Recommendation for a COUNCIL RECOMMENDATION on Malta’s 2014 national reform programme and delivering a Council opinion on Malta’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Malta, budget deficit, economic convergence, economic growth, economic recovery, economic stabilisation, financial control, job creation, multilateral surveillance, social situation, stability programme, structural adjustment













EUR-Lex - 52014DC0419 - EN











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52014DC0419

Recommendation for a COUNCIL RECOMMENDATION on Malta’s 2014 national reform programme and delivering a Council opinion on Malta’s 2014 stability programme /* COM/2014/0419 final  - 2014/ () */









 
 
Recommendation for a
COUNCIL RECOMMENDATION
on Malta’s 2014 national reform programme
and delivering a Council opinion on Malta’s 2014 stability programme

THE COUNCIL OF
THE EUROPEAN UNION,
Having regard to the
Treaty on the Functioning of the European Union, and in particular Articles
121(2) and 148(4) thereof,
Having regard to
Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the
surveillance of budgetary positions and the surveillance and coordination of
economic policies[1],
and in particular Article 5(2) thereof,
Having regard to the
recommendation of the European Commission[2],
Having regard to the
resolutions of the European Parliament[3],
Having regard to the
conclusions of the European Council,
Having regard to the
opinion of the Employment Committee,
Having regard to the
opinion of the Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy Committee,
Whereas:
(1)                   
On 26 March 2010, the
European Council agreed to the Commission’s proposal to launch a new strategy
for growth and jobs, Europe 2020, based on enhanced coordination of economic
policies, which will focus on the key areas where action is needed to boost
Europe’s potential for sustainable growth and competitiveness.
(2)                   
On 13 July 2010, the
Council, on the basis of the Commission's proposals, adopted a recommendation
on the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States, which together form the
‘integrated guidelines’. Member States were invited to take the integrated
guidelines into account in their national economic and employment policies.
(3)                   
On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.
(4)                   
On 9 July 2013, the Council
adopted a recommendation on Malta’s national reform programme for 2013 and
delivered its opinion on Malta’s updated stability programme for 2012-2016. On
15 November 2013, in line with Regulation
(EU) No 473/2013[4],
the Commission presented its
opinion on Malta's draft budgetary for 2014[5].
(5)                   
On 13 November 2013, the
Commission adopted the Annual Growth Survey[6], marking the start of the 2014
European Semester of economic policy coordination. On the same day on the basis
of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism
Report[7],
in which it identified Malta as one of the Member States for which an in-depth
review would be carried out. 
(6)                   
On 20 December 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to
pursue differentiated, growth-friendly fiscal consolidation, to restore normal
lending conditions to the economy, to promote growth and competitiveness, to
tackle unemployment and the social consequences of the crisis, and to modernise
public administration.
(7)                   
On 5 March 2014, the
Commission published the results of its in-depth review for Malta[8], under
Article 5 of Regulation (EU) No 1176/2011. The Commission's analysis leads it
to conclude that Malta is no longer experiencing macroeconomic imbalances in
the sense of the Macroeconomic Imbalance Procedure. Although indebtedness
remains high, risks to the sustainability of private and public sector debt and
the stability of the financial sector appear contained, even if they deserve
continued monitoring. In particular, financial stability indicators remain
sound. Still, in light of the structural nature of the risks in the sector, a
continuation of the current prudent supervisory and risk-taking practices is key.
The housing market has stabilised and thus risks arising from over-exposure to
property are limited. Private debt is on the decrease; the corporate
deleveraging is taking place in an orderly manner and credit market pressures
are limited.
(8)                   
On 16 April 2014, Malta
submitted its 2014 national reform programme which was updated on 8 May 2014
and on 30 April 2014 its 2014 stability programme. In order to take account of
their interlinkages, the two programmes have been assessed at the same time.
(9)                   
The objective of the
budgetary strategy outlined in the 2014 Stability Programme is to correct the
excessive deficit in a sustainable manner by 2014 and to gradually progress
toward the medium-term objective of a balanced budgetary position in structural
terms, which is more stringent than what the Stability and Growth Pact
requires. However, the achievement of the medium-term objective is not planned
within the programme period. In 2014, the planned (recalculated) structural
adjustment is narrowly missing the recommended effort. After the planned
correction of the excessive deficit, a small deviation from the adjustment path
towards the medium-term objective is planned in 2015. Thereafter, the planned
annual progress towards the medium-term objective is broadly in line with the
requirement of at least 0.5% of GDP. The programme projects that the government
debt, at 73% of GDP in 2013, will be put on a downward path, compliant with the
debt reduction benchmark, as from 2014. Overall, the programme objectives are
largely in line with the requirements of the Stability and Growth Pact. The
macroeconomic scenario underpinning the budgetary projections in the programme,
which has been endorsed by an independent body (the National Audit Office), is
plausible for 2014 and 2015 since the economic growth projections are
marginally lower than those in the Commission 2014 Spring forecast for these
years. However, risks to the budgetary targets are tilted to the down-side, as
the structural revenue increase planned over the programme period is not fully
underpinned by measures and expenditure overruns could require higher than
budgeted disbursements. According to the Commission forecast, Malta is expected
to sustainably correct its excessive deficit in 2014. At the same time, based
on the Commission forecast, the fiscal effort over the period 2013-2014 falls
short by 1.6% of GDP in terms of (corrected) change in the structural balance
and by 1.25% of GDP in terms of the amount of required measures estimated as
necessary at the time of the Excessive Deficit Procedure recommendation. While
there is no margin with respect to the compliance with the debt reduction
benchmark in 2014, risks to the debt scenario are tilted to the positive side. In
2015, there is a risk of significant deviation from the required progress
towards the medium-term objective. Based on its assessment of the programme and
the Commission forecast, pursuant to Council Regulation (EC) No 1466/97, the
Council is of the opinion that, while Malta’s planned headline deficit and general
government debt comply with the Excessive Deficit Procedure recommendation,
additional efforts are needed to bring the structural adjustment in line with
the recommended one in 2014 and to ensure an appropriate path towards the
medium-term objective as of 2015. 
(10)               
The non-binding nature of
Malta's fiscal framework and the short horizon of fiscal planning are not
supportive of a sound fiscal position. The adoption of the legislation meant to
come into force by the end of 2013 and aimed at fulfilling the requirements of
the Directive 85/2011/EU on budgetary frameworks and the Fiscal Compact has
been delayed. However, according to the Stability Programme the Maltese
government has recently endorsed a Fiscal Responsibility Act, which will be
submitted for the parliament's approval. The draft act foresees the
introduction of a balanced-budget rule in structural terms, a debt rule, a
three-year rolling budgetary framework and a gradual set up of the fiscal
council which would be charged with endorsing of the government's official
macroeconomic and fiscal forecasts as well as ex-ante and ex-post monitoring of
the respect of fiscal rules.
(11)               
Malta's revenue departments
are due to be merged into a single authority, which would streamline tax
collection processes and counter tax evasion. In order to improve tax
compliance and encourage the recovery of amounts due, the penalties in VAT
legislation and the interest on taxes due have been revised. Various other
measures have been introduced that are also expected to consolidate Malta's tax
system. These measures go in the right direction, but their impact has yet to
become apparent. 
(12)               
Despite still facing
challenges regarding the sustainability of Malta's public finances, little
progress can be registered as yet on its pensions system reforms and the
sustainability of its healthcare services. While a Pensions Strategy Group has
been set up to assess all options for reforming the pension system, the Maltese
authorities have given a commitment not to raise the statutory retirement age
beyond the increases outlined in the 2006 pension reform. The statutory
retirement age therefore remains disconnected from life expectancy, which poses
a problem for the long-term sustainability and adequacy of pensions. While
Malta intends to address these shortcomings with labour market measures and
notably its recently adopted active ageing strategy, it is unlikely that this solves
the problem. The sustainability of the healthcare system adds to the challenge
in view of a projected increase in age-related expenditure. A draft national
health systems strategy has just been launched, but it is unclear how this will
be implemented and what gains it will bring in terms of cost-effectiveness and sustainability.
There is a need to strengthen public primary care. 
(13)               
Malta's early school leaving
rate is still very high, but measures are being taken to reduce it and a
comprehensive monitoring system is being set up. Basic skill attainment remains
low, however, thereby contributing to low literacy and early school leaving. Proper
implementation of the recently adopted National Literacy Strategy is expected
to support efforts addressing this shortcoming. This is to be complemented by
further measures, which are expected to increase the labour-market relevance of
training and education. These include the reform of the apprenticeship
framework, establishing a lifelong learning strategy, the introduction of
work-based learning in vocational educational and training, and a specific
programme financed through the European Social Fund. 
(14)               
Malta is currently
implementing a number of significant measures that seek to increase the
participation of women in the labour market, notably through the provision of
free child care services to
households in which parents are in employment or pursuing further education.
Effective implementation will be crucial. The authorities are also helping to provide
after-school care and offering opportunities to send children to school before
the stipulated opening hours, so that parenthood can be better reconciled with
working life. Tax incentives are also envisaged to encourage parents to send
children to childcare facilities already running under previous schemes. Little
is being done, however, to provide and promote the use of flexible working
arrangements, such as teleworking and flexitime, which would help the
reintegration of women into the labour market.
(15)               
In order to further improve
its international competitiveness, in addition to avoiding the potentially
negative impact of a misalignment between wage and productivity developments, Malta
still needs to address infrastructure shortcomings in the energy and transport
sectors that dampen its potential, notably in view of elevated energy costs.
The electricity interconnector with Italy is due to be completed this year, which
will enhance security of supply and may contribute to the diversification of
supply and the use of externally generated renewable energy. The planned
link-up with the European gas network will also add to Malta's energy mix,
making it less reliant on one main source of energy and thereby increasing its
attractiveness as a place for business. Home-grown renewable energy sources,
with the exception of some success as regards the use of photovoltaic energy, represent
a potential that remains to be tapped. 
(16)               
Certain public
administration inefficiencies are limiting the further development of the
business climate in Malta. While improvements in public procurement go in the
right direction, procurement procedures remain excessively long, resulting in inefficient
public expenditure. These measures are not accompanied by targets making an
assessment of their effectiveness difficult. The lack of alternatives to debt
financing leads to a high cost of funding for companies, which puts pressure on
their economic activity. This corporate debt bias may also lead to excessively
high corporate leverage and insufficient allocation of capital. Further
opportunities for non-debt financing therefore need to be pursued. The
inefficiencies in the judicial system highlighted in the 2013 country-specific
recommendations for Malta remain. While it is expected that a number of the
numerous reform proposals delivered by the Commission for the Reform of Justice
in November 2013 will be implemented by the end of 2014, a clear timeline and
prioritisation of measures still needs to be announced. It also remains to be
seen how these will address backlog, in particular as regards the shortcomings
identified above.
(17)               
Malta has strengthened
regulatory oversight to ensure the stability of the financial sector.
Macro-prudential supervision has been added to the functions of the Central
Bank of Malta, and special emphasis is being placed on financial stability
issues, while the Joint Financial Stability Board is now enshrined in
legislation. Satisfactory measures have been taken to improve loan-loss
provisioning, mainly through the introduction of a revision of Banking Rule 9. 
(18)               
In the context of the
European Semester, the Commission has carried out a comprehensive analysis of
Malta’s economic policy. It has assessed the stability programme and the
national reform programme. It has taken into account not only their relevance
for sustainable fiscal and socio-economic policy in Malta but also their
compliance with EU rules and guidance, given the need to reinforce the overall
economic governance of the European Union by providing EU-level input into
future national decisions. Its recommendations under the
European Semester are reflected in recommendations (1) to (5) below.
(19)               
In the light of this
assessment, the Council has examined Malta's stability programme, and its
opinion[9] is reflected in particular in recommendation
(1) below.
(20)               
In the context of the
European Semester the Commission has also carried out an analysis of the economic
policy of the euro area as a whole. On the basis of this analysis the Council
has issued specific recommendations for the Member States whose currency is the
euro. Malta should also ensure the full and timely implementation of these
recommendations.
HEREBY
RECOMMENDS that Malta take action within the period 2014-2015 to:
1.                      
Correct the excessive
deficit in a sustainable manner by 2014. In 2015, significantly strengthen the
budgetary strategy to ensure the required structural adjustment of 0.6% of GDP
towards the medium-term objective. Thereafter, pursue a structural adjustment
of at least 0.5% of GDP each year, and more in good economic conditions or if
needed to ensure that the debt rule is met in order to keep the general
government debt ratio on a sustained downward path. Finalise the adoption of
the Fiscal Responsibility Act with a view to putting in place a binding,
rule-based multiannual fiscal framework and establishing an independent
institution charged with monitoring of fiscal rules and endorsing macroeconomic
forecasts underpinning fiscal planning. Continue improving tax compliance and
fighting tax evasion by ensuring the continued roll-out and evaluation of
measures taken so far, while taking additional action, notably by promoting the
use of electronic means of payment. 
2.                      
Step up the ongoing pension
reform, notably by significantly accelerating the planned increase in the
statutory retirement age and by consecutively linking it to changes in life
expectancy. Ensure that a comprehensive reform of the public health system
delivers a cost-effective and sustainable use of available resources, such as
strengthening primary care.
3.                      
Continue policy efforts to
address the labour-market relevance of education and training and improve basic
skills attainment by stepping up efforts on the overdue reform of the
apprenticeship system. Further reduce early school leaving, notably by
finalising and implementing the announced national literacy strategy. Further
improve the labour-market participation of women, notably those wishing to re-enter
the labour market by promoting flexible working arrangements.
4.                      
Diversify the energy mix in
the economy, including by increasing the share of energy produced from
renewable sources. 
5.                      
Continue efforts to increase
the efficiency and reduce the length of public procurement procedures; encourage
alternatives to debt-financing of companies through facilitating access to capital
markets and developing venture capital funds; and increase the efficiency of
the judicial system by ensuring a timely and efficient implementation of the
planned judicial reform.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               COM(2014) 419 final.
[3]               P7_TA(2014)0128 and P7_TA(2014)0129.
[4]               OJ L 140, 27.5.2013, p.11.
[5]               C(2013) 8007 final
[6]               COM(2013) 800 final
[7]               COM(2013) 790 final
[8]               SWD(2014) 150 final
[9]               Under Article 5(2) of Council Regulation (EC) No
1466/97.