Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Malta and delivering a Council opinion on the 2018 Stability Programme of Malta
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Malta, economic growth, economic policy, economic reform, education policy, labour market, money laundering, retirement conditions, stability programme, transport policy

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 417 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Malta  and delivering a Council opinion on the 2018 Stability Programme of Malta  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Malta 

and delivering a Council opinion on the 2018 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 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission  also  adopted  the  Alert  Mechanism  Report,  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, which was endorsed by the 
European  Council  on  22  March  2018.  On  14  May  2018,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘recommendation  for  the 
euro area’).  

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OJ L 209, 2.8.1997, p. 1. 
COM(2018) 417 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 

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(2) 

(3) 

(4) 

As a Member State 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 on the economic policy for the 
euro  area,  as  reflected  in  the  recommendations  below,  in  particular  (1).  The  2018 
country report for Malta4 was published on 7 March 2018. It assessed Malta’s progress 
in  addressing  the  country-specific  recommendations  adopted  by  the  Council  on  11 
July 2017, the follow-up given to the recommendations adopted in previous years and 
Malta's progress towards its national Europe 2020 targets. 

On 13 April 2018, Malta submitted its 2018 National Reform Programme and its 2018 
Stability programme. To take account of their interlinkages, the two programmes have 
been assessed at the same time. 

Relevant country-specific recommendations have been addressed in 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 of the European Parliament 
and  of  the  Council5,  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 that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance6.  

(5)  Malta is currently in the preventive arm of the Stability and Growth Pact. In its 2018 
Stability  Programme,  the  government  plans  to  maintain  a  surplus  in  headline  terms 
over  2018-2021.  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  Treaty  reference 
value and to gradually decline from 50.8 % of GDP in 2017 to around 36 % in 2021. 
The  macroeconomic  scenario  underpinning  those  budgetary  projections  is  plausible 
for 2018-2019 and favourable for 2020-2021. Based on the Commission 2018 spring 
forecast,  the  structural  balance  is  forecast  to  register  a  surplus  of  0.6  %  of  GDP  in 
2018  and  1.1  %  of  GDP  in  2019,  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  2018  and  2019.  At  the  same  time, 
expenditure developments should be monitored carefully in the short and the medium 
term, especially in light of possible future risks to the robustness of revenues.   

(6) 

As  indicated  in  the  2018  euro  area  recommendation,  the  fight  against  aggressive  tax 
planning  strategies  is  essential  to  impede  distortions  of  competition  between  firms, 
provide fair treatment of taxpayers and safeguard public finances. Spillover effects of 
taxpayers'  aggressive  planning  strategies  between  Member  States  call  for  a 
coordinated action of national policies to complement EU legislation. The absence of 

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SWD(2018) 216 final. 
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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(7) 

(8) 

withholding  taxes  on  outbound  (i.e.  from  EU  residents  to  third  country  residents) 
dividends, interest and royalty payments made by Malta based companies may lead to 
those  payments  avoiding  tax  altogether,  if  they  are  also  not  subject  to  tax  in  the 
recipient country. While Malta’s new Notional Interest Deduction regime will help to 
reduce  the  debt  equity  bias,  insufficient  anti-abuse  rules,  combined  with  a  relatively 
high rate and a stock-based regime, may provide opportunities for tax avoidance. The 
existence  of  some  provisions  in  bilateral  tax  treaties  between  Malta  and  other  EU 
Member States, coupled with Malta’s tax system, where a company that is resident but 
not  domiciled  in  Malta  is  taxed  on  source  and  remittance  basis,  may  be  used  by 
companies  to  engage  in  tax  avoidance  practices.  The  Commission  takes  note  of 
Malta's  commitment  to  fight  against  taxpayers  aggressive  tax  planning.  Based  on 
recent  exchanges,  the  Commission  will  continue  its  constructive  dialogue  to  fight 
against taxpayers aggressive planning strategies. 

retirement 

incomes.  The 

The long-term sustainability of public finances in Malta remains a challenge. This is 
entirely  driven  by  the  budgetary  impact  of  ageing-related  costs,  such  as  healthcare, 
long-term care and pensions. The pension system faces the dual challenge of achieving 
sustainability  while  ensuring  adequate 
long-term 
sustainability  prospects  for  pension  expenditure  have  improved,  mainly  thanks  to  a 
more  positive  assessment  of  Malta’s  long-term  growth  potential.  However,  the 
measures  introduced  in  the  2016  budget  had  only  a  limited  impact  on  long-term 
sustainability of the pension system, which therefore remains a significant challenge. 
In  addition,  despite  the  introduction  of  measures  to  improve  pension  adequacy,  the 
gender coverage gap in pensions remains high. The performance of the health system 
has improved and waiting times are being reduced. However, challenges remain in the 
redistribution  of  resources  and  activities  from  hospital  to  primary  care.  The 
institutional setting of primary healthcare provision puts pressure on both hospital and 
emergency  care.  Hospital  and  primary  care  are  not  well  coordinated  and  emergency 
care  remains  inefficiently  used.  Access  to  innovative  medicines  remains  a  major 
challenge,  also  in  budgetary  terms.  Initiatives  were  undertaken  to  cater  for  growing 
demand  in  the  long-term  care  system,  such  as  incentivising  community-based  and 
home care.  

Some  progress  has  been  made  in  improving  cross-border  cooperation.  However,  the 
Malta Financial Services Authority still appears understaffed and concerns remain on 
its  capacity  to  supervise  a  large  cross-border  financial  system,  in  particular  its  non-
bank segment. In addition, while the services sector (in particular, the online gaming 
industry) has significantly contributed to the country's sustained economic growth, this 
may  create  challenges  to  the  financial  system’s  integrity,  calling  for  a  strong  anti-
money  laundering  framework.  Malta  has  recently  transposed  the  4th  Anti  Money 
Laundering Directive; the effectiveness of its implementation remains to be assessed. 
In  addition,  following  the  transposition  of  the  Directive  into  national  law,  Maltese 
authorities  have  recently  presented  an  integrated  strategy  to  fight  money  laundering 
and terrorist financing. Among other actions, a National Coordinating Committee on 
Combating  Money  Laundering  and  Funding  of  Terrorism,  composed  of 
representatives  from  Government  and  other  relevant  national  authorities,  will  be  set 
up.  However,  challenges  remain  on  ensuring  proper  implementation  and  effective 
enforcement of the recently adopted regulatory framework. 

(9) 

In the context of strong economic growth and reforms supporting female employment 
and  up-skilling  of  the  workforce,  Malta's  labour  market  outcomes  have  further 
improved.  However,  high  gender  employment  gaps  and  the  low  labour  market 

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participation of women above the age of thirty and people with disabilities continue to 
be  a  challenge.  The  design  of  paternity  leave  and  parental  leave  remains  relatively 
weak but is important for gender-balanced caring responsibilities and greater support 
for  women  to  work.  Labour  shortages  are  growing  and  skills  mismatches  persist.  A 
substantial  share  of  the  Maltese  labour  force  still  has  low  qualifications,  while  the 
reliance on foreign labour to address the labour and skills shortages is increasing. The 
policy  initiatives  being  implemented  in  the  areas  of  labour  market,  skills  and  social 
inclusion are expected to continue further, but need to be informed by outcome- based 
monitoring and evaluation.  

(10)  At  18.6  %  in  2017,  the  early  school  leaving  rate  remains  the  highest  in  the  EU  and 
with  little  improvement  compared  to  the  previous  year.  Malta  also  has  the  highest 
early school leaving rate for people with disabilities, which is at 50 %, double the EU 
average.  Moreover,  learning  outcomes  are  strongly  influenced  by  socioeconomic 
background,  type  of  school  and  disability  status.  The  gap  in  science  performance 
between  students  from  the  bottom  versus  the  top  performing  schools  is  among  the 
highest  in  the  EU  and  1.5  times  the  average  of  the  Organisation  for  Economic  Co-
operation and Development. The share of low achievers in maths, science and reading 
is  the  fourth  highest  in  the  EU.  A  comprehensive  strategy  to  improve  educational 
quality  and  reduce  inequalities  in  educational  outcomes  between  social  groups  and 
different school types is missing. 

transport 

(11)  Robust  economic  growth  has  increased  pressure  on  infrastructure  and  natural 
resources.  In  particular,  the  road  transport  sector  faces  major  infrastructure  and  long 
infrastructure  and  rising 
term  sustainability  challenges.  Insufficient 
congestion  costs  are  a  barrier  to  investment.  The  increase  in  the  number  of  vehicles 
and  in  traffic  leads  to  rising  greenhouse  gas  emissions  and  negatively  affects  air 
quality. They may also negatively impact tourism, which represents an important pillar 
of Malta's economy. Therefore, the need to tackle the infrastructure gap goes hand in 
hand  with  the  need  for  clean  transport  solutions.  In  2016,  the  government  adopted a 
National Transport Strategy with a 2050 horizon and an Operational Transport Master 
Plan  to  2025.  It  also  announced  a  EUR  700  million  project  to  upgrade  the  road 
network.  Together,  these  measures  are  expected  to  reduce  the  economic  costs  of 
congestions by less than 20 %. Increasing economic activity may exacerbate existing 
infrastructure bottlenecks, putting even more pressure on environmental resources. In 
addition,  the  plan  fails  to  set  a  clear  target  for  the  reduction  of  greenhouse  gas 
emissions  from  transport  and  does  not  propose  an  effective  monitoring  system  for 
implementation of the measures reported (besides a five-year review cycle). It is thus 
important  to  set  targets  and  implement  measures  to  substantially  reduce  congestion 
and greenhouse emissions from transport by 2025, allowing for periodic monitoring of 
progress. 

(12)  The challenges created by the country’s size and island status make the need to move 
towards a more circular economy particularly compelling. Smart investment can help 
to  reduce  pressure  on  the  island's  vulnerable  natural  resources.  For  instance,  if  not 
addressed,  difficulties  with  disposal  of  construction  and  demolition  waste  might 
reduce  the  quality  of  environment  and  the  country's  attractiveness  as  a  tourist 
destination.  While  Malta  has  remained  in  the  bottom  group  for  eco-innovation 
performance  (26th  in  the  EU  in  2016  from  18th  in  2013,  according  to  the  Eco-
innovation  index),  it  has  the  potential  to  mobilise  investment  to  generate  or  adopt 
innovative solutions to improve resource and energy efficiency in construction, as well 
as the management of waste and waste water. In particular, improvements are needed 

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in  the  management  of  waste  alongside  investment  in  recycling  facilities  for 
construction  and  demolition  waste  and  the  implementation  of  controls  to  prevent 
illegal landfill or dumping at sea of construction and demolition waste. 

(13)  The  justice  system  continues  to  face  challenges  with  regards  to  its  efficiency  and  a 
strengthened  legal  and  institutional  framework  to  fight  corruption  is  necessary  to 
ensure  a  high  quality  business  environment.  Governance  shortcomings  in  the  anti-
corruption framework may adversely affect the business climate and weigh negatively 
on  investment.  The  effectiveness  of  Malta’s  efforts  to  fight  corruption  needs  to  be 
further  improved,  especially  with  regards  to  the  investigation  and  prosecution  of 
corruption.  Improving  the  governance  framework  is  crucial  to  preserving  Malta’s 
reputation and attractiveness as an international investment destination  

(14) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Malta’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Stability  Programme  and  the  2018 
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  Union  rules  and  guidance,  given  the  need  to  strengthen  the  Union’s  overall 
economic governance by providing Union-level input into future national decisions.  

(15) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme and is of the opinion that Malta is expected to comply with the Stability 
and Growth Pact. 

HEREBY RECOMMENDS that Malta take action in 2018 and 2019 to: 

1. 

2. 

Strengthen the overall governance framework by enhancing the national supervision 
of  internationally  oriented  financial  businesses  licensed  in  Malta,  by  ensuring  the 
effective enforcement of the Anti-Money Laundering framework and by continuing 
to step up the fight against corruption. 

Ensure  the  sustainability  of  the  health  care  and  the  pension  systems,  including  by 
increasing the statutory retirement age and by restricting early retirement. 

Done at Brussels, 

For the Council 
The President 

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