COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and stability programme for MALTA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Malta’s 2013 national reform programme and delivering a Council Opinion on Malta’s 2013 stability programme for 2012-2016
Date: 2013-05-29
Institutions: European Commission
Subjects: Malta, banking system, budget deficit, competitiveness, economic recession, energy supply, female work, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
SWD(2013) 368 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2013 national reform programme and stability programme for 
MALTA 

Accompanying the document 

Recommendation for a COUNCIL RECOMMENDATION  

on Malta’s 2013 national reform programme and delivering a Council Opinion on 
Malta’s 2013 stability programme for 2012-2016 

{COM(2013) 368 final} 

EN 

   EN 

 
 
 
 
  
 
TABLE OF CONTENTS 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Introduction .................................................................................................................. 5 

Economic developments and challenges...................................................................... 6 

Recent economic developments and outlook............................................................... 6 

Challenges .................................................................................................................... 7 

Assessment of policy agenda ....................................................................................... 9 

Fiscal policy and taxation............................................................................................. 9 

Financial sector .......................................................................................................... 17 

Education, labour market and social policies............................................................. 19 

Structural measures promoting growth and competitiveness..................................... 22 

Modernisation of public administration ..................................................................... 26 

Overview table ........................................................................................................... 29 

Annex ......................................................................................................................... 32 

2 

 
 
 
EXECUTIVE SUMMARY 

Economic Outlook 

The domestic economy is projected to outperform the euro area. In 2012, real GDP grew 
by  0.8%,  compared  with  a  0.6%  contraction  in  the  euro  area,  and,  according  to  the 
Commission services’ 2013 spring forecast, growth will continue to outperform the euro-area 
average,  accelerating  to  1.4%  in  2013  and  to  1.8%  in  2014.  Unemployment  is  projected  to 
remain low and stable, decreasing to 6.3% in 2013 and 6.1% in 2014.  

The  excessive  deficit  procedure  was  closed,  but  fiscal  consolidation  lost  momentum. 
According to the Commission services’ 2013 spring forecast, the general government deficit 
will remain above the 3%-of-GDP Treaty threshold in 2013-14. Government debt is above the 
60%-of-GDP threshold and is forecast to be on an increasing trend, rising from 72.1% of GDP 
in 2012 to 74.9% of GDP in 2014). 

Key Issues 

Malta  faces  important  entrenched  challenges  that  affect  the  sustainability  of  its  public 
finances  and  its  potential  growth,  and  it  was  one  of  the  countries  identified  by  the 
Commission  as  experiencing  macroeconomic  imbalances,  pertaining  in  particular  to  the 
financial sector and public finances.  

in 

the  2012 

implementing 

limited  progress 

Malta  made 
country-specific 
recommendations. On the positive side, in the area of public finances, adequate action has 
been  taken  towards  strengthening  tax  compliance  and  fighting  tax  evasion,  but  concrete 
results  are  yet  to  materialise.  Relevant,  albeit  insufficient,  measures  were  introduced  in  the 
labour market, in particular towards devising an early-school-leaving strategy, improving the 
links with education and training and encouraging female employment. Steps have also been 
taken  towards  improving  the  security  and  diversification  of  the  energy  supply.  Banking 
system reforms are in the pipeline, but concrete action has yet to be taken. At the same time, 
following  the  correction  of  the  excessive  deficit,  the  government  relaxed  its  fiscal  stance  in 
2012,  leading  to  a  notable  worsening  of  the  budget  deficit,  non-compliance  with  the  debt-
reduction and expenditure growth benchmarks and a significant deviation from the adjustment 
path  towards  the  medium-term  objective.  In  addition,  no  concrete  action  has  been  taken 
towards  strengthening  the  fiscal  framework,  reducing  the  debt  bias  in  corporate  taxation, 
further  reforms  of  the  pension  system  and  addressing  potential  risks  linked  to  the  wage 
indexation mechanism. Finally, measures taken in energy, climate and transport are far from 
sufficient in view of the scale of the challenges in these areas. The identified challenges have 
hence remained broadly unchanged over the past year. 

•  Public finances: The general government deficit exceeded the 3%-of-GDP reference 
value,  while  the  flexible  fiscal  framework  and  issues  with  tax  compliance  and  tax 
evasion  hinder  the  achievement  of  a  sound  fiscal  position.  In  the  long-term,  the 
sustainability  of  public  finances  is  still  at  risk  due  to  high  projected  age-related 
expenditure.  

3 

 
•  Labour market: Skills gaps continue to pose an obstacle to the efficient utilisation of 
human  capital.  While  there  was  an  increase  in  employment  in  all  segments  of  the 
labour  market,  including  among  older  workers  and  women,  the  female  employment 
rate remains the lowest in the EU (46.9% in 2012). 

•  Competitiveness:  Maintaining  external  competitiveness  is  essential  in  view  of  the 
very high trade openness of the economy. While Malta’s wage indexation mechanism 
has  characteristics  that  mitigate  its  negative effects,  it  could  still  pose  a  challenge  to 
the  flexibility  of  real  wages  and  thereby  on  competitiveness  and  labour  market 
adjustment in the event of a very adverse economic situation. 

•  Energy: Energy supply depends almost exclusively on imported oil, which, added to 
inefficiencies  in  distribution,  pose  an  obstacle  to  competitiveness.  Reaching  the 
national 2020 targets for energy and climate is still a significant way off, particularly 
in the transport sector. 

•  Financial  sector:  Near-term  risks  related  to  the  headline  size  of  the  banking  sector 
(nearly  800%  of  GDP)  appear  limited.  The  core  domestic  banks,  however,  are 
vulnerable  to  adverse  developments  on  the  real  estate  market  due  to  their  high 
exposure in the form of loans (over half of the entire lending portfolio) and collateral. 
Judicial  system  inefficiencies  could  hamper  the  efficient  enforcement  of  collateral 
with potentially negative consequences on the banking sector. 

. 

4 

 
1.  INTRODUCTION 

In May 2012, the Commission proposed a set of country-specific recommendations (CSRs)1 
for economic and structural reform policies in Malta. On the basis of these recommendations, 
the  Council  of  the  European  Union  adopted  six  CSRs  in  the  form  of  a  Council 
Recommendation.2 These CSRs concerned public finances, the labour market, education and 
training,  the  energy  system  and  financial  stability.  This  Staff  Working  Document  (SWD) 
assesses the state of implementation of these recommendations in Malta. 

The  SWD  assesses  policy  measures  in  light  of  the  findings  of  the  Commission’s  Annual 
Growth Survey 2013 (AGS)3 and the second annual Alert Mechanism Report (AMR),4 which 
were  published  in  November  2012.  The  2013  Annual  Growth  Survey  sets  out  the 
Commission’s  proposals  for  building  the  necessary  common  understanding  about  the 
priorities  for  action  at  national  and  EU  level  in  2013.  It  identifies  five  priorities  to  guide 
to  renewed  growth:  pursuing  differentiated,  growth-friendly  fiscal 
Member  States 
consolidation;  restoring  lending  to  the  economy;  promoting  growth  and  competitiveness; 
tackling  unemployment  and  the  social  consequences  of  the  crisis;  and  modernising  public 
administration.  The  2012  Alert  Mechanism  Report  serves  as  an  initial  screening  device  to 
determine  whether  macroeconomic  imbalances  exist  or  are  likely  to  emerge  in  Member 
States. It found positive signs that macroeconomic imbalances in Europe are being corrected. 
To ensure that a complete and durable rebalancing is achieved, Malta and 13 other Member 
States  were  selected  for  a  review  of  developments  in  the  accumulation  of  unwinding 
imbalances.5 

Against  the  background  of  the  2012  Council  Recommendation,  the  2013  Annual  Growth 
Survey and the 2012 Alert Mechanism Report, Malta presented updates of its national reform 
programme  (NRP)  and  of  its  stability  programme  on  30  April  2013.  These  programmes 
provide detailed information on progress made since July 2012 and on the future plans of the 
government.  This  information  provides  the  basis  for  the  assessment  made  in  this  Staff 
Working Document. 

The  national  reform  programme  was  prepared  partly  on  the  basis  of  consultation  with  the 
social partners and its implementation is subject to a bi-annual assessment. Both the national 
reform programme and the stability programme were approved by the Cabinet of Ministers. 
Malta  has  ensured  coherence  between  the  two  programmes,  notably  in  terms  of 
macroeconomic  scenario  and  inter-linkages  between  fiscal  and  other  macroeconomic  areas, 
and both programmes are consistent with the code of conduct and the guidance provided by 
the Commission. 

1  
2  
3  
4  
5  

COM (2012) 321 final of 30 May 2012 
OJ C 219 of 24 July 2012 
COM (2012) 750 final 
COM (2012) 751 final 
13  in-depth  reviews  were  published  on  10  April  2013.  While  selected  for  an  in-depth  review  in  the 
AMR,  Cyprus  was  ultimately  not  reviewed  under  the  Macroeconomic  Imbalance  Procedure  (MIP)  in 
view of the advanced preparations for a financial assistance programme. 

5 

 
                                                 
Overall assessment  

The analysis in this document leads to the conclusion that Malta has made limited progress on 
measures taken to address the CSRs of the Council Recommendation.  

On  the  positive  side,  the  Excessive  Deficit  Procedure  was  abrogated  after  the  general 
government deficit was brought below 3 % of GDP in 2011. The employment rate continued 
to improve in particular thanks to rising female participation in the labour market, while the 
construction of the electricity interconnector with Italy, which will contribute to the security 
and diversification of the energy supply, is under way. On the negative side, the fiscal stance 
was  relaxed  in  2012,  when  the  deficit  again  exceeded  the  3  %-of-GDP  Treaty  reference 
threshold, while there has been no substantial progress in ensuring the long-term sustainability 
of public finances. Malta remains far from meeting the national 2020 targets for energy and 
climate  and  no  progress  has  been  reported  as  regards  the  reform  of  the  wage  indexation 
mechanism. Overall, despite the adoption of some relevant measures, policy efforts have often 
lacked sufficient ambition.  

Challenges identified in July 2012 and reflected  in the 2013 Annual Growth Survey remain 
valid.  In  the  short  term,  the  main  challenges  are  to  put  the  public  finances  on  a  sustainable 
path in a credible way and to safeguard financial stability, while also addressing inefficiencies 
in the judicial system. In the medium to long term, it is essential to ensure the sustainability of 
public  finances  and  to  continue  diversifying  the  energy  system.  Strengthening  the 
competitiveness of the economy also requires ensuring better outcomes for the education and 
training system so as to meet labour market needs.  

2.  ECONOMIC DEVELOPMENTS AND CHALLENGES 

2.1. 

Recent economic developments and outlook 

Recent economic developments 

In 2012, real GDP grew by 0.8 %, driven by exports and public spending. International 
trade  remained  a  key  driver  of  economic  growth  in  2012,  despite  the  challenging 
environment,  also  owing  to  a  favourable  composition  of  exports  and  the  geographical 
orientation  of  trade,  in  particular  of  goods.  This  contributed  to  the  correction  of  Malta’s 
current  account  deficit  in  2012.  In  addition,  high  public  spending  somewhat  offset  the 
weakness  in  private  consumption  and  investment,  albeit  with  negative  consequences  for  the 
general government balance. The labour market performed better than the euro-area average 
with  relatively  strong  job  creation,  albeit  starting  from  low  employment  and  participation 
rates, while unemployment remained low and stable, reaching 6.4 % in 2012 (11.4 % for the 
euro area). Despite these positive developments, Malta’s inactivity rate remains the highest in 
the euro area. 

Economic outlook 

Economic  prospects  are  expected  to  improve  gradually  over  the  medium  term.  
According to the Commission services’ 2013 spring forecast, economic growth in Malta will 
continue to outperform the euro-area average. After moderating to 0.8 % in 2012, real GDP 
6 

 
growth is projected to accelerate to 1.4 % in 2013 and further to 1.8 % in 2014, underpinned 
by  gradual  recovery  in  domestic  demand.  Growth  is  expected  to  remain  job-rich  and 
employment  is  forecast  to  continue  increasing  at  a  relatively  fast  rate,  mainly  thanks  to 
catching  up  employment  rates  among  women  and  older  workers,  with  unemployment  and 
inactivity decreasing as a result. After spiking in 2012, price inflation is forecast to become 
more moderate, but to remain higher than the average for the euro area. 

The macroeconomic scenario underpinning the SP and the NRP is plausible. The Maltese 
stability programme and national reform programme share the same macroeconomic scenario. 
Projected real  GDP growth  for  2013-14 in the two  programmes  is  marginally  lower  than  in 
the  Commission  services’  2013  spring  forecast  on  the  back  of  slightly  weaker  domestic 
demand  and  slightly  less  favourable  labour  market  projections.  In  the  outer  years  of  the 
programme period, the growth outlook remains cautious and is in line with potential growth 
as estimated by the Commission services.  

The contribution of structural reforms to growth is estimated to increase after 2014. The 
programmes incorporate the positive impact of selected structural reforms on potential output. 
The  annual  impact  in  non-cumulative  terms  is  estimated  to  be  relatively  modest  at  0.13 
percentage points in 2013 before increasing to over 0.7 percentage points in 2014, thanks to 
the  launching  of  the  electricity  interconnector  with  Italy.  Thereafter,  the  positive  impact  of 
structural reforms is expected to moderate gradually, reaching 0.6 percentage points in 2017.  

2.2. 

Challenges  

The  Maltese  economy  faces  important  entrenched  challenges  that  affect  its  potential 
growth.  The  challenges  relate  to  the  areas  of  fiscal  consolidation  and  the  long-term 
sustainability  of  public  finances;  improving  competitiveness;  diversifying  the  energy  supply 
system and safeguarding financial stability. They have remained broadly unchanged over the 
past  year  and  are  consistent  with  the  policy  priorities  set  out  in  the  2013  Annual  Growth 
Survey  adopted  by  the  Commission  in  November  2012.  The  need  to  safeguard  financial 
stability and to ensure the sustainability of public finances were also identified as challenges 
to address macroeconomic imbalances in the 2013 in-depth review for Malta in the context of 
the Macroeconomic Imbalances Procedure (see Box 1). 

Pursuing fiscal consolidation and ensuring that public debt is put on a downward path 
remains  a  challenge.  Following  the  correction  of  the  excessive  deficit  in  2011,  the  fiscal 
consolidation  lost  momentum  in  2012  and  the  deficit  again  exceeded  the  Treaty  threshold, 
moving  the  structural  balance  further  away  from  the  medium-term  objective  (MTO)  of  a 
balanced  position.  Additional  short-term  fiscal  challenges  are  the  non-binding  nature  of  the 
medium-term  fiscal  framework,  which  does  not  help  to  anchor  the  fiscal  consolidation 
strategy, and the tax system, which is characterised by low compliance and high tax evasion, 
also  due  to  the  phenomenon  of  undeclared  work,6  while  the  debt  bias  in  corporate  taxation 
remains.  The  long-term  sustainability  of  public  finances  remains  at  risk  in  view  of  the 

6  

Manwel Debono (2012), Malta, May 2012 – Undeclared Work Update, Malta European Employment 
Observatory; 
http://www.eu-employment-observatory.net/resources/reports/UndeclaredWorkUpdate-
Malta.pdf. 

7 

 
                                                 
projected above-EU-average increase in age-related expenditure,  in particular  as regards  the 
pension  system  and  healthcare.  Very  low  labour  market  participation  of  older  workers  and 
women, together with the lack of a comprehensive active ageing strategy, add to the scope of 
the challenge.  

Ensuring that the domestic economy remains competitive is key in view of Malta’s high 
trade openness. Given its size and geographical situation, Malta is very reliant on trade for 
growth  and  to  satisfy  domestic  demand.  Therefore  it  is  essential  that  the  economy  remains 
externally competitive. This entails ensuring that wages grow in line with productivity. While 
it does not appear to have been a major hindrance to overall labour market performance so far, 
the characteristics of the automatic cost-of-living adjustment (COLA) pose a potential risk to 
the  economy,  in  particular  during  strongly  adverse  phases  of  the  economic  cycle,  by 
hampering  the  adjustment  of  real  wages,  in  turn  impeding  reaching  labour  market 
equilibrium.  Further  promoting  research  and  innovation  is  also  key  for  maintaining 
competitiveness going forward.  

There remains large scope for improving the utilisation of human capital. Despite notable 
improvements in recent years, in particular as regards women, the employment rate in Malta 
is still low as the impact of parenthood remains significant.7 Skills gaps that have emerged as 
a  result  of  the  structural  changes  in  the  economy  represent  an  obstacle  to  an  efficient 
utilisation of human capital. Particular challenges include a high, albeit declining, rate of early 
school  leaving,  a  low  achievement  of  basic  skills,  a  still  modest  level  of  tertiary  education 
attainment, and a vocational training system in need of modernisation. 

Features  of  the  energy  and  transport  system  continue  to  pose  a  challenge  to  the 
economy’s  competitiveness  and  its  environmental  performance.  Energy  supply  depends 
almost exclusively on imported oil, making the country vulnerable to increases in oil prices 
and putting pressure on the external trade balance, while the share of energy from renewable 
sources is still marginal. Inefficiency in energy distribution also contributes to high electricity 
tariffs for companies, in turn posing an obstacle to competitiveness. There remains significant 
room  for  improving  efficiency  and  cutting  emissions  in  the  transport  sector,  which  is  of 
particular importance for achieving the climate target and, at the same time, generating green 
growth. Finally, an inadequate waste recycling infrastructure delays progress towards Malta’s 
2020 targets. 

Preserving the stability of the financial sector is a continuous challenge for the domestic 
economy. The banking sector has been demonstrating resilience throughout the international 
financial  crisis.  However,  domestic  banks  may  benefit  from  stronger  capital  buffers  as  the 
coverage  of  non-performing  loans  by  provisions  remains  relatively  low.  This  is  particularly 
important  in  view  of  the  banks’  very  high  exposure  to  the  real  estate  market,  both  in  their 
lending  portfolios  and  through  collateralisation,  and  the  elevated  corporate  indebtedness.  In 
addition,  the  very  large  size  of  the  financial  sector,  which  has  become  a  main  engine  for 
growth for the domestic economy, raises supervisory challenges. Moreover, shortcomings in 

7  

The employment gap relative to the EU average is particularly large for women and older workers. 

8 

 
                                                 
the  judicial  system  may  hamper the  swift  recovery  of  collateral.  This  could  put  pressure  on 
banks’ balance sheets and affect lending decisions. 

Box 1: Summary of the 2013 in-depth review under the Macroeconomic Imbalance Procedure 

The analysis in the in-depth review identified imbalances in Malta’s financial sector, in particular as 
regards its exposure to the real estate market as well as in public finances, in particular as regards 
their medium- to long-term sustainability. The main observations of the report are: 

•  After posting sizeable deficits for most of the past decade, the current account balance has 
adjusted structurally and has been on an upward path since 2009. Additional factors, such as 
a  positive  net  international  investment  position  and  Malta’s  position  as  a  net  external 
creditor contribute to the sustainability of the external position. 

•  The level of private debt is high, but there are mitigating factors. Starting from a low level, 
household  debt  has  increased  rapidly  in  recent  years,  mainly  due  to  growing  mortgage 
lending. Nevertheless, households continue to hold very sizeable net financial wealth. The 
gross corporate debt and leverage raise some concern, but potential risks are mitigated by a 
number of factors such as the mainly long-term structure of liabilities and the diversification 
of financing sources. 

•  The long-term sustainability of public finances is at risk as the projections for both pension 
and healthcare expenditure in Malta significantly exceed the EU average. The government 
is  not  experiencing  problems  with  debt  financing,  thanks  to  high  domestic  demand  for 
issued securities, but sizeable state guarantees to state-owned companies, some of which are 
not in a sound financial state, represent a risk.  

•  The  majority  of  the  very  large  banking  sector  is  internationally-oriented  and  has  very 
limited links with the domestic economy, therefore not posing immediate risks for domestic 
stability.  The  domestically-oriented  banks,  while financially  stable,  have  high exposure  to 
the real estate market, while the activities of the relatively small non-core domestic banks 
are riskier. 

•  Despite  some  overvaluation  and  possible  oversupply  in  the  real  estate  market,  sharp 
downward  adjustments  in  prices  in  the  short  term  are  not  expected  as  demand  is  robust, 
while developers’ balance sheets are strong enough to allow them to abstain from selling at 
unfavourable  prices,  even  if  estimates  suggest  that  there  may  be  oversupply  in  some 
segments of the market. 

3.  ASSESSMENT OF POLICY AGENDA  

3.1. 

Fiscal policy and taxation 

Budgetary developments and debt dynamics  

After loosening the fiscal stance in 2012, the authorities plan to bring the deficit below 
the 3 % of GDP threshold in 2013. After having reached 3.3 % of GDP in 2012, from 2.8 % 
of GDP in 2011, Malta plans to correct the excessive deficit in 2013 and to continue reducing 
the  deficit  gradually,  to  0.8  %  of  GDP  in  2016.  The  primary  surplus  is  to  improve  from  a 
deficit  of  0.2  %  of  GDP  in  2012  to  a  surplus  of  2.4  %  in  2016.  The  planned  fiscal 
consolidation implies gradual progress towards the medium-term objective, which is defined 
9 

 
as a balanced position in structural terms (unchanged from the previous programme), although 
the actual achievement of the medium-term objective is not envisaged within the programme 
period.  The  medium-term  objective  more  than  adequately  reflects  the  objectives  of  the 
Stability and Growth Pact. 

The  higher-than-planned  deficit  outcome  for  2012  is  due  mainly  to  expenditure 
slippages, while the deficit target for 2013 relies on revenue buoyancy. The 2012 deficit 
outturn is 1.1 pps. of GDP higher than the target set in the previous programme. The worse-
than-planned  outcome  is  due  mainly  to  higher current  expenditure,  especially  compensation 
of  employees  and  social  transfers,  while  current  revenues  were  overall  in  line  with  the 
projections, even though with a different composition of direct and indirect revenues. Current 
expenditure was 1.3 % of GDP higher than in 2011, 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 operator8. For 2013, the 
deficit target of 2.7 % of GDP is 1 percentage point higher than in the previous update, also 
against the background of a downward revision in real GDP growth (to 1.4 % from 2.0 % in 
the  previous  programme).  The  target  incorporates  the  impact  of  the  2013  budget  that  was 
endorsed  by  Parliament  in  April  20139,  which  includes  expansionary  measures  on  both  the 
revenue and expenditure side, with a net deficit-increasing impact of 0.3 % of GDP (see Box 
2).  The  Commission  services’  2013  spring  forecast  projects,  under  a  no-policy-change 
assumption, the 2013 deficit to remain above the reference value in 2013, at 3.7 % of GDP, 
with  the  difference  with  the  authorities’  target  being  explained  by  lower  growth  for  current 
taxes,  especially  indirect  taxes,  in  spite  of  an  underlying  macroeconomic  scenario  that  is 
broadly  similar  to  that  in  the  stability  programme.  For  2014,  the  difference  between  the 
stability programme target and the Commission services forecast widens to 1.5 pps of GDP. 

There  are  clear  risks  that  the  deficit  outcomes  could  be  worse  than  targeted.  The 
projected  dynamic  increase  in  tax  revenues  in  2013-14,  especially  as  regards  indirect  taxes, 
does  not  appear  to  be  fully  explained  by  the  underlying  macroeconomic  scenario,  nor  is  it 
underpinned by measures10. The programme provides details on some specific items only (see 
Box  2).  There  is  a  risk  of  slippages  in  the  public  sector  wage  bill,  notwithstanding  the 
continued  commitment  to  the  restrictive  policy  on  recruitment  in  the  public  sector,  and  in 
intermediate  consumption,  given  previous  years’  experience,  particularly  in  pharmaceutical 
expenditure. On the other hand, as has frequently occurred in the past, net capital expenditure 
could  be  lower  than  planned  and  act  as  a  buffer.  A  final  risk  factor  relates  to  the  financial 
situation of the energy provider Enemalta, which could require additional subsidies. 

8  

The programme does not identify these items as one-offs. According to the programme, one-off measures 
in 2012 amounted to 0.1% of GDP. 

9   At  the  end of November  2012,  the previous  government  presented  the draft  2013 budget  which failed  to 
receive parliamentary endorsement. In April 2013, the new government presented and approved the 2013 
budget,  which  was  broadly  similar  to  the  one  that  was  originally  presented  in  November  2012  and  was 
based on a deficit target for 2012 of 2.3% of GDP, 1 pp. lower than the notified outturn. 
In  2014,  the  difference  in  growth  projections  is  marginal  but  the  composition  is  different,  with  the 
programme assuming a stronger pace of job creation. 

10  

10 

 
                                                 
In 2012, the structural deficit increased by ½ pp. of GDP and the structural effort will 
remain  insufficient  in  2013-14.  The  worsening  of  the  structural  balance  in  2012  implies  a 
significant  deviation  from  the  adjustment  path  towards  the  medium-term  objective.  The 
programme  plans  an  annual  improvement  in  the  (recalculated)  structural  balance11  of  just 
below ¾ pps. of GDP on average over the period 2013-2016. This is in line with the 0.5 pps. 
benchmark  in  the  Stability  and  Growth  Pact  for  the  annual  pace  of  progress  towards  the 
medium-term objective, but the effort is strongly frontloaded (in 2013 it is planned to be at 
around  1½  pp.  of  GDP).  By  contrast,  according  to  the  Commission  services’  2013  spring 
forecast,  on  a  no-policy-change  basis,  the  improvement  in  the  structural  balance  in  2013 
would be much lower, at just ¼ pp. of GDP, and only stemming from a reduced contribution 
from  one-off  measures;  in  2014,  it  would  be  marginal.  Similarly,  the  growth  rate  of 
government expenditure, net of discretionary revenue measures, is expected to contribute to 
the  annual  structural  adjustment  towards  the  medium-term  objective  by  0.5  pp.  of  GDP 
according  to  the  plans  in  the  stability  programme  (except  in  2015)  but  not  according  to  the 
Commission services' forecast. In the latter, over 2012-2014, the growth rate of government 
expenditure,  net  of  discretionary  revenue  measures,  is  above  the  lower  rate  under  the 
expenditure benchmark (equal to 0.24 % in 2012-13 and 0.57 % in 2014-16). On the basis of 
an overall assessment of Malta's budgetary plans, with the structural balance as a reference, 
and including an analysis of expenditure net of discretionary revenue measures, the planned 
adjustment  path  towards  the  medium-term  objective  seems  to  be  appropriate,  albeit  heavily 
frontloaded.  However,  the  Commission  services’  2013  spring  forecast  projects  a  further 
significant deviation from the adjustment path towards the MTO in 2013-14.  

The  general  government  gross  debt  ratio  is  planned  to  continue  increasing  until  2014. 
From 72.1 % of GDP in 2012, the general government gross debt ratio is planned to increase 
to 74.2 % of GDP in 2014 under the expected continued influence of both the snow-ball effect 
and  the  stock-flow  adjustment  (in  particular  in  2013,  on  account  of  the  planned  equity 
injection into Air Malta). Starting from 2015, the debt would decrease helped by increasing 
primary surpluses and a debt-decreasing stock-flow adjustment. According to the Commission 
services’ 2013 spring forecast, the debt ratio is projected to reach 74.9 % of GDP by 2014. 
The difference with the programme targets is due to a lower expected primary surplus, partly 
offset  by  a  higher,  debt-increasing  stock-flow  adjustment  in  both  years  (reflecting  also 
different  assumptions  regarding  the  impact  of  guarantees  to  EFSF  disbursements,  bilateral 
loans  to  Greece  and  capital  contributions  to  the  ESM).  The  same  risks  highlighted  for  the 
deficit targets apply to the programme's plans for the debt projections. Moreover, the stock-
flow  adjustment  could  well  be  higher  than  projected  in  the  programme,  given  that 
government-guaranteed  debt  in  Malta  is  high  (17.3  %  of  GDP  in  2012)  as  compared  with 
other Member States, 60 % of which is accounted for by the public energy utility corporation 
(Enemalta). Following the correction of the excessive deficit in 2011, Malta is in a three-year 
transition  period  as  regards  the  applicability  of  the  debt  reduction  benchmark,  starting  in 
2012.  According  to  both  the  plans  in  the  stability  programme  and  the  Commission  service 
forecast, Malta did not make sufficient progress towards compliance with the debt criterion in 

11  

Cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
services  on  the  basis  of  the  information  provided  in  the  programme,  using  the  commonly  agreed 
methodology. 

11 

 
                                                 
2012  and  thus  risks  being  put  in  EDP  if  corrective  measures  are  not  taken  and  it  is  also 
projected as failing to comply in 2013-14.  

Overall,  the  2012  country-specific  recommendation  in  the  area  of  fiscal  consolidation 
was not implemented, as the 2012 outturn was worse than targeted and above the 3 %-of-
GDP  reference  value,  thus  implying  a  deviation  from  the  adjustment  path  towards  the 
medium-term  objective.  In  addition,  the  measures  underpinning  the  strategy  from  2013 
onwards are not all outlined in the programme. The programme plans a broadly appropriate 
pace  of  adjustment  towards  the  medium-term  objective  and  a  gradual  decrease  in  the  debt 
ratio after 2014. By  contrast,  the  Commission services'  2013 spring forecast  projects only a 
marginal improvement in the structural balance and a continued upward path for the debt ratio 
in 2013-14.  

12 

 
Box 2. Main budgetary measures (% of GDP) 

  Revenue 

Expenditure

2012 

• 

efficiency 

Increased 
revenue 
collection  (0.5  %),  mostly  pecuniary 
incentives  to  reduce  VAT  arrears  (0.2 
%; one-off) 

in 

•  Concession  fees  from  the  local  lottery 

operator (0.6 %; one-off) 

•  Pension reform (0.1 %) 
• 

Increase  in  registration  tax  for  vehicles 
Euro 1 to 3 and older (0.1 %) 
Increase in excise duty rates (0.1 %) 

tax 

relief 

for  parents  with 

• 
•  Direct 

•  Net  savings  in  social  transfers  (-0.1  %) 
resulting  from  efforts  to  curb  benefit  fraud 
and the gradual impact of the 2006 pension 
reform,  partly  offset  by  measures  targeted 
at  supporting  families  with  children  and 
elderly aged over 80  

•  Subsidy to the energy provider (0.3 %) 
• 

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

dependent children (-0.1 %) 

2013 

• 

efficiency 

Increased 
collection (0.2 %) 
•  Pension reform (0.2 %) 
•  Revision  in  registration  tax  for  cleaner 

revenue 

in 

• 

private vehicles (-0.1 %) 
Increase in several excise duty rates (0.1 
%) 

•  Revision in income tax bracket (-0.2 %) 

•  Net  savings  in  social  transfers  (-0.2  %) 
resulting  from  the  gradual  impact  of  the 
2006  pension  reform,  partly  offset  by 
measures  targeted  at  supporting  families 
with children 

•  Restructuring  of  Air  Malta 

(equity 

acquisition) (0.6 %) 

2014 

•  Pension reform initiatives (0.1 %) 
• 

Increase in several excise duty rates (0.2 
%) 

•  Savings  in  social  transfers  resulting  from 
the  gradual  impact  of  the  2006  pension 
reform (-0.3 %) 

•  Revision in income tax bracket (-0.2 %) 

•  Restructuring  of  Air  Malta 

(equity 

acquisition) (0.2 %) 

2015 

•  Pension reform initiatives (0.1 %) 
• 

Increase in several excise duty rates (0.2 
%) 

•  Savings  in  social  transfers  resulting  from 
the  gradual  impact  of  the  2006  pension 
reform (-0.2 %) 

•  Revision in income tax bracket (-0.2 %) 

•  Restructuring  of  Air  Malta 

(equity 

acquisition) (0.6 %) 

2016 

•  Pension reform initiatives (0.1 %) 

•  Savings in social transfers resulting from the 
the  2006  pension 

impact  from 

gradual 
reform (-0.2 %) 

  Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national 

authorities. A plus sign indicates that revenue / expenditure increases as a consequence of the measure. 
The degree of detail reflects the information made available in the stability programme.  

• 

13 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term sustainability 

The  sustainability of public finances  appears to be more challenging in the medium to 
long term. Government debt is above the 60 % of GDP threshold and on an increasing trend 
(72.1  %  of  GDP  in  2012,  projected  to  rise  to  74.9  %  of  GDP  in  2014  according  to  the 
Commission services' 2013 spring forecast). Medium-term debt projections (see Graph below 
Table  V  in  annex)  indicate  that  full  implementation  of  the  programme  could  put  debt  on  a 
downward path by 2020, but it would still be above the 60 % of GDP reference value. Malta 
does  not  appear  to  face  a  risk  of  fiscal  stress  in  the  short  term,  but  the  sustainability  risk 
increases in the medium and long term, due to a combination of a worsened initial budgetary 
position  and  the  budgetary  impact  of  ageing.  Risks  would  increase  if  the  structural  primary 
balance12  reverted  to  the  lower  values  observed  in  the  past  decade.  The  long-term 
sustainability of public finances would benefit from reducing the gross government debt and 
containing the increase in age-related expenditure in the long run. 

Further  reforms  of  the  pension  system  in  Malta  could  help  to  curb  the  projected 
long-term  increase  in  age-related  expenditure.  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.  The 
legislated increases in the retirement age are rather slow. Compared with other EU Member 
States,  the  statutory  retirement  age  in  2012  was  still  among  the  lowest  for  both  men  and 
women. The retirement age is set to gradually reach 65 years for both genders only in 2027, 
whereas  16  Member  States  will  already  have  reached  or  exceeded  this  level  in  2020. 
Moreover,  no  further  increases  are  envisaged  after  reaching  65  years,  whereas  by  2060  14 
Member  States  will  have  legislated  a  retirement  age  of  67  years  or  higher.  The  2013  NRP 
states  that  the  authorities  do  not  see  urgency  in  accelerating  the  legislated  increase  in  the 
retirement age and linking it to life expectancy as the average exit age from the labour market 
is expected to increase faster than life expectancy until 2030. Nevertheless, it is important to 
note  that  delaying  action  raises  intergenerational  equity  concerns  as  it  would  put  the  entire 
adjustment burden on those retiring after 2030.  

Policy  action  taken  so  far  is  insufficient  to  ensure  the  long-term  sustainability  of  the 
pension  system.  In  2012,  following  advice  from  an  independent  Pensions  Working  Group, 
the  government  set  up  a  task  force  to  raise  the  overall  financial  literacy  of  the  Maltese 
population  and  a  pensions  strategic  unit  to  examine  pension  reform  options.  Legislation  as 
regards  the  introduction  of  a  third  pillar  to  the  pensions  system  has  been  approved  by 
Parliament, but has not yet come into force. In addition, discussions have been held with the 
social partners, but so far no concrete proposals for further reform have been put forward and 
there  has  been  no  progress  on  implementing  the  specific  elements  outlined  in  the  relevant 
2012 Council Recommendation for Malta, namely accelerating the legislated increase in the 
statutory  retirement  age,  linking  it  to  life  expectancy  and  encouraging  private  pensions 

12  
The government budget balance cyclically adjusted, net of one-off and temporary measures and interest 
payments. The actual primary balance may be a misleading indicator since it also reflects the temporary effects 
of  the  cyclical  deviations  of  output  from  its  underlying  trend.  The  structural  primary  balance  allows  to 
disentangle these temporary influences of the output gap on the government’s primary balance and get a clear 
picture of the budgetary performance. 

14 

 
                                                 
savings.  Raising  the  employment  rate  of  older  workers,  although  insufficient  on  its  own, 
could  also  contribute  to  improving  the  sustainability  of  public  finances.  To  this  end,  the 
government  introduced  legislative  changes  to  encourage  working  pensioners  via  a  reduced 
income tax rate (at 15 % on work income) but has not yet presented an active ageing strategy. 
Overall, limited progress has been registered in the implementation of this CSR.  

Sustainability  pressures  could  also  arise  from  health-related  spending,  where  there  is 
scope for efficiency increases. Malta records one of the highest projected increases in the EU 
for healthcare (see Box 3) and is faced with challenges with respect to the performance of the 
health  system.  Compared  with  other  Member  States,  Malta  devotes  little  resources  to 
ambulatory care and has limited public primary care provision with few general practitioners 
and  nurses.  In  the  long  run,  limited  availability  of  ambulatory  care  may  lead  to  increasing 
public expenditure on hospital care. 

Box 3. Healthcare 

According  to  the  2012  Fiscal  Sustainability  Report  and  the  2012  Ageing  Report,  Malta 
faces an above-EU-average need for structural fiscal adjustment in  the area  of  healthcare. 
While public spending on healthcare is at 5.7 % of GDP and below the EU average of 8.0 
% of GDP, its projected increase until 2060 is estimated at between 2.9 and 3.6 % of GDP 
(1.1  to  1.7  %  in  the  EU),  driven  by  demographic  and  non-demographic  factors13.  An 
additional spending increase of +1.0 % of GDP, depending on the scenario, can be expected 
in the area of long-term care (+1.6 % of GDP in the EU).  

Overall, the Maltese population enjoys a relatively high life expectancy, although there is 
scope  for  reducing  infant  and  amenable  mortality  rates.14  Public  healthcare  provision  is 
universal  and  largely  free  at  the  point  of  use.  However,  supply  of  cost-effective  primary 
care services is limited as the number of nurses and general practitioners per capita and the 
share of general practitioners in all physicians is relatively low.15 At the same time, while 
formally in place, the system of general practitioners acting as gatekeepers to further levels 
of  care  is  often  bypassed.  Data  collection  and  monitoring  of  system  performance  (health 
needs,  outputs  and  quality  of  outputs)  is  also  very  limited.  These  factors  point  to 
bottlenecks  in  the  provision  of  primary  care  services  and  add  to  higher  waiting  times  for 
hospital care. 

• 

at 

According to the Ageing Working Group reference scenarios, as published in the 2012 Ageing Report, 
http://ec.europa.eu/economy_finance/publications/european_economy/2012/2012-ageing-

13  
available 
report_en.htm. 
14  
Infant mortality in Malta stands at 5.5 per 1.000 life births (4.1 in EU), amenable or avoidable mortality 
rates,  i.e.  those  that  could  be  reduced  in  the  presence  of  timely  and  effective  care,  are  high  in  a  series  of 
important causes of deaths (AMIEHS, 2011, http://amiehs.lshtm.ac.uk/). 
15  
and the share of general practitioners in all physicians is 21 % (31 % in EU). 

In  Malta,  there  are  approximately  71.2  general  practitioners  per  100.000  inhabitants  (99.3  in  the  EU) 

15 

 
 
 
                                                 
Fiscal framework 

The  absence  of  a  binding  fiscal  framework  undermines  the  credibility  of  the 
government’s  fiscal  strategy.  The  medium-term  budgetary  framework  is  non-binding  and 
there  are  no  fiscal  rules  to  ensure  that  the  government’s  consolidation  strategy  is  upheld. 
Malta has not yet transposed Directive 2011/85/EU on budgetary frameworks.16 In addition, a 
structural  budget  balance  rule,  as  provided  for  in  the  Treaty  on  Stability,  Coordination  and 
Governance,  has  not  yet  been  introduced  in  the  legislation.  The  stability  programme 
announces  a  reform  of  the  budgetary  framework  with  a  view  to  making  it  more  binding 
through the introduction of fiscal rules. It also announces plans to set up a Fiscal Council, but 
concrete action has yet to be taken in these areas. 

Tax system 

Some measures have been introduced to improve tax compliance, but concrete gains are 
yet  to  materialise.  In  2012,  the  Council  recommended  that  the  Maltese  authorities  to 
strengthen  tax  compliance,  fight  tax  evasion  and  reduce  incentives  towards  indebtedness  in 
corporate  taxation.  As  regards  international  tax  compliance  and  tax  evasion,  a  peer  review 
coordinated  by  the  OECD  gave  a  positive  assessment  of  Malta’s  legal  and  regulatory 
framework for the exchange of information17, and recommended that it continue to develop its 
exchanges of information with all relevant partners. Malta also signed the Council of Europe - 
OECD  Mutual  Assistance  Treaty  in  October  2012  and  concluded  a  number  of  agreements 
with international tax authorities to facilitate the exchange of information. The 2013 national 
reform  programme  announces  a  sector  analysis  and  the  development  of  new  audit  tools  to 
identify areas for improvement. The housing rental sector in particular has been identified as 
an  important  source  of  tax  evasion  and  relevant  measures  are  in  the  pipeline.  In  addition, 
staffing  capacity  of  the  relevant  authorities  is  being  strengthened  and  the  departments 
responsible  for  VAT,  inland  revenues  and  customs  tax  collection  are  being  merged.  While 
these  measures  are  relevant,  the  credibility  of  the  policy  plans  and  their  medium-term 
effectiveness will depend on proper implementation. 

Tax incentives for companies to take on debt are still very high. In 2012, Malta stood out 
as  the  country  with  the  second-highest  gap  between  the  tax  treatment  of  debt  and  equity 
financing of new investment, due to the fact that the corporate income tax system allows for 
the tax deductibility of interest payments on debt, but not for equity financing. This debt bias 
may lead to excessively high corporate leverage, as also discussed in the 2013 in-depth review 
for Malta, and inefficient allocation of capital. Still, no relevant policy action has been taken 
in this area. 

The legal deadline for transposition is 31 December 2013. However, Heads of State and Government of 

16  
euro area member states committed to transpose by end 2012. 
17  
of 
available 
Purposes. 
http://www.oecd.org/countries/malta/peerreviewreportofmalta-phase1legalandregulatoryframework.htm  

The ‘phase 1’ peer review carried out under the OECD's Global Forum on Transparency and Exchange 
at 
Information 

information 

More 

Tax 

on 

16 

 
                                                 
The  need  for  fiscal  consolidation  could  provide  an  opportunity  to  streamline  the  tax 
system  in  Malta.  In  addition  to  potential  revenue  from  improved  tax  compliance,  fiscal 
consolidation  can  be  pursued  by  broadening  the  tax  bases  (in  particular,  the  scope  of  VAT 
exemptions could be reduced) or increasing taxes that are less detrimental to growth, such as 
recurrent property taxes. Malta applies only a transaction tax on immovable property, and no 
recurrent  taxes.  Broadening  the  tax  base  could  render  public  finances  less  vulnerable  to 
sectoral changes resulting from EU-level tax reforms.18 

3.2. 

Financial sector 

The  financial  sector  remained  resilient  throughout  the  crisis,  but  there  are  challenges. 
The  banking  system  appears  well-positioned  to  ensure  sufficient  access  to  financing  for 
SMEs. Profitability and solvency ratios remained stable during the crisis, and no bank needed 
to  resort  to  government  support.  Recourse  to  Eurosystem  funding  has  also  been  limited  as 
banks maintained sufficient liquidity. Nevertheless, the domestic banks’ high exposure to the 
real  estate  sector  continues  to  pose  a  challenge.  Furthermore,  the  large  size  of  the  overall 
financial  sector  relative  to  the  size  of  the  economy  warrants  close  monitoring.  In  2012,  the 
Council  Recommendation  for  Malta  called  on  the  authorities  to  strengthen  loan-loss 
provisioning in the banking sector and mitigate potential risks arising from its exposure to the 
real  estate  market.  The  planned  policy  response  is  relevant  but  incomplete,  leading  the 
Commission to the conclusion that Malta has made only some progress towards implementing 
this CSR. 

The  banking  sector  appears  robust,  but  its  large  size  warrants  strict  supervision  to 
prevent the accumulation of imbalances. The banking sector is very large in proportion to 
the  domestic  economy  with  total  assets  of  around  EUR  53.5  billion  (790  %  of  GDP)  at  the 
end  of  2012,  up  by  4.2  %  from  end-2011.  As  highlighted  in  the  2013  in-depth  review  for 
Malta,  potential  risks  arising  from  the  size  of  the  sector  are  limited  by  the  fact  that  the 
majority of assets belong to internationally-oriented institutions with very limited exposure to 
the domestic economy. Despite suffering an increase in non-performing loans, in particular in 
the  corporate  portfolio,  the  core  domestic  banks’19  profitability  and  solvency  ratios 
strengthened  in  2012.  These  banks  apply  a  relatively  conservative  banking  model  and  their 
aggregate  loan-to-deposit  ratio  fluctuates  between  70  %  and  75  %.  Their  exposure  to  non-
residents  is  limited  with  only  around  8  %  of  total  assets  invested  in  euro-area  government, 
institutional  and  corporate  securities  at  the  end  of  2011.  Exposure  to  EU/IMF  programme 
countries represents about 2.5 %, predominantly in the form of placements with banks.20  

18  
The remote  gaming  industry employs  about  4%  of  the  total  workforce. Malta  currently  exempts  such 
activities  from  VAT.  However,  as  from  2015,  VAT  must  be  charged  on  the  basis  of  where  the  customer  is 
located  which  could  impact  Malta's  attractiveness  for  the  industry  with  potentially  negative  consequences  for 
corporate tax collection and employment. 
19  
According to the methodology of the Central Bank of Malta, these are the banks that are most relevant 
for domestic financial stability because their main business is collecting resident deposits and providing loans to 
residents. They account for around 97% of all resident loans and 96 % of all resident deposits. 
20  
See Central Bank of Malta, Financial Stability Report 2011, September 2012. 

17 

 
                                                 
While immediate risks for financial stability appear to be limited, it is important that the 
banking  sector,  including  the  non-core  domestic  and  international  banks,  remains 
subject  to  strict  supervision.  Adverse  developments  in  these  banks  may  still  impact  the 
jurisdiction's international reputation, thereby affecting confidence in the banking system and 
reducing  future  growth  prospects.  To  this  end,  the  setting-up  of  a  Joint  Financial  Stability 
Board 21 in January 2013 is a welcome step. The Board will have a broad mandate to monitor 
risks  to  financial  stability  and  recommend  relevant  policy  measures.  However,  these 
recommendations, which are to be based on criteria defined by the European Systemic Risk 
Board, are non-binding and the Financial Services Authority, the regulator and supervisor of 
the  financial  services  industry,  is  legally  bound  only  to  consider  them.  Therefore,  while 
relevant, the level of credibility and ambition of this policy action remains to be assessed. 

Policy plans to safeguard financial stability are in the pipeline. The 2013 in-depth review 
for  Malta  highlights  potential  risks  to  financial  stability  related  to  the  exposure  to  the  real 
estate market and the low level of provisions for non-performing loans. Talks on regulatory 
action  to  address  these  risks  are  under  way  between  the  Malta  Financial  Services  Authority 
and  the  Central  Bank  of  Malta.  In  particular,  plans  include  classifying  risk  related  to  real 
estate exposures under Pillar II22 of the Basel II accord, which requires banks to increase their 
awareness  of  such  risks  and  take  appropriate  action  to  limit  them,  while  also  giving 
supervisors more authority to monitor and intervene. To strengthen loan-loss provisioning, the 
towards  a  more  forward-looking  model  for  reporting 
authorities  envisage  moving 
impairments. As a counter-cyclical tool, this will allow banks to be better prepared for times 
of  economic  stress.  Moreover,  the  Malta  Financial  Services  Authority  envisages  further 
amending banking regulation to require that institutions with already high level of delinquent 
assets  to  further  increase  provisions  in  order  to  create  an  additional  safety  buffer.  These 
reforms  are  still  at  a  drafting  stage,  but  the  authorities  plan  to  implement  them  by  end-
September.  They  are  relevant,  as  they  would  contribute  to  safeguarding  banking  stability. 
While  the  authorities  insist  that  any  action  should  be  introduced  gradually  to  minimise  any 
negative  impact  on  economic  activity,  unnecessary  delays  could  undermine  the  potential 
boost to confidence the measures could bring. Therefore, the level of credibility and ambition 
of the policy plans will depend on their timely and thorough implementation. 

Access  to  financing  for  Maltese  small  and  medium-sized  enterprises  (SMEs)  can  be 
considered adequate. Policy action to ensure that SMEs have sufficient access to financing 
has been satisfactory. The government has come up with an appropriate portfolio of enterprise 
support schemes that facilitate access to finance, such as Microfinance, loan guarantees and 
the  Joint  European  Resources  for  Micro  to  Medium  Enterprises  (JEREMIE)  initiative.  In 
addition  to  the  relatively  well-performing  banking  sector,  these  schemes  ensure  that  the 
private  sector  has  adequate  access  to  finance  to  meet  its  demands.  Appetite  for  financing, 

21  
The Joint Financial Stability Board will consist of two members from the Central Bank of Malta and the 
Malta Financial Services Authority each. It will be chaired by the deputy governor of the central bank, who will 
have a casting vote if the four members fail to reach agreement on a policy recommendation. 
22  
While Pillar I sets an overall capital adequacy requirement, Pillar II allows national supervisors to target 
more  idiosyncratic  risks.  Including  a  risk  under  Pillar  II  gives  national  regulators  a  wider  range  of  tools  to 
monitor banks’ riskiness and to apply prudential judgement if risks are deemed too high. 

18 

 
                                                 
however, has been limited in recent years due to the subdued economic environment as well 
as the elevated corporate indebtedness. 

3.3. 

Labour market, education and social policies 

Labour  market  performance  continued  improving  but  continued  policy  attention  is 
warranted. Starting from a low level, total employment in Malta continued to grow in 2012 
(1.8 percentage points gain as opposed to a slight decline in the EU). Gains were reported in 
all segments of the labour market, including among older workers and, most notably, women. 
Nevertheless, the female employment rate remains the lowest in the EU. This also reflects a 
still  inadequate  mix  of  family-friendly  measures  and  flexible  working  arrangements.  Skills 
gaps related to the system of education and training also continue to pose a challenge to the 
efficient  utilisation  of  human  capital.  In  2012,  the  Council  Recommendation  for  Malta 
included a CSR concerning the need to improve the links between the education system and 
the  labour  market  and  to  address  the  high  rate  of  early  school  leaving  and  the  gender 
employment  gap.  In  the  Commission’s  assessment,  Malta  has  made  some  progress  towards 
implementing  this  CSR.  The  Council  Recommendation  also  called  for  reforming  the  wage 
indexation  mechanism  in  Malta,  but  no  progress  has  been  made  towards  implementing  this 
recommendation. 

Education and training 

The  measures  already  in  place  to  tackle  early  school  leaving  are  steps  in  the  right 
direction,  subject  to  proper  implementation.  The  rate  of  early  school  leaving  has  been 
significantly reduced in recent years but remains among the highest in the EU.23 The measures 
taken in 2011-12 demonstrate that the government and the educational institutions are aware 
of  the  challenge.  A  national  strategy  focused  on  prevention,  intervention  and  compensation 
measures  has  been  launched  for  consultation  in  April.  Policy  action  has  thus  been  relevant, 
but  a  comprehensive  monitoring  system  to  collect  and  analyse  information  to  underpin  the 
national strategy is not yet in place. The level of credibility will be determined by the proper 
implementation of the policy plans in place. Overall, it can be concluded that there has been 
some progress towards the implementation of the recommendation calling for steps to reduce 
early school leaving. 

Policy  efforts  in  education  and  training  were  maintained,  but  the  main  challenges 
remain  valid.  The  two  existing  apprenticeship  schemes  showed  positive  results  in  2012  as 
one third of participants decided to continue education and more than half were able to find a 
job. To further improve the efficiency of the schemes and modernise the vocational training 
system, the authorities envisage creating a single national apprenticeship scheme that would 
usefully  cover  more  qualification  levels  and  occupations.  Further  in  the  same  vein,  the 
planned sector skills committee is to become operational in the second quarter of 2013 and a 
Lifelong Learning Strategy is being drafted. The need to raise skill levels and address skills 

23  
Figures  concerning  Early  School  Leaving  are  under  review  by  the  Maltese  Statistical  Office  and 
Eurostat due to a new classification of certain qualifications at secondary level. According to the new data, the 
2012 early school leaving rate is about 10 percentage points lower than with the old methodology. At present, 
figures according to the new classification are available only after 2010 and are therefore not comparable with 
those up to 2009. In view of this, the authorities are about to present a new 2020 target, based on the new data. 

19 

 
                                                 
mismatches is set to become even more relevant in the future as the European Centre for the 
Development of Vocational Training (Cedefop) projects the employment pattern up to 2020 
to  be  characterised  by  more  medium  and  high  qualification  jobs.24  Despite  the  introduced 
measures,  Malta  continues  to  largely  underperform  the  EU  average  in  terms  of  tertiary 
educational attainment, although the recent positive trends in participation in and graduation 
from  higher  education  point  to  possible  improvement  in  the  future.  The  share  of  adult 
participation  in  education  and  training  also  remains  low  in  comparison  with  the  EU  (7  % 
against  9  %  in  2012).  Due  to  the  long-term  nature  of  many  measures  to  promote  skills 
matching,  it  is  too  early  to  assess  their  impact,  but  the  general  principles  go  into  the  right 
direction.  

Labour market participation and employment 

The female activity rate continues to increase, also thanks to policy action mainly aimed 
at improving reconciliation of work and family life. In recent years, sizeable gains in the 
participation  and  employment  rates  of  women  resulted  in  the  national  2020  employment 
target already being met in 2012. However, the female employment rate remains among the 
lowest in the EU and therefore the intention to revise the target, as stated in the 2013 NRP, is 
welcome.25  The  gains  are  certainly  to  a  large  extent  due  to  a  favourable  ‘cohort  effect’,  as 
younger generations, who have on average a higher level of educational attainment, appear to 
be keener to enter and remain on the labour market (see Box 4). The government is supporting 
this trend through appropriate measures to facilitate the reconciliation of work and family life. 
New childcare centres administered either directly by public authorities or in partnership with 
the  private  sector  have  been  set  up,  albeit  with  some  delays.  Private  childcare  facilities  are 
also available. High costs and often inconvenient opening hours, however, seem to hinder the 
efficiency  of  these  facilities.  Furthermore,  afternoon  school  programmes  have  been 
announced  aiming  to  provide  after-school  care  services  within  school  structures,  thereby 
bridging the gap between the school day and parents’ regular working hours, and several tax 
incentives  have  been  put  in  place  for  families  sending  their  children  to  private  childcare 
facilities. Additional measures introduced in 2012 to foster reconciliation of work and family 
life include the extension of maternity leave and new incentives in the income tax system in 
the income tax system for working parents. Overall, the measures put in place with regard to 
the promotion of female participation in the labour market appear to be relevant and credible. 
Still,  the  employment  rate  in  Malta  remains  far  from  the  EU  average,  which  requires 
continued policy efforts.  

24  
The  increase  is  forecast  to  come  mainly  in  the  number  of  professionals  and  technicians.  At  the  same 
time,  demand  for  low  qualification  jobs,  which  currently  represent  a  much  higher  share  in  the  total  in  Malta 
compared to the average for the euro area, is to see a marked decline. 
25  
Working Group used in the 2012 Ageing Report. 

The current national 2020 target of 62.9 % is lower than the 2020 projection of 65.4% by the Ageing 

20 

 
                                                 
Box 4: Characteristics and evolution of female labour market participation in Malta 

Labour  market  participation  by  women  is  very  low  in  Malta.  In  2011,  the  employment  gap 
with  the  EU27  for  women  aged  15  and  over  stood  at  over  25pps.  Inactivity  among  women 
may  be  largely  attributable  to  cultural  reasons,  together  with  a  lack  of  sufficiently  adequate 
work-life reconciliation policies. Indeed, the profile of labour market participation in Malta is 
peculiar,  with  very  high  activity  among  younger  women  followed  by  a  steep  decline  (see 
Panel A) from the child-bearing years, in sharp contrast with the EU27. 

Labour  market  participation  of  women  in  Malta,  has  been  on  a  clear  upward  path  since  the 
early 90’s26, improving from around 30 % to 44.1 % in 2011. As shown in Panel B, there is a 
noticeable cohort effect, as younger women are choosing to enter the labour market and stay 
in employment. As a consequence, the gap with the EU average has been closing across age 
groups. Higher educational attainment, as reflected in a 50 % increase in the share of women 
aged 25-34 with at least upper secondary education between 2000 and 2009, certainly played 
a  role  in  this  improvement.  A  number  of  policies  and  practices,  such  as  increasing  the 
availability  of  public  childcare  facilities,  and  a  change  in  management  attitudes  among 
Maltese  enterprises  towards  providing  more  flexible  working  arrangements,  may  also  have 
contributed.  Finally,  in  recent  years  an  ‘added  worker’  effect  may  have  come  into  place,  as 
more and more households find it difficult to maintain living standards on just one income. 

Graph: Female labour market participation 

Panel A: Female labour market participation by age 
group 

Panel B: Cross-cohort comparison of 
participation rates by age 

90

80

70

60

50

40

30

20

10

0

4
2
-
5
1

9
2
-
5
2

4
3
-
0
3

9
3
-
5
3

4
4
-
0
4

9
4
-
5
4

4
5
-
0
5

4
6
-
5
5

Malta

EU27

Source: Eurostat 

90

80

70

60

50

40

30

20

10

0

4
2
-
5
1

9
2
-
5
2

4
3
-
0
3

9
3
-
5
3

4
4
-
0
4

9
4
-
5
4

4
5
-
0
5

4
6
-
5
5

2000

2004

2008

2011

As  the  younger  cohort  ages,  the  participation  gap  with  the  EU-27  is  expected  to  decline. 
Nevertheless,  the  impact  of  parenthood  remains  significant  as  the  employment  gap  between 
women aged 25 to 49 years with and without children has remained broadly unchanged since 
2005. Therefore, maintaining policy efforts in providing childcare facilities and other family-
friendly measures is important in allowing women to stay longer on the labour market. 

26  
Bank of Valletta Review, No. 33, Spring 2006  

See also Caruana, Kevin. Female Labour Market Participation in Malta: A Lisbon Agenda Perspective, 

21 

 
 
 
 
                                                 
The  automatic  wage  indexation  mechanism  could  pose  a  potential  challenge  to  the 
flexibility  of  wages,  but  there  are  mitigating  characteristics.  Malta’s  wage  indexation 
mechanism  has  a  number  of  potential  drawbacks  that  could  have  negative  implications  for 
competitiveness and labour market adjustment by impeding the adjustment of real wages, in 
particular during strongly adverse phases of the economic cycle. Specifically, it is enshrined 
into law and compulsory for the entire economy;  the price index includes also very volatile 
imported components, thus rendering the economy vulnerable to supply-side or terms-of-trade 
shocks  (such  as  a  spike  in  oil  prices)  that  could  lead  to  wage-price  spirals;  and  the  flat-rate 
increase may lead to wage compression, thus potentially discouraging demand for lower-paid 
workers.  The  system  has  an  impact  on  public  finances  as  well  through  the  indexation  of  a 
range of social transfers and public sector wages. Nevertheless, potential risks are somewhat 
mitigated  by  the  fact  that  the  system  represents  only  partial  compensation  for  inflation  to 
wages above the reference ‘base’ wage (which stands at about 60 % of the average wage and 
is  higher  than  the  current  minimum  wage).  In  addition,  the  mechanism  contains  micro-  and 
macro-level derogation clauses. The decentralised system of wage bargaining at the company 
level  also  allows  for  a  reasonable  degree  of  wage  flexibility  across  economic  activities.  A 
possible review of the system will be warranted should the above-mentioned risks materialise  

Poverty and social exclusion 

A number of measures have been put in place to curb the increase of the risk of poverty 
and social exclusion. The share in the total population of people at risk of poverty and social 
exclusion in Malta is lower than the average for the euro area and compares favourably with 
the new Member States. Nevertheless, the number of people at risk has seen dynamic growth 
in Malta in recent years. The authorities aim to attain the 2020 goal by targeting vulnerable 
groups,  such  as  children,  the  elderly  and  persons  living  in  low-income  households.  To  this 
end,  a  number  of  measures  have  been  put  in  place  to  enhance  employability,  financial 
assistance  and  housing  prospects  of  those  living  at  risk  of  poverty  or  social  exclusion. 
Measures  to  address  child  poverty  include  a  study  to  better  understand  the  roots  of  the 
phenomenon  and  strengthening  the  provision  of  out-of-home  care  for  children  who  cannot 
live with their parents.  

3.4. 

Structural measures promoting growth and competitiveness 

Inefficiencies in the energy and transport systems, high dependence on imported oil as 
well  as  low  R&D  intensity  continue  to  pose  challenges  to  the  competitiveness  of  the 
Maltese  economy.  Productivity  growth  in  Malta  has  lagged  behind  the  euro-area  average 
over  the  past  decade  and  has  been  notably  weaker  than  in  the  New  Member  States.  The 
transport  system  and  energy  supply  and  distribution  remain  inefficient  and  Malta  is  still  far 
from meeting its national Europe 2020 energy and climate targets. Moreover, relatively low 
R&D  intensity  poses  obstacles  to  a  further  move  towards  a  knowledge-based  economy  that 
would boost productivity growth. 

In  2012,  the  Council  Recommendations  for  Malta  contained  a  CSR  concerning  the  need  to 
reduce  the  economy’s  dependence  on  imported  oil  through  promoting  energy  efficiency, 
fostering renewable energy and prioritising infrastructure development. In the Commission’s 
assessment, Malta has made limited progress towards implementing this CSR. 

22 

 
Climate, transport and environment 

Progress on reducing emissions to meet the national 2020 target is slow. Malta ranks last 
among  the  EU  Member  States  with  regard  to  the  projected  distance  from  their  2020 
emissions’  targets.  Unless  decisive  action  is  taken  to  move  towards  a  low-carbon  economy, 
Malta will have  to  make  use of carbon credits in order to avoid non-compliance. Under the 
Europe  2020  Strategy,  Malta  committed  itself  to  limiting  the  increase  in  greenhouse  gas 
emissions  in  sectors  not  covered  by  the  emissions  trading  scheme  by  5  %  (compared  with 
their  2005  level),  but  according  to  the  latest  government  projections  emissions  are  instead 
expected to increase by 33 % during this period. The overall energy and carbon intensity of 
the Maltese economy is largely in line with those of its peers, but its dependence on imported 
heavy fuel oil slows down progress in meeting the climate and energy targets. Road transport 
emissions in Malta grew by nearly 6 % between 2005 and 2010, as opposed to a reduction by 
over 3 % in the EU. The waste sector, which heavily relies on landfill waste, contributed even 
more to the increase in emissions over this period. It is unlikely that Malta will reach the 2020 
recycling  target  and  the  objectives  of  the  Resource  Efficiency  Roadmap  (implying  a  sharp 
reduction in landfill waste) without significant additional efforts, including incentive systems 
favouring prevention of waste and separate waste collection.  

There  remains  significant  room  for  improving  efficiency  and  cutting  emissions  in  the 
transport sector. The road transport sector accounts for about half of total emissions coming 
from non-ETS sectors covered by the target and national projections point to a steep increase 
in  emissions  by  2020.27  A  very  high  motorisation  rate  combined  with  an  aged  car  fleet,  an 
inefficient  road  network  and  an  established  preference  for  private  transport  have  resulted  in 
significant  road  congestion  problems  and  increased  carbon  emissions.  Therefore,  the 
measures to upgrade the 112 km of strategic arterial and distributor road network (including 
the 51 km of existing TEN-T roads) and to improve the effectiveness of public transport will 
be important in ensuring sustainable internal mobility. The public transport reform, launched 
in  2011  and  planned  to  be  completed  in  2015,  has  so  far  resulted  in  only  modest  uptake  of 
public  transport.  Measures  introduced  to  make  the  car  fleet  more  sustainable,  such  as  a 
minimum  level  of  biofuels  in  petroleum  fuel  in  all  transport  modes,  a  differentiated  car 
registration tax, a car scrapping scheme and continued financial support to electric and hybrid 
vehicles  are  relevant  towards  diversification  and  decreased  dependency  on  fuel  imports. 
However, considering the extent of the challenge faced in the transport sector, these measures 
are  insufficient  to  meet  the  national  greenhouse  gas  emissions  targets  and  commitments  in 
transport.  

Energy 

The  electricity  generation  sector  is  undergoing  important,  efficiency-boosting  changes. 
The  extension  of  the  Delimara  power  plant  was  put  in  commercial  use  in  December  2012, 
leading to notable efficiency gains as it allows an older plant to be replaced. The electricity 
interconnector  with  Italy  will  bring  important  changes  to  the  energy  system.  Malta  will  no 
longer  be  an  isolated  energy  island,  its  energy  supply  will  be  more  secure  and  electricity 

27  

Annual EEA Report GHG Emissions and Trends in the European Union, 2012 

23 

 
                                                 
generation – cheaper. Furthermore, the increased capacity will mean that the inefficient Marsa 
power  plant  can  be  switched  off,  which  will  improve  overall  efficiency  and  in  turn  could 
contribute to lower energy tariffs. The connection to the continental European electricity grid 
will also provide a greater opportunity to integrate energy produced from renewable sources, 
thereby  further  helping  to  reduce  the  overwhelming  recourse  to  heavy  fuel  oil  in  electricity 
generation. The project is now well under way and is expected to become operational in 2014. 
Moreover, the government is taking steps towards switching from heavy fuel to cheaper and 
more  environment-friendly  liquefied  natural  gas  (LNG)  as  a  main  energy  source,  which,  if 
properly  implemented,  would  also  contribute  towards  reducing  generation  costs  and  cutting 
carbon emissions. The gas would preferably be sourced from an LNG terminal, which may be 
considered as an intermediate step before a gas pipeline, although the feasibility of the latter is 
questionable given the small size of the domestic market. 

The difficult financial situation of the state-owned power utility Enemalta continues to 
pose a challenge for the security of energy supply and for the public finances. Enemalta 
has  accumulated  debts  of  EUR  687  million  and  thus  represents  a  significant  contingent 
liability  for  the  public  finances.28  Standard  and  Poor’s  downgraded  the  company’s  credit 
rating two years in a row on account of its high costs29 and poor profitability.30 There have 
also been long-standing losses in the distribution of electricity as well as problems in metering 
and billing. These factors suggest that the company’s viability based on the current situation is 
not  sustainable.  In  addition,  Malta  has  not  applied  for  a  temporary  derogation  from  the 
obligation  to  auction  off  carbon  allowances  to  power  plants,  so  Enemalta  will  now  have  to 
pay for these allowances, which could add to the company’s financial problems. Still, the new 
electricity  interconnector  and  the  phasing-out  of  the  inefficient  Marsa  power  plant  are 
expected  to  relieve  Enemalta’s  financial  problems  and  may  help  the  company  sustain 
investments to improve its efficiency and environmental record. The viability of the company 
will crucially depend on electricity tariffs matching generation and transmission costs. 

The  share  of  electricity  produced  from  renewable  energy  sources  continues  to  be  very 
low. According to latest available data for 2011, the share of renewable energy in gross final 
energy consumption was 0.4 % which is significantly below the first interim target foreseen 
for 2011-12 (2.1 %). Thus, Malta remains the worst performer in the EU in this area and is a 
significant  way  off  reaching  its  2020  target.  Efforts  to  meet  the  target  largely  rely  on  three 
large-scale  wind  energy  projects.  Progress,  however,  is  slow  –  an  environmental  impact 
assessment for the biggest Sikka l-Bajda project has been submitted to the planning authority 
(MEPA),  but  further  assessment  is  needed.  On  the  positive  side,  the  take-up  of  smaller 
capacity  schemes,  such  as  the  installation  of  photovoltaic  systems,  solar  water  heaters  and 
micro-wind turbines, has exceeded the government target, but these schemes will make only a 

28  
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).  Enemalta's  debt  amounts  to 
around 60% of the gross government-guaranteed debt. 
29  
its planned lifetime, which involves along fines for exceeding environmental limits. 
30  
sector, electricity tariffs in Malta do not fully reflect costs. 

High costs reflect the fact that the very inefficient Marsa power plant is still in operation, well beyond 

As a result of government intervention, despite being already high by EU standards for the corporate 

24 

 
                                                 
relatively  small  contribution  to  meeting  the  2020  target.  Hence,  the  potential  for  importing 
electricity produced from renewable sources through the interconnector with Italy or the use 
of pure statistical transfers could also be explored.31 The 2013 NRP announces the launch of a 
comprehensive  strategy  on  renewable  energy,  exploring  other  energy  sources,  most  notably 
sea energy, to tackle these challenges by the end of the summer 2013. As regards improving 
energy  efficiency,  the  government  has  stepped  up  its  efforts  through  relevant  policies,  with 
the support of EU funds, which is welcome. Overall, policy action in response to the country-
specific  recommendation  to  reduce  dependence  on  imported  oil,  step  up  efforts  to  promote 
energy  efficiency  and  increase  the  share  of  energy  from  renewable  has  been  relevant  and 
credible, but seems insufficiently ambitious given the scale of the challenge. 

Research and innovation 

The  relatively  modest  national  target  for  research  and  development  expenditure  has 
been met. The level of expenditure on research and development (0.73 % of GDP in 2011, up 
from 0.67 % of GDP in 2010) has already exceeded the national Europe 2020 target thanks to 
increases in both higher education and business spending (of which more than 80 % is spent 
by foreign-owned companies). The national target, however, is modest when judged against 
the  government’s  stated  aim  of  building  a  knowledge-based  economy  with  research  and 
innovation at its core. Therefore, the intention to revise the target, stated in the 2013 NRP, is 
welcome.  As  businesses  largely  fund  their  own  research  and  central  government  provides 
funding  for  public  research  and  higher  educational institutions,  cross-funding between these 
sectors is very low, which undermines the achieved gains.  

Maintaining  the  policy  efforts  to  date  would  enable  further  progress  towards  a 
knowledge-based  economy.  The  draft  National  Strategic  Plan  for  Research  and  Innovation 
2011-2020  maintains  a  strong  business  orientation  in  the  areas  of  information  and 
communication technology, health and biotechnology, energy and environmental technologies 
as  well  as  value-added  manufacturing  and  services.  In  2012,  the  Malta  Council  for  Science 
and  Technology  launched  a  Commercialisation  Programme  to  assist  research-oriented  and 
innovative  companies,  assisted  by  several  targeted  initiatives  (e.g.  ‘Business  First’,  a  one-
stop-shop for businesses, and the ‘Trust Fund for R&D&I’ set up by the University of Malta). 
In addition, a number of industry sectors have been identified for future specialisation, such as 
digital  gaming,  where  a  strategy  was  published  in  early  2012  to  lay  the  foundations  for  the 
development  of  a  gaming  industry  in  Malta.  Moreover,  the  2013  NRP  announces  plans  to 
provide  a  more  nurturing  legislative  and  regulatory  framework  for  developing  innovative 
financial  services.  Consultation  with  stakeholders  is  ongoing  and  a  number  of  legislative 
changes  to  be  implemented  in  2013  are  under  consideration.  Insufficient  alignment  of  the 
draft National Strategic Plan for Research and Innovation 2011-20 with the requirements for a 
‘research  and  innovation  strategy  for  smart  specialisation’  (RIS3)  and  weak  links  between 
knowledge  institutions  and  businesses  hinder  further  progress.  To  that  end,  the  government 

31  

The Renewable Energy Directive allows for the use of cooperative mechanisms to achieve the overall 
target for renewable energy. This principle cannot apply for achieving the renewable energy target in 
transport. 

25 

 
                                                 
intends to finalise an Innovative Strategy for Smart Specialisation that would identify sectors 
with high potential for innovation-based growth by the third quarter of 2013. 

Functioning of the internal market 

Challenges  to  the  proper  functioning  of  the  internal  market  continue  to  exist. 
Discriminatory  pricing  practices  appear  to  persist,  obstructing  equal  access  for  non-Maltese 
nationals who reside or intend to reside in Malta to some basic services, such as telephony, 
utilities and public transportation. A number of complaints by EU citizens resident in Malta 
have  been  submitted,  leading  to  the  initiation  of  infringement  procedures  by  the  European 
Commission.  Meanwhile,  the  authorities  have  launched  a  number  of  relevant  initiatives  to 
improve  the  functioning  of  the  internal  market  such  as  the  Small  Business  Act,  the 
commitment to reduce the administrative burden and the social economy initiative. While the 
implementation  of  the  first  two  is  quite  advanced,  the  social  economy  project  is  still  in  an 
initial phase of development. 

3.5.  Modernisation of public administration 

Despite  a  generally  business-friendly  environment,  benefiting  from  significant  policy 
attention, public administration suffers from inefficiencies with negative implications for 
economic  activity.  A  number  of  reforms  have  improved  the  capacity  of  the  public 
administration  to  support  a  generally  FDI-  and  SME-friendly  business  environment. 
Nevertheless,  important  gaps  remain,  including  in  the  judicial  system,  which  also  affect  the 
ability to absorb EU funding. 

Business environment 

Significant  policy  attention  has  been  given  to  the  business  environment  for  SMEs.  The 
Late Payments Directive was transposed into Maltese law in 2012. This was received well by 
stakeholders,  although  some  articles  in  the  Directive  may  not  have  been  transposed  as 
intended, which may hinder its usefulness. Also, the Small Business Malta Act, an important 
legislative tool to foster the role of SMEs in enhancing growth and competitiveness, has been 
in  operation  since  June  2011.  In  particular,  putting  the  ‘SME  test’  into  force  in  order  to 
identify  the  potential  impact  of  all  new  proposed  legislation  on  small  entrepreneurs  is 
expected to bring positive results. It has yet to be fully implemented, however. The setting-up 
of  the  ‘Business  First’  one-stop-shop  was  another  notable  initiative  to  lower  the 
administrative burden on SMEs and its activity in 2012 appears to be yielding positive results. 
To  foster  communication  with  the  business  community,  an  Enterprise  Consultative  Council 
has  been  set  up.  The  level  of  ambition  in  this  area  can  be  stepped  up  still  and  the  Council 
appears  not  to  be  sufficiently  independent  from  the  government.  Overall,  policy  action  to 
improve the business environment has been relevant and ambitious. Implementation in some 
areas,  however,  has  been  unsatisfactory,  which  hampers  the  overall  credibility  of  the 
government’s strategy. 

26 

 
Public administration 

Inefficiencies put the timely absorption of EU funds at risk. Available figures until the end 
of  2011  show  that  Malta  experiences  significant  problems  with  absorption  of  EU  funds.32 
While the rate of project selection is on par with the EU average, the expenditure rate is well 
below  it,  especially  for  the  European  Regional  Development  Fund  and  the  European  Social 
Fund.  Delays  are  due  to  insufficient  administrative  capacity  and  complicated  and  lengthy 
procedures, in particular in the areas of public procurement and environmental permits. The 
 120 000, 
roll out of electronic procurement, currently only in place for projects worth over €
could  partly  help  by  streamlining  processes,  but  with  the  end  of  the  programming  period 
approaching there is a growing risk that not all available EU funding will be absorbed and the 
indicated objectives will not be achieved. Still, the management and control systems for EU 
funds appear to be functioning satisfactorily and the error rate is very low. The full transition 
to electronic procurement, as announced in the 2013 NRP, could contribute to improving the 
administration of EU funds. 

Judicial system 

Malta’s judicial system appears to suffer from shortcomings. An efficient justice system is 
a  key  element  of  a  business-friendly  environment.  The  EU  Justice  Scoreboard33  highlights 
that the time needed to resolve non-criminal, and in particular civil and commercial, cases is 
one of the longest  in  the EU. The  number  of  pending  cases  at  first  instance  is  high  and  the 
clearance rate is low, indicating that more cases arise each year than are resolved.  

Long  insolvency  procedures  could  impact  financial  stability.  Inefficiency  in  the  justice 
system  may  hamper  the  swift  recovery  of  collateral  in  times  of  economic  stress,  thereby 
resulting  in  direct  losses  and  recapitalisation  needs  in  the  banking  sector,  and  affecting 
financial  institutions’  lending  decisions.  This  is  particularly  relevant  given  domestic  banks’ 
high  exposure  to  the  real  estate  market  in  the  form  of  collateral.  The  World  Bank’s  Doing 
Business  report  indicates  shortcomings  in  resolving  insolvency  procedures,  as  reflected  in  a 
very  low  recovery  of  asset  value  for  creditors  and  the  very  long  time  procedures  take.  This 
also appears to be the result of inefficient bankruptcy law procedures, where Malta ranks last 
in the EU.34  

The  authorities  have  launched  an  ambitious  reform  of  the  system.  The  2013  National 
Reform  Programme  announces  the  launch  of  a  comprehensive  judicial  reform  process.  A 
specialised  commission  has  been  appointed  to  carry  out  a  review  of  the  system  and 
recommend policy measures. The terms of the review are wide-ranging and include, among 
others,  the  accountability  of  judges,  the  civil  courts,  the  legal  aid  system,  the  use  of 
information 
the  administration  of  cases,  alternative  dispute  resolution 
mechanisms and the  implementation of  reparative justice. The  policy plans  are relevant and 

technologies, 

32  

33  
34  

Cohesion policy: Strategic report 2013 on programme implementation 2007-13, available at 
http://ec.europa.eu/regional_policy/how/policy/doc/strategic_report/2013/strat_report_2013_en.pdf  
http://ec.europa.eu/justice/effective-justice/files/justice_scoreboard_communication_en.pdf  
http://ec.europa.eu/enterprise/policies/sme/business-
environment/files/business_dynamics_final_report_en.pdf  

27 

 
                                                 
ambitious  and  their  credibility  will  depend  on  respecting  the  set  timetable,  whereby  the 
its  policy  recommendations  by  end-June  and 
appointed  commission 
implementation is to start by the end of the year. 

to  present 

is 

28 

 
4. 

OVERVIEW TABLE  

2012 commitments 

Summary assessment 

Country-specific recommendations (CSRs) 

CSR  1:  Reinforce  the  budgetary  strategy  in  2012  with 
additional permanent measures so as to ensure adequate 
progress  towards  the  MTO  and  keep  the  deficit  below 
3% of GDP without recourse to one-offs. Continue fiscal 
consolidation  at  an  appropriate  pace  thereafter,  so  as  to 
make  sufficient  progress  towards  the  MTO,  including 
meeting 
towards 
the  expenditure  benchmark,  and 
compliance  with  the  debt  reduction  benchmark,  by 
specifying  the  concrete  measures  to  back  up  the  deficit 
targets  from  2013,  while  standing  ready 
take 
additional measures in case of slippages. Implement, by 
end-2012 at the latest, a binding, rule- based multiannual 
fiscal framework. Increase tax compliance and fight tax 
evasion,  and  reduce  incentives  towards  indebtedness  in 
corporate taxation. 

to 

towards 

the  adjustment  path 

This CSR has not been implemented. 
The  2012  outturn  was  worse  than  targeted  and  above 
the  3%-of-GDP  reference  value,  thus  implying  a 
the 
deviation  from 
medium-term  objective.  In  addition,  not  all  measures 
that  underpin  the  strategy  from  2013  onwards  are 
outlined  in  the  programme.  The  programme  plans  a 
broadly  appropriate  pace  of  adjustment  towards  the 
medium-term  objective  and  a  gradual  decrease  in  the 
debt  ratio  after  2014.  By  contrast,  the  Commission 
services' 2013 spring forecast projects only a marginal 
improvement in the structural balance and a continued 
upward path for the debt ratio in 2013-14. No concrete 
action has been taken to reform the fiscal framework or 
to address the debt bias in corporate taxation. 

the  pension 

sustainability  of 

CSR 2: Take action, without further delay, to ensure the 
long-term 
system, 
comprising  an  increase  in  the  effective  retirement  age, 
including  through  a  significant  acceleration  of  the 
progressive  increase  in  the  statutory  retirement  age 
compared to current legislation and through a clear link 
between the statutory retirement age and life expectancy, 
and  measures  to  encourage  private  pension  savings. 
Take  measures  to  increase  the  participation  of  older 
workers  in  the  labour  force  and  discourage  the  use  of 
early retirement schemes. 

CSR  3:  Take  steps  to  reduce  the  high  rate  of  early 
school  leaving.  Pursue  policy  efforts  in  the  education 
system to match the skills required by the labour market. 
Enhance 
the  provision  and  affordability  of  more 
childcare  and  out-of-school  centres,  with  the  aim  of 
reducing the gender employment gap. 

Some  progress  has  been  made  in  increasing  tax 
compliance  and  fighting  tax  evasion,  but  concrete 
results are yet to materialise. 

Malta has made no progress in the implementation 
of  this  CSR  in  terms  of  the  pension  system  reform. 
There  has  been  only  limited  progress  in  terms  of 
attracting older workers onto the labour market. 
The  fiscal  incentives  put  in  place,  together  with  the 
current  pension  reform,  have  helped  in  increasing  the 
labour  market participation of  older workers,  although 
this age group still has vast growth potential. An active 
ageing strategy is yet to be delivered. 

towards 

some  progress 

Malta  has  made 
implementing this CSR. 
The  measures  against  early  school  leaving  already  in 
place  seem  to  be  pointing  in  the  right  direction,  while 
their proper implementation and the evaluation of their 
impact  will  be  crucial.  However,  the  issue  remains  an 
area  of  concern  and  scope  for  further  action  remains. 
Due  to  the  long-term  nature  of  many  measures  to 
promote  skill  matching,  it  is  too  early  to  assess  their 
impact,  but  the  general  principles  seem  to  go  in  the 
right direction. 

Malta  is  also  positively  addressing  the  issue  of 
childcare  provision  and  out-of-school 
facilities, 
although there is still scope for improvements. 

No progress has been registered on this CSR. 

CSR  4:  Take  the  necessary  further  steps  to  reform,  in 
consultation with social partners and in accordance with 
national  practices,  the  system  of  wage  bargaining  and 
wage indexation, so as to better reflect developments in 
labour  productivity  and  reduce  the  impact  of  prices  of 
imports on the index. 

29 

 
 
 
CSR  5:  In  order  to  reduce  Malta’s  dependence  on 
to  promote  energy 
imported  oil,  step  up  efforts 
efficiency  and  increase  the  share  of  energy  produced 
from  renewable  sources  by  carefully  monitoring  the 
existing  incentivising  mechanisms  and  by  prioritising 
the  further  development  of  infrastructure,  including  by 
completing the electricity link with Sicily. 

CSR 6: To strengthen the banking sector, take measures 
to  mitigate  potential  risks  arising  from  the  large 
exposure  to  the  real  estate  market.  Take  measures  to 
further  strengthen  the  provisions  for  loan  impairment 
losses. 

Europe 2020 (national targets and progress) 

Employment rate target: 

R&D target: 0.68% of GDP 

Greenhouse gas (GHG) emissions target: 

National  Target: limited  increase  to  +5%  (compared  to 
2005  emissions,  ETS  emissions  not  covered  by  this 
national target) 

Renewable energy target: 10% 
Share  of  renewable  energy  in  all  modes  of  transport: 
10% 

Indicative  national  energy  efficiency  target  for  2020: 
22% energy or 235.254toe savings target by 2020 (with 
an  intermediate  target  for  2014  of  15%  or  144.876toe). 
This  implies  reaching  a  2020  level  of  0.825  Mtoe 
primary  energy  consumption  and  0.493  Mtoe  final 
energy consumption. 

Limited  progress  towards  implementing  this  CSR 
has  been  made.  In  2012,  Malta  allocated  structural 
funds  for  renewable  energy  by  saving  them  in  the 
transport and waste sector. Although this focused funds 
on energy production covered by the ETS and the RES 
headline target, it moved them away from tackling non-
ETS sectors where emissions are increasing beyond the 
committed target. 
It  is  expected  that  the  Interconnector  project  will  be 
implemented  by  the  end  of  2013,  but  this  has 
previously been delayed. 
Although  Malta  might  face  problems  in  implementing 
some  of  the  wind  projects,  there  is  certainly  scope  to 
promote  other  RES.  For  instance  costs  for  electricity 
from PV should be low due to plenty of solar radiation. 
Also the use of imported biofuels would be an option. 
In any case Malta needs to have a strategy as to how to 
fulfil the renewable energy targets. 

some  progress 

Malta  has  made 
towards 
implementing  this  CSR.  The  two  national  regulators, 
Central Bank of Malta and the Malta Financial Services 
Authority, have started talks on reforms of the Banking 
Act.  The  planned  measures  are  relevant,  but  they  are 
still at the drafting stage. 

63.1% (2012) – Malta exceeded the modest 2020 target 
of 62.9%. 

0.73%  of  GDP  (2011)  –  Malta  has  already  exceeded 
the modest 2020 target 

Change in non-ETS greenhouse gas emissions between 
2005 and 2010: +10% 
According  to  the  latest  national  projections  submitted 
to  the  Commission  and  taking  existing  measures  into 
account,  it  is  expected  that  the  target  will  be  missed: 
+33  %  in  2020  as  compared  with  2005  (a  projected 
gap of 28 percentage points compared to the target). 

Share  of  total  renewable  energy  in  gross  final  energy 
consumption  was  0.4  %  in  2011  and  0.0  %  in  the 
transport  sector.  (Source:  Eurostat.  April  2013.  For 
2011,  only  formally  reported  biofuels  compliant  with 
Art. 17 and 18 of Directive 2009/28/EC are included). 

Malta  has  set  an  indicative  national  energy  efficiency 
target  in  accordance  with  Articles  3  and  24  of  the 
Energy  Efficiency  Directive  (2012/27/EU).  It  has  also 
expressed it, as required, in terms of an absolute level 
of  primary  and  final  energy  consumption  in  2020  and 
has  provided  information  on  the  basis  on  which  data 
this has been calculated. 

Early school leaving target: the 29% target was based on 
old figures and is now obsolete. A new target is expected 
to be set in the coming months. 

Full  data  according  to  the  new  methodology  are 
available  as  from  2010  and  are  not  comparable  with 
data  up  to  2009.  Early  school  leaving  rate:  22.6%  in 
2012; 23.6% in 2011; 24.8% in 2010. 

30 

 
Tertiary education target: 33% 

Tertiary  attainment  rate:  21.5%  in  2010;  21.4%  in 
2011; 22.4% in 2012. Limited progress has been made 
towards achieving the target. 

Risk of poverty or social exclusion target: 

88,000 at risk (2011) 

31 

 
 
5.  ANNEX 

Table I. Macroeconomic indicators 

1995-
1999

2000-
2004

2005-
2009

2010

2011

2012

2013

2014

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

4.5
-0.3
3.3
1.9
5.9
22.3
20.0

-7.1
45.3
n.a
33.7
40.9
2.7

1.9
-0.1
2.6
2.0
7.3
19.0
15.0

-6.3
61.3
-44.8
36.1
42.3
3.4

2.3
0.8
2.5
2.2
6.7
19.8
13.5

-3.2
63.7
-46.8
39.6
42.8
3.3

2.9
-0.1
2.0
-1.5
6.9
17.0
12.3

-3.6
67.4
-50.4
38.4
42.0
2.9

n.a

n.a

n.a

n.a

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

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

-93.7
-7.9
n.a
25.2

-107.2
-9.6
n.a
26.6

-104.1
-15.6
n.a
25.6

n.a
170.2
n.a
n.a
n.a
n.a

n.a
188.7
n.a
n.a
n.a
n.a

n.a
182.8
n.a
n.a
n.a
n.a

Net financial assets; non-financial corporations
Net financial assets; financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2005 market prices.
2 The indicator on domestic demand includes stocks.

-2.9
-1.3
1.4
-6.6
1.7
37.9
49.3
3.7
107.5
98.3
119.6

-3.9
-38.4
-1.7
-0.5
0.5
47.2
41.0
4.5
94.0
98.4
113.1

-5.1
-15.5
-2.6
-4.2
1.9
41.2
45.6
4.2
106.0
99.8
106.3

-6.6
n.a
-8.7
0.2
0.7
52.4
37.4
4.5
92.6
95.7
131.5

1.7
0.2
2.5
-1.1
6.5
14.6
12.4

-2.8
70.3
-51.8
39.3
42.1
3.1

n.a

-109.5
-7.1
n.a
n.a

n.a
168.7
n.a
n.a
n.a
n.a

0.5
1.5
5.0
-6.1
1.0
36.6
50.1
3.4
108.2
99.1
116.3

0.8
-0.3
3.2
-0.2
6.4
14.6
11.6

-3.3
72.1
n.a
40.5
43.9
3.2

n.a

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

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

0.1
n.a
5.8
-7.1
0.9
36.2
50.8
3.2
107.9
99.1
123.6

1.4
-0.4
1.9
1.2
6.3
14.9
12.1

-3.7
73.9
n.a
40.9
44.6
3.2

n.a

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

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

1.1
n.a
6.6
-6.9
1.2
n.a
n.a
n.a
111.1
99.3
126.8

1.8
-0.1
1.9
1.7
6.1
15.4
12.7

-3.6
74.9
n.a
41.1
44.7
3.2

n.a

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

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

1.2
n.a
6.7
-6.8
1.2
n.a
n.a
n.a
112.2
99.3
127.6

3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. 
The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

Source:
Commission services’ 2013 spring forecasts (COM); Stability programme (SP).

32 

 
 
Table II. Comparison of macroeconomic developments and forecasts 
2014

2012

2013

2015

2016

Real GDP (% change)

Private consumption (% change)

Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:

- Final domestic demand

- Change in inventories

- Net exports
Output gap1
Employment (% change)

Unemployment rate (%)

Labour productivity (% change)

HICP inflation (%)

GDP deflator (% change)

Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of the 
world (% of GDP)

COM SP

COM SP

COM SP

0.8

-0.6

-2.5
5.2
4.4

0.4

-0.5

1.0

-0.3
2.1

6.4

-1.2

3.2

2.2

2.4
0.1

0.8

-0.6

-2.5
5.2
4.4

0.4

-0.5

1.0

-0.5
2.4

6.4

-0.5

3.2

2.2

2.9
1.8

1.4

0.9

1.5
2.2
2.0

1.1

0.0

0.3

-0.4
1.8

6.3

-0.4

1.9

2.2

1.8
1.1

1.4

0.9

0.5
2.1
1.6

0.8

0.0

0.6

-0.5
0.7

6.6

0.2

2.0

1.9

0.7
4.0

1.8

1.3

2.5
4.6
4.7

1.6

0.0

0.2

-0.1
2.1

6.1

-0.3

1.9

2.3

1.8
1.2

1.6

1.0

3.2
1.6
1.2

1.1

0.0

0.5

-0.3
0.9

6.4

0.8

1.6

2.2

1.1
4.7

SP

1.9

1.5

3.0
1.0
0.7

1.5

0.0

0.3

0.2
0.7

6.1

1.2

1.7

2.3

1.3
5.9

SP

1.9

1.7

2.8
0.7
0.6

1.8

0.0

0.2

0.6
0.9

5.7

1.2

1.8

2.4

3.4
5.2

Note:
1In percent of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme 
scenario using the commonly agreed methodology.

Source :

Commission services’ 2013 spring forecasts (COM); Stability programme (SP).

33 

 
Table III. Composition of the budgetary adjustment 

(% 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 gap2
Cyclically-adjusted balance

2

3
Structural balance (SB)
Change in SB

Two year average change in SB 

Structural primary balance
Change in structural primary balance

3

Expenditure benchmark

Applicable reference rate

4

5

Deviation
Two-year average deviation (% GDP)

 (% GDP)

2012

2013

2014

2015

2016

COM COM

40.5

40.9

13.6

13.8

7.5

5.6

43.9

13.5

13.7

7.5

6.2

44.6

SP

42.1

14.4

13.9

7.4

6.4

44.9

1
COM

41.1

13.4

13.9

7.5

6.3

44.7

SP

42.8

14.3

14.3

7.4

6.8

44.9

SP

43.2

14.3

14.4

7.4

7.1

44.9

SP

42.0

14.1

14.4

7.4

6.1

42.9

40.7

41.4

41.7

41.5

41.7

41.7

39.7

13.5

6.7

13.9

1.1

3.1

2.4

3.2

-3.3

-0.2

0.9

-4.3

-0.3

-3.2

-4.1

-0.5

0.2

-1.0

0.24

0.7

-0.1

13.5

6.8

13.8

1.2

3.1

2.9

3.2

-3.7

-0.5

0.3

-4.0

-0.4

-3.5

-3.8

0.3

-0.1

-0.6

0.4

0.24

1.2

1.0

13.5

6.7

13.7

1.2

3.5

3.0

3.2

-2.7

0.5

0.2

-2.9

-0.5

-2.5

-2.7

1.4

0.4

0.5

1.5

0.24

-0.4

-0.3

13.4

6.9

13.7

1.3

3.2

2.9

3.2

-3.6

-0.4

0.1

-3.8

-0.1

-3.6

-3.7

0.1

0.2

-0.5

0.1

0.57

0.9

1.0

13.3

6.7

13.7

1.3

3.7

2.8

3.2

-2.1

1.1

0.1

-2.2

-0.3

-2.0

-2.1

0.6

1.0

1.1

0.6

0.57

-0.1

-0.2

13.2

6.6

13.7

1.2

3.7

3.3

3.2

-1.6

1.6

0.1

-1.7

0.2

-1.7

-1.8

0.3

0.4

1.4

0.3

0.57

0.3

0.1

12.9

6.2

13.5

1.1

3.3

2.5

3.2

-0.8

2.4

0.1

-0.9

0.6

-1.0

-1.1

0.6

0.5

2.1

0.6

0.57

-0.4

0.0

Change: 
2012-2016
SP

1.5

0.5

0.6

-0.1

0.5

-1.0

-1.0

-0.6

-0.5

-0.4

0.0

0.2

0.1

0.0

2.5

2.6

-0.8

3.4

1.0

2.2

3.0

-

-

3.0

-

-

-

-

Notes:

1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission services on 
the basis of the programme scenario using the commonly agreed methodology.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.
4 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its 
M TO in year t. A lower  rate applies as long as the country is adjusting towards its M TO, including in year t.The reference rates applicable 
to 2014 onwards have been updated in 2013. 
5 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the 
applicable reference rate. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed 
methodology. A positive sign implies that expenditure growth exceeds the applicable reference rate. 

Source :

Stability programme (SP); Commission services’ 2013 spring forecasts (COM); Commission services’ calculations.

34 

 
Table IV. Debt dynamics 

(% of GDP)

1
Gross debt ratio
Change in the ratio
Contributions 2 :

1. Primary balance

2. “Snow-ball” effect

Of which:

Interest expenditure

Growth effect

Inflation effect

3. Stock-flow adjustment

Of which:

Cash/accruals diff.

Acc. financial assets

Privatisation

Val. effect & residual

5,6

Gap to the debt benchmark
7
Structural adjustment
To be compared to:
Required adjustment8

Notes:

Average
2007-2011

65.1

1.6

0.3

0.3

3.1

-1.2

-1.6

1.0

2012

72.1

1.8

0.2

1.1

3.2

-0.6

-1.5

0.6

2013

2014

COM

73.9

1.8

0.5

0.7

3.2

-1.0

-1.5

0.6

SP

74.2

2.1

-0.5

0.9

3.2

-1.0

-1.3

1.7

COM

74.9

1.0

0.4

0.3

3.2

-1.3

-1.6

0.3

SP

74.2

0.0

-1.1

0.5

3.2

-1.1

-1.5

0.6

2015
SP

72.7

-1.5

-1.6

0.2

3.2

-1.4

-1.6

-0.1

2016
SP

70.0

-2.7

-2.4

0.2

3.2

-1.3

-1.6

-0.5

2013

2014

2015

2016

2012

n.r.
-0.5

COM / 
3

SP
n.r.
0.5

0.4

0.3

4

SP

n.r.
0.5

0.2

COM / 
3

SP
-2.4
n.r.

n.r.

4

SP

-2.4
n.r.

n.r.

SP

-2.6
n.r.

SP

-2.4
n.r.

n.r.

n.r.

1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth 
and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual 
accounting, accumulation of financial assets and valuation and other residual effects. 

3 Assessment of the consolidation path set in SP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the SP assuming growth follows the SP projections.
5Not relevant for M ember Sates that were subject to an EDP procedure in November 2011 and for a period of three years 
following the correction of the excessive deficit.
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio 
does not comply with the debt reduction benchmark.
7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing 
in November 2011.

8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – M ember State 
will comply with the debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary 
projections for the previous years are achieved.

Source :

Stability programme (SP); Commission services’ spring 2013 forecasts (COM); Commission services’ calculations.

35 

 
 
Table V. Sustainability indicators 

S2

of which:

Initial budgetary position (IBP)

Long-term cost of ageing (CoA)

of which:

Pensions

Health care

Long-term care

Others

S1 (required adjustment)*

of which:

Initial budgetary position (IBP)

Debt requirement (DR)

Long-term cost of ageing (CoA)

S0 (risk for fiscal stress)**

Debt,  % of GDP (2012)

Age-related expenditure, % of GDP (2012)

MT

EU27

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

No-policy 
change 
scenario 

Programme 
(SCP) 
scenario

6.8

1.8

5.0

3.0

1.9

0.6

-0.5

3.1

1.7

0.9

0.5

4.3

-0.5

4.8

2.8

1.8

0.6

-0.4

-0.2

-1.5

0.7

0.6

3.0

0.8

2.2

1.0

0.9

0.6

-0.4

2.2

0.0

1.9

0.3

1.3

-0.9

2.2

1.1

0.8

0.6

-0.3

0.5

-1.8

1.9

0.4

0.41

72.1

21.8

:

87.0

25.8

Note: 
The 'No-policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves 
according to the Commissions' spring 2013 forecast until 2014. The 'Programme (SCP)' scenario depicts the sustainability gap 
under the assumption that the budgetary plans in the programme are fully implemented.
* The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.              
** The critical threshold for the S0 indicator is 0.44. 

Source : 
Commission services; 2013 stability programme.                                                                                                                               

(% of GDP)

Gross debt as % of GDP - MT - Medium term debt projections

120

100

80

60

40

20

0

0
9
9
1

2
9
9
1

4
9
9
1

6
9
9
1

8
9
9
1

0
0
0
2

2
0
0
2

4
0
0
2

6
0
0
2

8
0
0
2

0
1
0
2

2
1
0
2

4
1
0
2

6
1
0
2

8
1
0
2

0
2
0
2

2
2
0
2

4
2
0
2

6
2
0
2

8
2
0
2

0
3
0
2

COM no-policy change scenario

COM + Shock ( -1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015)

COM + Shock (+1p.p. in the short-term/long-term interest rate on maturing and new debt from 2015)

COM consolidation scenario (0.5% per year on SB) in order to achieve MTO

COM consolidation scenario (1% per year on SB) in order to achieve MTO

SCP scenario

36 

 
 
 
Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)

30.0

33.0

33.0

33.3

32.6

33.5

2002

2006

2008

2009

2010

2011

Breakdown by economic function (% of GDP)1
     Consumption

              of which:

              - VAT

              - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth
     p.m.  Environmental taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

Note: 

12.3

13.7

13.3

13.1

12.9

13.4

6.2

1.3

1.3

3.6

7.9

1.5

1.3

3.1

10.2

10.3

0.9

5.1

1.5

3.3

1.1

5.8

2.1

3.3

7.7

1.2

1.4

2.9

9.4

1.0

7.5

1.7

3.4

7.6

1.2

1.5

2.8

9.9

1.1

7.6

1.6

3.3

7.6

1.3

1.5

2.6

9.7

1.1

7.3

1.6

3.0

7.9

1.3

1.6

2.6

10.1

1.1

7.3

1.6

3.2

54.9

58.3

57.1

56.5

57.7

59.4

1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission 
(2013) Taxation trends in the European Union, for a more detailed explanation.

2 This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 The VAT efficiency is measured via the VAT revenue ratio. The VAT revenue ratio is defined as the ratio between the actual VAT revenue collected and the 
revenue that would theoretically be raised if VAT was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due 
to large exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection 
gap'). See European Commission (2012), Tax reforms in EU M ember States, European Economy 6/2012 and Taxation Papers 34/2012 for a more detailed 
explanation.

Source: Commission

37 

 
 
 
 
Table VII. Financial market indicators 

2008

2009

2010

2011

2012

Total assets of the banking sector (% of GDP)

713.1

695.1

795.6

784.4

787.9

Share of assets of the five largest banks (% of total assets)

Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans)1), 2)
              - capital adequacy ratio (%) 1), 2)
              - return on equity (%) 1), 2)
Bank loans to the private sector (year-on-year % change)

Lending for house purchase (year-on-year % change)

Loan to deposit ratio

CB liquidity as % of liabilities

Banks' exposure to countries receiving official financial assistance  (% of GDP)

Private debt (% of GDP)
Gross external debt (% of GDP)3)
            - Public
            - Private

Long term interest rates spread versus Bund (basis points)*

Credit default swap spreads for sovereign securities (5-year)*
Notes: 

1) Latest data (September 201).
2) Domestic banks dealing only with residents.
3) Latest data 2012Q3.

72.8

40.7

5.5
11.5

5.9

20.0

9.4

72.8

36.3

6.2
13.5

18.3

-2.8

10.0

71.3

…

7.5
12.9

19.1

2.9

8.6

72.0

…

7.3
13.5

20.1

3.0

8.6

108.0

105.7

103.2

94.3

2.0

…

3.5

…

2.7

…

1.3

…

…

…

8.3
13.9

24.2

3.5

6.8

89.7

1.1

…

168.9

167.0

165.5

164.3

160.3

4.9
44.9

0.8

…

4.4
47.6

1.3

…

3.6
54.2

1.4

…

3.8
55.1

1.9

…

5.0
57.6

2.6

…

* M easured in basis points.

Source :

Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

38 

 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment (% of total employment, 
15 years and more)
Part-time employment of women  (% of women employment, 15 
years and more)
Part-time employment of men  (% of men employment, 15 years 
and more)
Fixed term employment (% of employees with a fixed term 
contract, 15 years and more)
Transitions from temporary 
to permanent employment
Unemployment rate1 (% of labour force, 
age group 15-74)
Long-term unemployment rate2 (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)
Youth NEET rate (% of population aged 15-24)

Early leavers from education and training (% of pop. 18-24 with at 
most lower sec. educ. and not in further education or training)

Tertiary educational attainment (% of population 30-34 having 
successfully completed tertiary education)
Formal childcare (from 1 to 29 hours; % over the population less 
than 3 years)
Formal childcare (30 hours or over; % over the population less 
than 3 year)
Labour productivity per person employed (annual % change)

Hours worked per person employed  (annual % change)
Labour productivity per hour worked (annual % change; constant 
prices)

Compensation per employee (annual % change; constant prices)

Nominal unit labour cost growth (annual % change)

Real unit labour cost growth (annual % change)

2007

2008

2009

2010

2011

2012

58.5

59.1

58.8

60.1

61.5

63.2

2.4

37.4

78.7

28.5

10.9

24.6

4.4

5.1

1.0

6.5

2.7

13.9

11.7

38.3

21.5

10.0

3.0

1.7

1.9

-0.2

0.2

1.4

-1.5

2.5

39.3

78.2

29.2

11.5

25.5

4.5

4.3

3.3

6.0

2.5

12.2

9.5

38.1

20.9

10.0

5.0

1.4

-0.5

1.9

1.2

2.8

-0.2

-0.2

39.8

77.1

27.8

11.3

23.7

5.1

4.9

4.6

6.9

3.0

14.4

9.8

36.8

1.7

41.5

77.9

30.4

12.5

25.0

6.0

5.6

0.6

6.9

3.2

13.1

9.5

24.8

2.7

43.4

78.9

31.8

13.2

25.7

6.6

6.6

0.7

6.5

3.0

13.8

10.6

23.6

2.1

46.9

79.0

33.6

14.0

26.3

6.9

6.9

:

6.4

3.0

14.2

11.1

22.6

21.0

21.5

21.4

22.4

4.0

4.0

-2.4

1.1

-3.5

1.2

6.6

3.7

7.0

4.0

1.1

-0.9

2.1

-1.8

-0.1

-2.9

8.0

3.0

-1.0

6.1

-6.7

-1.6

1.5

-0.6

:

:

-1.2

-1.8

0.6

0.2

3.7

1.4

Notes:
1 Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within 
two weeks. The labour force is the total number of people employed and unemployed.

2 Long-term unemployed are unemployed persons for at least 12 months.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

39 

 
 
 
 
 
Expenditure on social protection benefits (% of 
GDP)
Sickness/Health care

Invalidity

Old age and survivors

Family/Children

Unemployment

Housing and Social exclusion n.e.c.

Total

of which:  means tested benefits
Social inclusion indicators
At-risk-of-poverty or social exclusion1 
(% of total population)
At-risk-of-poverty or social exclusion of children 
(% of people aged 0-17)
At-risk-of-poverty or social exclusion of elderly 
(% of people aged 65+)
At-Risk-of-Poverty rate2 (% of total population)
Severe Material Deprivation3  (% of total population)
Share of people living in low work intensity households 4 (% of 
people aged 0-59)
In-work at-risk-of poverty rate (% of persons employed)
Impact of social transfers (excluding pensions) on reducing 
poverty
Poverty thresholds, expressed in national currency at constant 
prices5
Gross disposable income (households)
Relative median poverty risk gap (60% of median equivalised 
income, age: total)

2006

2007

2008

2009

2010

5.25

1.13

9.49

1.13

0.61

0.18

18.11

3.21

5.21

1.07

9.33

1.07

0.51

0.24

17.78

3.14

5.45

0.98

9.49

1.22

0.50

0.23

18.24

2.51

6.10

0.93

10.29

1.26

0.59

0.16

19.71

2.65

5.72

0.86

10.75

1.22

0.54

0.16

19.57

2.60

2007

2008

2009

2010

2011

19.4

23.1

23.1

14.8

4.2

9.2

4.5

19.6

23.5

26.4

15.0

4.0

8.2

5.0

20.2

25.5

23.2

15.3

4.7

8.4

5.7

20.3

24.3

21.5

15.0

5.7

8.4

5.7

21.4

25.8

21.5

15.4

6.3

8.3

6.0

30.2

33.9

33.8

33.6

32.8

5581

5991

6064

5799

5949

:

:

:

:

:

17.2

20.4

16.2

17.2

17.7

Notes:
1 People at-risk-of poverty or social exclusion (AROPE): individuals who are at-risk-of poverty (AROP) and/or suffering from severe 
material deprivation (SM D) and/or living in household with zero or very low work intensity (LWI).
2 At-risk-of poverty rate (AROP): share of people with an equivalised disposable income below 60% of the national equivalised median 
income. 

3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or utility bills, ii) keep their 
home adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein equivalent every second day, v) enjoy a week of 
holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour tv, or ix) have a telephone.

4 People living in households with very low work intensity: share of people aged 0-59 living in households where the adults (excluding 
dependent children) work less than 20% of their total work-time potential during the previous 12 months.

5 For EE, CY, M T, SI, SK, thresholds in nominal values in Euros; HICP -  index 100 in 2006 (2007 survey refers to 2006 incomes)

Sources: 
For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

40 

 
 
 
 
                      
 
 
Table IX. Product markets performance and policy indicator 

Performance indicators

2003-
2007

2008

2009

2010

2011

2012

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, steam and 
air conditioning supply (annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Total number of patent2 applications per million of 
labour force

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries 5
(Index; 0=not regulated; 6=most regulated)

1.1

1.4

-2.4

1.1

-1.0

-1.2

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

45.1

32.3

39.0

38.0

n.a.

n.a.

2003-
2007
n.a.

n.a.

0.5

18.6

2008

2009

2010

2011

2012

n.a.

n.a.

0.6

20.9

n.a.

n.a.

0.5

21.0

n.a.

n.a.

0.7

21.5

505

40

0.7

21.1

505

40

n.a.

21.7

5.82

2007

5.86

2008

5.46

2009

n.a.

2010

n.a.

2011

n.a.

2012

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1 Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Total number of patent applications to the European Patent Office (EPO) per million of labour force
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 
4 The methodologies of the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.
5 Aggregate Energy, Transport and Communications Regulation (ETCR).
*figure for 2007.

Source :
Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

41 

 
 
 
Table X. Green Growth 

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users**
Gas prices for medium-sized industrial users***
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS*
Transport energy intensity
Transport carbon intensity
Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share renewable energy in energy mix

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €

%
HHI
HHI
%

2002-
2006

0.20
0.64
0.38
n.a.
-3.7%
n.a.
n.a.
29.5%
10.1%

n.a.
5.9
n.a.
n.a.
n.a.
n.a.
13.3%
n.a.
n.a.
n.a.

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

2007

2008

2009

2010

2011

0.19
0.63
0.26
n.a.
-1.5%
6
-7.2
36.5%
10.9%

n.a.
7.3
0.12
n.a.
0.00%
0.00%
6.8%
65.3%
n.a.
n.a.

0.19
0.60
0.19
0.46
-2.4%
6
14.3
33.0%
10.1%

n.a.
6.6
0.14
n.a.
0.00%
0.00%
3.3%
65.9%
n.a.
n.a.

0.18
0.60
0.31
n.a.
-0.1%
6
9.9
32.1%
9.9%

n.a.
6.8
0.14
n.a.
0.00%
0.00%
4.1%
63.7%
n.a.
n.a.

100.0% 100.0% 101.1%
0.00
1.00
0.0%

0.00
1.00
0.0%

0.00
1.00
0.0%

0.18
0.59
n.a.
0.25
1.1%
6
27.1
29.0%
9.3%

n.a.
n.a.
0.18
n.a.
0.00%
0.00%
13.0%
62.7%
n.a.
n.a.

0.21
n.a.
n.a.
n.a.
-3.0%
7
0.4
n.a.
n.a.

n.a.
n.a.
0.18
n.a.
0.00%
0.00%
n.a.
63.9%
n.a.
n.a.

99.1% 100.6%
0.00
0.99
0.4%

n.a.
1.00
0.1%

Country-specific notes: 
The year 2012 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN elaborations indicated below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)
          Resource intensity: Domestic M aterial Consumption (in kg) divided by GDP (in EUR)
          Waste intensity: waste (in kg) divided by GDP (in EUR)
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Electricity and gas prices medium industrial users: consumption band 500  - 2000M Wh and 10000 - 100000 GJ;  figures excl. VAT.
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transp industry gross value added (2005 EUR)
Transport carbon intensity:  greenhouse gas emissions in transport activity divided by gross value added of the transport sector
Energy import dependency: net energy imports divided by gross inland energy consumption incl. energy consumption international bunkers

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share renewable energy in energy mix: %-share in  gross inland energy consumption, expressed in tonne oil equivalents

*Provisional data (15 April 213). Commission Services and EEA.

** For 2007 average of S1 & S2 for DE, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for IT, NL, FI, SE & UK. Other countries only have S2.

42