Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Malta and delivering a Council opinion on the 2017 Stability Programme of Malta
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Malta, economic policy, economic reform, education policy, employment policy, gross domestic product, labour market, pension scheme, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 517 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Malta  and delivering a Council opinion on the 2017 Stability Programme of Malta  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Malta 

and delivering a Council opinion on the 2017 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 
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  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,4 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,5  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 
area. That Recommendation was endorsed by the European Council on 9-10 March 
2017 and adopted by the Council on 21 March6.  

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OJ L 209, 2.8.1997, p. 1. 
COM(2017) 517 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 
2017/C92/01 

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(3) 

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(7) 

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As  a  country  whose  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 for the euro area which is 
reflected in recommendation 2 below.  
The 2017 country report for Malta7 was published on 22 February 2017. It assessed 
Malta’s progress in addressing the country-specific recommendations adopted by the 
Council  on  12 July  2016,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Malta’s progress towards its national Europe 2020 targets.8  

On 18 April 2017, Malta submitted its 2017 National Reform Programme and on 2 
May  2017  Malta  submitted  its  2017 Stability  Programme.  To  take  account  of  their 
interlinkages, the two programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States' programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,9 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.10 

Malta is currently in the preventive arm of the Stability and Growth Pact. In its 2017 
Stability Programme,  the government plans to  maintain  a surplus in  headline terms 
over  2017-2020.  The  medium-term  budgetary  objective  —  a  balanced  budgetary 
position in terms of GDP — continues to be met with a positive margin throughout 
the  programme  period.  According  to  the  Stability  Programme,  the  general 
government  debt-to-GDP  ratio  is  expected  to  remain  below  the  60%  of  GDP 
reference  value  and  to  gradually  decline  from  58.3%  of  GDP  in  2016  to  47.6%  in 
2020.  The  macroeconomic  scenario  underpinning  these  budgetary  projections  is 
plausible for 2017 and cautious for 2018-2020. At the same time, there are possible 
implementation risks related to budgetary execution. 

On  12  July  2016,  for  2017  the  Council  recommended  Malta  to  achieve  an  annual 
fiscal  adjustment  of  0.6%  of  GDP  towards  the  medium-term  budgetary  objective. 
Outturn  data  indicate  that  Malta  already  reached  its  medium-term  budgetary 
objective  in  2016.  Based  on  the  Commission  2017  spring  forecast,  the  structural 
balance  is  forecast  to  increase  from  a  surplus  of  0.4%  of  GDP  in  2017  to  0.7%  of 
GDP  in  2018,  remaining  above  the  medium-term  budgetary  objective.  Overall,  the 
Council is of the opinion that Malta is projected to comply with the provisions of the 
Stability and Growth Pact in 2017 and 2018.  

SWD(2017) 83 final. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 

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(11) 

Notwithstanding the achievement of the medium-term objective three years ahead of 
the  target,  expenditure  increases  outpaced  potential  output  growth.  If  sustained 
further,  this  poses  a  challenge  to  the  sustainability  of  public  finances,  especially  in 
the  case  of  unanticipated  shocks  to  revenues.  The  authorities  carried  out  spending 
reviews,  in  some  areas  of  public  spending  particularly  relevant  in  terms  of 
sustainability  —  healthcare,  education  and  training  and  social  security.  Timely  and 
effective  implementation  of  the  ensuing  recommendations  will  determine  their 
effectiveness in achieving their goal. In addition, Malta's public finances continues to 
face  sustainability  risks  in  the  long-term  due  to  the  projected  costs  linked  to 
population  ageing,  such  as  health  care,  long-term  care  and  pensions.  The  steep 
increase  in  projected  age-related  expenditure  is  mainly  due  to  pension  expenditure, 
which is estimated to increase by 3.2 percentage points of GDP by 2060 according to 
the  2015  Ageing  Report.  Some  of  the  recently  introduced  measures  are  likely  to 
generate  savings.  However,  these  savings  are  unlikely  to  be  sufficient  to  offset 
mounting  spending  pressures  and  decisively  improve  long-term  sustainability. 
Further measures could, therefore, be necessary. 

Malta  has  put  forward  several  measures  to  address  the  dual  challenge  of 
sustainability  and  ensuring  adequate  retirement  incomes  posed  by  the  pension 
system.  Measures  introduced  in  the  2017  budget  are  expected  to  moderately  lower 
the poverty risk for older people and improve somewhat the net replacement rate of 
the guaranteed minimum pension. Overall, pension adequacy indicators still indicate 
considerable room for improvement including on reducing the high gender coverage 
gap. 

Road traffic congestion has become a barrier to business, and its external (economic 
and environmental) costs have been estimated at 274 million euros per year and are 
projected  to  increase.  In  addition,  emissions  of  greenhouse  gases  from  traffic 
continue growing and Malta is likely to fail to reach its 2020 emission targets. Malta 
has  adopted  an  ambitious  National  Transport  Strategy  with  a  2050  horizon  and  an 
Operational Transport Master Plan to 2025. They include a diverse set of measures to 
rationalise  the  use  of  private  cars,  promote  alternative  mobility  solutions  and  make 
more  efficient  use  of  multimodal  and  collective  transport  systems.  While  these 
measures  are  projected  to  make  significant  improvements,  congestion  is  still 
projected  to  rise  and  greenhouse  gas  emissions  from  transport  to  decrease  only 
modestly until 2030. 

The financial system is characterised by a significant number of foreign institutions 
attracted, among other factors, by the favourable tax environment. Malta is the only 
EU  Member  State  utilising  the  full  imputation  system  of  company  taxation  and  it 
offers a refundable tax credit scheme. It has an extensive network of double taxation 
treaties, and it has an attractive tax residency status for individuals. The supervision 
of the internationally-oriented business, however, is challenging. The financial sector 
carries  out  most  of  its  activities  outside  Malta.  The  ability  of  a  relatively  small 
supervisory  authority  to  oversee  a  large  system,  in  particular  in  the  insurance 
sector but also in banking, is under pressure. The Malta Financial Services Authority, 
in consultation with the ECB, has recently requested  the withdrawal of the banking 
licence of a small internet banking provider that collects deposits also outside Malta. 

(12) 

Despite progress, further improvements in the efficiency of the justice system remain 
necessary.  Although  new  measures  on  second  chance  and  insolvency  have  been 
proposed by the government, lengthy insolvency and discharge procedures harm the 
quality  of  the  business  environment  in  Malta.  Moreover,  the  framework  of  debt 

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(13) 

(14) 

discharge does not provide for a time limit, thus it lacks legal certainty. To address 
the shortcomings, a draft amendment to the Companies Act introducing considerable 
changes to the legal framework on insolvency, such as the possibility of mediation, 
was tabled and is currently being considered by the national parliament. The impact 
of these changes in their final scope and formulation remains to be analysed.  

Labour shortages are emerging across the skills spectrum and the adjustment of skills 
supply to labour market needs is still incomplete. A substantial share of the Maltese 
labour force still has low qualifications. While educational attainment is increasing, 
the  rate  of  early  school  leaving  remains  high  and  basic  skills  attainment  among 
young people is still weak. Access and participation in lifelong learning — with the 
involvement  of  employers  —  is  improving  including  for  the  low-skilled,  but  given 
the  extent  of  the  challenge,  efforts  need  to  be  sustained.  Significant  investments  in 
the  education  and  training  system  are  expected  to  bear  fruit,  especially  if  the 
measures  are  maintained  and  improved  in  the  future,  notably  through  the  recently 
established  National  Skills  Council.  Employment  rates  are  steadily  improving  and 
labour  market 
the  unemployment  rate  has  dropped  below  5 %.  However, 
participation  is  still  among  the  lowest  in  the  EU,  in  particular  for  older  and  low-
skilled women, which also points to remaining social exclusion risks for those who 
are  not  equipped  to  adjust  to  a  fast  changing  economy.  Therefore,  current  policy 
investments  need  to  be  sustained  and  further  developments  are  to  be  closely 
monitored.  

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  2017 
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.  

(15) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion11 is reflected in particular in recommendation 1 below, 

HEREBY RECOMMENDS that Malta take action in 2017 and 2018 to: 

1. 

2. 

Expand the scope of the ongoing spending reviews to the broader public sector and 
introduce performance-based public spending. 

Ensure  the  effective  supervision  of  internationally  oriented  business  by  financial 
institutions,  licensed  in  Malta  in  cooperation  with  the  host  supervisors  in  the 
countries where they operate. 

Done at Brussels, 

For the Council 
The President 

11 

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

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