Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Malta
Date: 2013-05-29
Institutions: European Commission
Subjects: Malta, budget deficit, budgetary equilibrium, gross domestic product, stability pact

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 391 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

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

{SWD(2013) 389 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

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

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof, 

Having regard to the recommendation from the Commission; 

Whereas: 

(1) 

(2) 

(3) 

(4) 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) Member States shall avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

On [21 June 2013], the Council decided, in accordance with Article 126(6) TFEU, that 
an excessive deficit existed in Malta. 

In accordance with Article 126(7) TFEU and Article 3 of Council Regulation (EC) No 
1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure1, the Council is required to address recommendations to the Member State 
concerned with a view to bringing the situation of an excessive deficit to an end within 
a  given  period.  The  recommendation  has  to  establish  a  maximum  deadline  of  six 
months for effective action to be taken by the Member State concerned to correct the 
excessive deficit. Furthermore, in a recommendation to correct an excessive deficit the 
Council  should  request  the  achievement  of  annual  budgetary  targets  which,  on  the 
basis of the forecast underpinning the recommendation, are consistent with a minimum 
annual  improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance 
excluding  one-off  and  other  temporary  measures,  of  at  least  0.5%  of  GDP  as  a 
benchmark. In addition, in accordance with Article 2 of Council Regulation (EC) No 
1467/97  specifying  the  requirement  under  the  debt  criterion,  the  budgetary  target 
recommended for the final year of the correction period must ensure that the required 
reduction  in  the  differential  between  the  debt-to-GDP  level  and  the  60%-of-GDP 
Treaty  reference  value  will  occur  over  the  two  years  following  the  correction  of  the 
excessive deficit, based on the Commission forecast. 

(5) 

The  Commission  2013  spring  forecast  projects  that  the  deficit  will  continue  to  be 
above the reference value in 2013 and 2014, respectively at 3.7% and 3.6% of GDP. 
These budgetary projections are based on current policies, thus incorporating the 2013 

1 

OJ L 209, 2.8.1997, p. 6. 

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(6) 

budget  that  was  endorsed  by  Parliament  in  April  2013,  which  includes  expansionary 
measures  on  both  the  revenue  and  expenditure  side  as  well  as  the  already  planned 
equity injection into Air Malta (0.6% of GDP), with a net deficit-increasing impact of 
0.3% of GDP. The expansionary measures are only partially compensated by increases 
in  excise  duties,  the  collection  of  tax  arrears  as  well  as  the  expenditure  savings  and 
higher  social  contributions  stemming  from  the  2006  pension  reform.  In  addition,  the 
contribution of net deficit-reducing one-offs, as identified by the Commission, to the 
consolidation  effort  would  fall  sharply  after  2012.  Due  to  the  expected  continued 
primary  deficits  in  2013  and  2014,  the  general  government  debt,  according  to  the 
Commission  2013  spring  forecast,  is  projected  to  rise  further,  to  73.9%  of  GDP  in 
2013 and to 74.9% of GDP in 2014. In 2015 and 2016, the general government deficit 
is  projected  to  remain  above  the  3%  of  GDP  reference  value,  and  the  debt-to-GDP 
ratio would increase to 75.6% of GDP by 2016.  

According  to  Regulation  1467/97,  the  correction  of  the  excessive  deficit  should  be 
completed  in  the  year  following  its  identification,  unless  there  are  special 
circumstances.  In  light  of  this,  a  correction  of  the  excessive  deficit  by  2014  is 
warranted.  In  particular,  a  credible  and  sustainable  adjustment  path  would  require 
Malta  to  reach  a  headline  general  government  target  of  3.4%  of  GDP  for  2013  and 
2.7%  of  GDP  in  2014,  which  is  consistent  with  an  annual  improvement  of  the 
structural balance of 0.7% of GDP in 2013 and 0.7% of GDP in 2014. The 2014 target 
ensures  that  the  required  reduction  in  the  differential  between  the  debt-to-GDP  level 
and the 60%-of-GDP Treaty reference value will occur over the two years following 
the  correction  of  the  EDP.  To  reach  the  above-mentioned  structural  targets,  Malta 
would  need  to  adopt  additional  consolidation  measures  of  around  0.4%  of  GDP  in 
2013,  on  top  of  the  measures  already  included  in  the  baseline  scenario,  and  around 
¾% of GDP in 2014. These targets take into account the need to compensate for the 
negative  second-round  effects  of  fiscal  consolidation  on  public  finances,  through  its 
impact on GDP growth. The baseline scenario on which this adjustment path is built 
incorporates the Commission 2013 spring forecast and extends it up to 2016 relying on 
standard  assumptions  about  the  closure  of  the  output  gap  and  the  sensitivity  of  the 
budget  to  the  cycle;  it  does  not  include  however  the  additional  capital  injection  into 
Air Malta that is planned in 2015 according to the 2013 stability programme. It is thus 
assumed that the capital injection will not take place or be offset by measures in the 
opposite direction.  

(7)  Malta’s  fiscal  framework  is  quite  flexible,  and  its  non-binding  nature  and  the  short 
horizon  of  fiscal  planning  are  not  supportive  of  a  sound  fiscal  position.  Directive 
2011/85/EU  on  budgetary  frameworks  has  not  yet  been  transposed.  Moreover,  in 
accordance with Article 5 of Regulation No 473/2013 of the European Parliament and 
of the Council of 21 May 2013 on common provisions for  monitoring and assessing 
draft budgetary plans and ensuring the correction of excessive deficit of the Member 
States in the euro area, Malta should put in place independent bodies for monitoring 
compliance with fiscal rules. While the stability programme states the intention of the 
government to set up a fiscal council, no concrete plans are laid out. 

(8) 

In  accordance  with  Article  9(1)  of  Regulation  No  473/2013  of  the  European 
Parliament and of the Council of 21 May 2013 on common provisions for monitoring 
and assessing draft budgetary plans and ensuring the correction of excessive deficit of 
the Member States in the euro area, Malta should present to the Commission and to the 
Council  an  economic  partnership  programme,  simultaneously  with  the  report  to  be 
submitted in accordance with Article 3(4a) of Regulation (EC) No 1467/97. 

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(9) 

In the view of the Council, budgetary consolidation measures should secure a lasting 
improvement  in  the  general  government  balance,  while  being  geared  towards 
enhancing the quality of the public finances and reinforcing the growth potential of the 
economy, 

HEREBY RECOMMENDS: 

(1) 

(2) 

Malta should put an end to the present excessive deficit situation by 2014.  

Specifically, Malta should:  

(a) 

reach a headline general government target of 3.4% of GDP for 2013 and 2.7% 
of  GDP  in  2014,  which  is  consistent  with  an  annual  improvement  of  the 
structural  balance  of  0.7%  of  GDP  in  2013,  and  0.7%  of  GDP  in  2014.  This 
adjustment  path  would  allow  bringing  the  headline  government  deficit  below 
the 3% of GDP reference value by 2014 while at the same time ensuring that 
the government gross debt ratio will approach the 60%-of-GDP reference value 
at a satisfactory pace; 

(b) 

specify  and  rigorously  implement  the  measures  that  are  necessary  to  achieve 
the  correction  of  the  excessive deficit by 2014, and use all windfall gains for 
deficit reduction.  

(3) 

The Council establishes the deadline of 1 October for Malta to take effective action 
and,  in  accordance  with  Article  3(4a)  of  Council  Regulation  (EC)  No  1467/97,  to 
report in detail the consolidation strategy that is envisaged to achieve the targets. 

Following the correction of the excessive deficit, Malta is invited to continue making progress 
at  an  appropriate  pace  towards  its  medium-term  objective  of  a  balanced  budget  in  strcutral 
terms,  including  by  meeting  the  expenditure  benchmark.  To  limit  risks  to  budgetary 
execution,  the  Council  invites  Malta  to  strengthen  the  effectiveness  of  its  budgetary 
framework and improve the monitoring of budget execution throughout the year. In particular, 
Malta is invited to put in place a more binding, rule-based multiannual fiscal framework. In 
addition,  the  role  of  independent  bodies  monitoring  fiscal  policy  should  be  strengthend,  in 
accordance with Article 5 of Regulation (EC) No 473/2013 of the European Parliament and of 
the  Council  of  21  May  2013  on  common  provisions  for  monitoring  and  assessing  draft 
budgetary plans and ensuring the correction of excessive deficit of the Member States in the 
euro area.  

Finally, to ensure the success of the fiscal consolidation strategy, the Maltese authorities are 
invited to back the fiscal consolidation with comprehensive structural reforms, in line with the 
Council recommendations addressed to Malta in the context of the European Semester and in 
particular those related to the preventive arm of the Macroeconomic Imbalances Procedure. 

This recommendation is addressed to the Republic of Malta. 

Done at Brussels,  

For the Council 
The President 

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