Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Malta and delivering a Council opinion on the 2016 stability programme of Malta
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Malta, budget deficit, continuing education, economic policy, economic reform, labour force, public finance, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 338 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Malta  and delivering a Council opinion on the 2016 stability programme of Malta  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Malta 

and delivering a Council opinion on the 2016 stability programme of Malta 

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 
policies1, and in particular Article 5(2) thereof, 

Having regard to the recommendation of the European Commission2, 
Having regard to the resolutions of the European Parliament3, 

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  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey4, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report5,  in  which  it 
did  not  identify  Malta  as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  carried  out.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council recommendation on the economic policy of the euro 
area6.  This  recommendation  was  endorsed  by  the  European  Council  on  18-19 
February  2016  and  adopted  by  the  Council  on  8  March  2016.  As  a  country  whose 

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OJ L 209, 2.8.1997, p. 1. 
COM(2016) 338 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 
COM(2015) 692 final. 

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(2) 

(3) 

(4) 

(5) 

currency is the euro and in view of the close interlinkages between the economies in 
the  economic  and  monetary  union,  Malta  should  ensure  the  full  and  timely 
implementation of the recommendation. 
The 2016 country report for Malta was published on 26 February 20167. It assessed 
Malta’s progress in addressing the country-specific recommendations adopted by the 
Council  on  14  July  2015  and  Malta’s  progress  towards  its  national  Europe  2020 
targets. 

On 15 April 2016, Malta submitted its 2016 national reform programme and its 2016 
stability  programme.  To  take  account  of  their  interlinkages,  the  two  programmes 
have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance.8 

in 

Malta is currently in the preventive arm of the Stability and Growth Pact and subject 
to the debt rule. In its 2016 stability programme the government plans the headline 
balance to improve to a surplus of 0.1% of GDP by 2019. The structural balance will 
gradually  improve  so  that  Malta's  medium-term  budgetary  objective  -  a  balanced 
budgetary position in structural terms – is reached by 2019. According to the stability 
programme, the general government debt-to-GDP ratio is expected to fall to 62.6% 
in  2016  and  decrease  further  to  55.5%  in  2019.  The  macroeconomic  scenario 
underpinning  these  budgetary  projections  is  plausible  for  2016  and  cautious  for 
2017-19. However, the measures needed to support the planned deficit targets from 
2017 onwards have not been sufficiently specified. Based on the Commission 2016 
spring forecast, there is a high risk of a significant deviation from the recommended 
adjustment  towards  the  medium-term  objective  in  2015  and  2016  taken  together, 
essentially  stemming  from  the  slippage  in  2015  which  needs  to  be  corrected  for  in 
2016, and under unchanged policies in 2017. The slippage in 2015 is partly explained 
by  the  surge  in  investment  largely  due  to  the  exceptionally  high  absorption  of  EU 
funds in the run up to the conclusion of the 2007-2013 programming period. In order 
to reduce the deviation over the two-years 2015-2016, the 2016 stability programme 
includes  additional  measures  for  2016  that  could  not  yet  be  included  in  the  spring 
forecast. These measures are targeted at reducing primary expenditure (by 0.16% of 
GDP),  especially  in  the  areas  of  compensation  of  employees,  intermediate 
consumption and capital transfers. In addition, the estimates of some of the revenue 
measures for 2016-2019 have been revised to reflect more up to date information, as 
well as the actual impact of the measures for 2015. Taken together, these measures 
have  a  net  deficit-reducing  impact  of  0.2%  of  GDP.  Compared  to  the  Commission 
forecast,  factoring  in  these  measures  would  improve  the  structural  effort,  and  the 
structural balance pillar would point to some deviation on average over the two years 

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SWD(2016) 86 final. 
COM(2014) 494 final. 

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(6) 

(7) 

(8) 

2015-2016, whereas a risk of a significant deviation would remain in 2017. Malta is 
forecast to comply with the debt reduction benchmark both in 2016 and 2017. Based 
on its assessment of the stability programme and taking into account the Commission 
2016 spring forecast, the Council is of the opinion that there is a risk that Malta will 
not comply with the provisions of the Stability and Growth Pact. Therefore, further 
measures will be needed to ensure compliance in 2016 and 2017. 

The long-term sustainability of public finances in Malta remains a challenge. This is 
mainly  due  to  the  budgetary  impact  of  ageing-related  costs,  such  as  healthcare  and 
long-term  care  and  pensions.  The  pension  system  faces  the  double  challenge  of 
achieving  sustainability  while  ensuring  adequate  retirement  incomes.  Pension 
expenditure  was  lower  than  the  EU  average  in  2013,  at  9.6  %  of  GDP,  but  it  is 
projected  to  increase  to  12.8  %  by  2060,  one  of  the  highest  in  the  EU.  In  March 
2016, the government adopted several measures to address the sustainability and the 
adequacy of the pensions system, but the budgetary impact has not yet been assessed. 
In order to improve the adequacy of the system, the contributory national minimum 
pension continues to evolve in 2016, with a view to reaching 60 % of median income 
by  2027,  and  to  extend  its  coverage.  Effectiveness  of  the  reform  will  depend  on 
safeguarding  the  employability  of  older  cohorts.  In  addition  to  pensions,  public 
expenditure on healthcare and long-term care is projected to increase faster than the 
EU  average,  at  2.1%  and  1.2%  of  GDP.  The  authorities  have  adopted  a  national 
health systems strategy and are conducting a healthcare spending review with a view 
to improving the efficiency of expenditure. However, the savings from these efforts 
have  yet  to  materialise.  Sustainability  in  the  long  run  would  benefit  from  using 
potential savings to address the projected expenditure growth. 

Significant  investments  have  been  made,  but  education  and  training  outcomes  are 
still  below  target.  This  affects  the  quality  of  labour  supply  and  the  labour  market 
participation rate. The educational attainment of Malta’s workforce is still among the 
lowest  in  the  EU.  Malta  is  implementing  a  comprehensive  strategy  for  lifelong 
learning,  but  participation  in  lifelong  learning  programmes  is  still  limited, 
particularly  among  those  with  low  educational  attainment.  Challenges  in  this  area 
include  targeted  outreach,  improved  access  to  training  and  partnerships  between 
education  and  training  institutions  and  employers.  A  legal  notice  establishing  an 
institute  for  the  continuous  professional  development  of  teachers  (the  Institute  for 
Education) was approved in 2015. The Institute’s main objectives are to: (i) provide 
teachers with skills needed in their daily professional activities; (ii) act as a hub for 
educators  to  meet  and  share  their  experiences  and  (iii)  promote  educational 
leadership. The Institute is now becoming operational and is expected to become the 
main driver in addressing teachers’ professional development needs. Progress in this 
area will need to be monitored. 

Apart from one-off large-scale projects in 2014-2015, investment in Malta has been 
muted, reflecting structural changes in the economy and bottlenecks. This is mainly 
linked  to  the  increasing  importance  of  less  capital-intensive  service  sectors,  which 
lowers  the  economy’s  future  investment  needs.  Nevetherless,  some  challenges  that 
affect investment activity in the country persist, such as the insufficient capacity to 
innovate, skills bottlenecks, inefficiencies in the public administration and the justice 
system, the regulatory burden and significant traffic congestion.  

(9) 

The  transport  and  logistical  infrastructure  is  one  of  the  major  barriers  to  foreign 
investment.  The  external  costs  of  transport  borne  by  Malta’s  economy  are 
substantial.  These  stem  mainly  from  an  inefficient  use  of  the  country’s  transport 

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(10) 

(11) 

network and the lack of real alternatives to using private passenger cars. In addition, 
the high number of private vehicles, pollution and traffic congestion pose challenges 
to  the  sustainability  of  the  national  transport  sector.  No  comprehensive  transport 
strategy  has  yet  been  implemented,  despite  the  fact  that  the  development  of  a 
national  transport  strategy  and  master  plan  is  a  pre-condition  for  accessing  EU 
structural and investment funds (2014-2020), which will be used to co-fund transport 
investments.  

The government has taken several steps to improve access to finance for small and 
medium-sized enterprises (SMEs). These steps were geared to providing equity and 
venture capital, which had been identified as a bottleneck in recent years. In addition, 
future measures include setting up a central credit register and a development bank 
and the launch by the Malta Stock Exchange of a platform designed specifically to 
help SMEs raise funds through the capital market. Difficulties in the area of access to 
non-bank  instruments  remain,  but  SMEs  in  Malta  benefit  from  a  better  financing 
environment than many of their EU peers. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Malta’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 
programme  and  the  follow-up  given  to the recommendations  addressed  to  Malta in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal  and  socioeconomic  policy  in  Malta  but  also  their  compliance  with  EU  rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations (1) and (2) below. 

(12) 

In the light of this assessment, the Council has examined the stability programme and 
its opinion9 is reflected in particular in recommendation 1 below. 

HEREBY RECOMMENDS that Malta take action in 2016 and 2017 to: 

1. 

2. 

In  view  of  the  high  risk  of  a  significant  deviation,  achieve  an  annual  fiscal 
adjustment of 0.6 % of GDP towards the medium-term budgetary objective in 2016 
and in 2017, by taking the necessary structural measures. Step up measures to ensure 
the long-term sustainability of public finances. 

Take  measures  to  strengthen  labour  supply,  notably  through increased  participation 
of low-skilled persons in lifelong learning. 

Done at Brussels, 

For the Council 
The President 

9 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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