

 
 
 
                                                 
 
market  performed  better  than  the  euro-area  average  with  continued  job  creation,  while 
unemployment remained low and stable, reaching 6.4%.  

According to the Commission 2013 spring forecast, economic growth in Malta will continue 
to outperform the euro-area average until the end of the forecast horizon. Real GDP growth is 
projected to accelerate to 1.4% in 2013 and 1.8% in 2014, underpinned by a gradual recovery 
in  domestic  demand.  Growth  is  expected  to  remain  job-rich,  mainly  thanks  to  catching-up 
employment  rates  among  women  and  older  workers,  with  unemployment  and  inactivity 
decreasing  as  a  result.  Price  inflation,  after  spiking  in  2012,  is  forecast  to  moderate,  but  to 
remain above the euro area average.  

Table 1: Comparison of macroeconomic developments and forecasts 

2011 

2012 

2013 

2014 

Real GDP (% change) 
Contributions to real GDP growth: 
- Final domestic demand 
- Change in inventories 
- Net exports 

Output gap (% of potential GDP) 
Employment (% change) 
Unemployment rate (%) 
Labour productivity (% change) 

HICP inflation (%) 

Comp. of employees (per head, % 

Outturn  Outturn  COM 

1.7 

0.8 

1.4 

0.6 
-1.7 
2.8 

0.2 
2.7 
6.5 
-1.0 

2.5 

0.5 

0.4 
-0.5 
1.0 

-0.3 
2.1 
6.4 
-1.2 

3.2 

2.4 

-3.3 
72.1 

1.1 
0.0 
0.3 

-0.4 
1.8 
6.3 
-0.4 

1.9 

1.8 

-3.7 
73.9 

SP 

1.4 

0.8 
0.0 
0.6 

-0.5 
0.7 
6.6 
0.2 

2.0 

0.7 

-2.7 
74.2 

COM 

1.8 

1.6 
0.0 
0.2 

-0.1 
2.1 
6.1 
-0.3 

1.9 

1.8 

-3.6 
74.9 

SP 

1.6 

1.1 
0.0 
0.5 

-0.3 
0.9 
6.4 
0.8 

1.6 

1.1 

-2.1 
74.2 

change) 

General government balance  (% of GDP) 
Government gross debt  (% of GDP) 

-2.8 
70.3 

    Source: 
    2013 Stability Programme (SP); Commission 2013 spring forecast (COM); Commission services’ calculations. 

3. 

BUDGETARY OUTLOOK 

The  baseline  scenario  on  which  this  adjustment  path  is  built  incorporates  the  Commission 
2013  spring  forecast  and  extends  it  up  to  2016  relying  on  standard  assumptions  about  the 
closure of the output gap and the sensitivity of the budget to the cycle.  

The  budgetary  projections  for  2013  incorporate  the  2013  budget  that  was  endorsed  by 
Parliament  in  April  2013,  which  includes  expansionary  measures  on  both  the  revenue  and 
expenditure side, with a net deficit-increasing impact of 0.3% of GDP. In particular, the 2013 
budget stipulates: the gradual reduction in the income tax rate for the middle income bracket, 
as well as its widening, over the period 2013-2015; a lower registration tax on “clean” private 
vehicles;  and  an  increase  in  the  minimum  rate  of  child  allowances.  The  budget  also 
incorporates  the  previously  planned  equity  injection  into  Air  Malta  (0.6%  of  GDP).  These 
expansionary  measures  are  only  partially  compensated  by  increases  in  excise  duties,  the 

3 

 
 
 
 
 
 
 
 
 
 
 
collection  of  tax  arrears,  as  well  as  the  expenditure  savings  and  higher  social  contributions 
stemming from the 2006 pension reform.   

Table 2: Forecast of key macroeconomic and budgetary variables under the baseline 
scenario 

% of GDP 

2011 

2012 

2013 

2014 

2015 

2016 

39.3 
37.6 

40.5 
38.3 

41.0 
38.2 

41.2 
38.4 

41.3 
38.5 

41.3 
38.5 

Revenues 
Current revenues 
Discretionary measures with impact on current 
revenue (1) 
Expenditure 
Real GDP growth (%) 
Nominal GDP growth (%) 
Potential GDP growth (%) 
Structural balance 
General government balance 

-0.2 
44.7 
1.8 
4.0 
1.7 
-3.5 
-3.4 
0.9 
1.0 
-0.1 
   (1) Measures clearly specified and committed to by governments according to the 2013 Stability programme. 
   (2) The standard revenue elasticity has been revised in line with the recently endorsed by EPC methodology for computing 
cyclically-adjusted balances. 
      Source: 
      Stability programme (SP); Commission 2013 spring forecast (COM); Commission services’ calculations. 

p.m CAB methodology revenue elasticity (2) 
p.m Apparent revenue elasticity 
p.m Output gap (% of pot. Output) 

-0.3 
44.9 
1.8 
3.9 
1.5 
-3.7 
-3.6 
0.9 
1.1 
-0.1 

0.6 
42.1 
1.7 
3.8 
1.3 
-3.6 
-2.8 
0.9 
1.7 
0.2 

0.0 
44.8 
2.2 
4.3 
2.1 
-3.5 
-3.4 
0.9 
1.0 
0.0 

0.8 
43.9 
0.8 
3.0 
1.4 
-4.1 
-3.3 
0.9 
1.7 
-0.3 

-0.6 
44.6 
1.4 
3.4 
1.4 
-3.8 
-3.7 
0.9 
0.9 
-0.4 

The general government deficit is projected to remain above the 3% of GDP reference value 
until  2016.  For  2015,  the  baseline  scenario  does  not  include  the  additional  capital  injection 
into Air Malta that is planned in 2015 according to the 2013 stability programme. It is thus 
assumed that the capital injection will not take place or be offset by measures in the opposite 
direction.  After  decreasing  by  ½  pp.  of  GDP  in  2012,  the  structural  balance  is  projected  to 
improve by around ½ pp. of GDP between 2012 and 2016. Thus, in the baseline scenario, the 
structural  effort  will  remain  insufficient  to  ensure  progress  towards  the  medium-term 
objective  of  a  balanced  budget  in  structural  terms.  According  to  the  baseline  scenario,  the 
general  government  debt  is  projected  to  increase  from  72.1%  of  GDP  in  2012  to  75.6%  of 
GDP by 2016. 

4. 

PROPOSED ADJUSTMENT PATH 

The  EDP  scenario  implies  the  correction  of  the  excessive  deficit  with  respect  to  both  the 
deficit and debt criteria by 2014. For a debt-based-EDP, the recommendation should embed a 
fiscal trajectory ensuring that, if followed, the debt complies with at least the forward looking 
element of the debt benchmark4 at the end of the recommendation period (this is a necessary 
condition  for  abrogation).  This  can  only  be  achieved  by  calibrating  the  necessary  structural 

4 

The  calculation  of  the  debt  benchmark  is  specified  by  the  Code  of  Conduct:  the  forward  looking 
element  of  the  debt  benchmark  is  fulfilled  when  the  debt-to-GDP  ratio  forecast  by  the  Commission 
services is below the debt benchmark for the year t+2. 

4 

 
 
 
                                                 
effort, which – on the basis of the underlying macro scenario – would lead to certain levels of 
nominal deficit ensuring a sufficiently diminishing debt-to-GDP ratio. Based on the baseline 
scenario,  compliance  with  the  forward  looking  component  of  the  debt  benchmark  in  2014 
(hence looking at the debt-to-GDP ratio in 2016) implies a nominal deficit target of no more 
than 2.7% of GDP in 2014. For 2013, the headline deficit target would be of 3.4% of GDP. 
The primary balance would be at -0.2% of GDP in 2013 and at 0.5% of GDP in 2014. The 
attainment of these targets is consistent with an improvement in the structural budget balance 
of  0.7  pps.  of  GDP  in  both  2013  and  2014.  From  72.1%  of  GDP in 2012, the  debt-to-GDP 
ratio would peak at 74% of GDP in 2014 before  decreasing to 72.2% of GDP by 2016.   

Based  on  the  Commission  2013  spring  forecast,  to  reach  the  above  mentioned  structural 
targets, the Maltese authorities would need to implement additional consolidation measures of 
0.4% of GDP in 2013 and ¾% of GDP in 2014 on top of the measures already included in the 
baseline scenario. These targets for the annual improvement in the structural budget balance 
take  into  account  the  need  to  compensate  for  the  negative  second-round  effects  of  fiscal 
consolidation  on  the  public  finances,  through  its  impact  on  GDP  growth.  They  also  assume 
that  a  possible  capital  injection  into  Air  Malta  for  2015  would  be  fully  compensated  by 
additional  consolidation  measures.  The  general  government  debt  is  projected  to  increase  to 
73.5% of GDP in 2013 and stabilize in 2014 as a consequence of the restored primary surplus.  

Table 3: Forecast of key macroeconomic and budgetary variables under the EDP 
scenario  

% of GDP 
Real GDP growth (%) 
Potential GDP growth (%) 
Structural balance 
General government balance 
p.m Output gap (% of pot. output) 
Source: 
Commission services’ calculations. 

2012 
0.8 
1.4 
-4.2 
-3.3 
-0.2 

2013 
1.2 
1.4 
-3.5 
-3.4 
-0.4 

2014 
1.6 
1.5 
-2.7 
-2.7 
-0.3 

The  deterioration  in  the  2012  budgetary  position  resulted  from  slippages  in  current 
expenditure, which suggests that the non-binding nature and short horizon of fiscal planning 
in Malta are not supportive of a sound fiscal position. In light of this, it would be important to 
underpin the adjustment path with a more binding and effective multiannual fiscal framework 
and  improved  monitoring  of  budgetary  execution  throughout  the  year.  The  setting  up  of  an 
independent body would help to ensure compliance with fiscal rules5. At the same time, fiscal 
consolidation  needs  to  be  designed  in  a  growth-friendly  manner  (including  by  conducting 
systematic expenditure reviews).  

5 

According to Article 6 of Council Directive 2011/85/EU of 8 November 2011, independent bodies or 
bodies  endowed  with  functional  autonomy  vis-à-vis  the  fiscal  authorities  of  the  Member  State  shall 
provide  reliable  and  independent  analysis  of  the  effective  and  timely  monitoring  of  compliance  with 
numerical  fiscal  rules.  Article  5  of  Regulation  No  473/2013  of  the  European  Parliament  and  of  the 
Council  of  21  May  2013  emphasises  the  role  of  independent  bodies  in  monitoring  and  assessing 
compliance with the national fiscal rules. 

5 

 
 
 
 
 
 
 
                                                 
5. 

CONCLUSIONS  

The 2013 Stability Programme of Malta sets out deficit targets for 2013 and 2014 that, in light 
of  the  Commission  2013  spring  forecast,  do  not  appear  credible.  In  particular,  the 
Commission  services  project  a  deficit  that  remains  above  the  reference  value  in  2013  and 
2014,  and  is  indeed  higher  than  the  2012  outturn.  The  lower  deficit  target  in  the  Stability 
Programme compared with the Commission services’ forecast mainly reflects a higher growth 
for current taxes that is not credibly justified6. For 2014, the Programme projects the deficit to 
decline further, but provides details only on some specific measures.  

On current information, a gradual correction of the excessive deficit  in Malta,  which would 
bring the deficit below the 3%-of-GDP reference value and ensure compliance with the debt 
reduction  benchmark  in  2014  seems  appropriate.  This  would  correspond  to  intermediate 
headline  deficits  of  3.4%  of  GDP  in  2013  and  2.7%  of  GDP  in  2014.  The  underlying 
improvement  in  the structural budget balance  implied by these  targets is 0.7 pps of GDP in 
both  2013  and  2014.  The  fiscal  measures  needed  on  top  of  those  already  included  in  the 
baseline  scenario  of  the  Commission  2013  spring  forecast  are  estimated  at  around  0.4%  in 
2013 and ¾% of GDP in 2014. 

Malta’s fiscal framework is quite flexible, and its non-binding nature and the short horizon of 
fiscal  planning  are  not  supportive  of  a  sound  fiscal  position.  It  is  important  to  underpin  the 
adjustment path by a more binding and effective multiannual fiscal framework.  

6 

According  to  Article  4.1  of  Council  Directive  2011/85/EU  of  8  November  2011,  the  macroeconomic 
and  budgetary  forecasts  by  Member  States  shall  be  compared  with  the  most  updated  forecasts  of  the 
Commission and, if appropriate, those of other independent bodies. Significant differences between the 
chosen macrofiscal scenario and the Commission’s forecast shall be described with reasoning. 

6