Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Malta and delivering a Council opinion on the 2019 Stability Programme of Malta
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Malta, economic policy, economic reform, fiscal policy, health care, money laundering, pension scheme, research, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 518 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Malta and delivering a Council opinion on the 2019 Stability Programme of Malta    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Malta and delivering a Council opinion on 
the 2019 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 Commission, 

Having regard to the resolutions of the European Parliament, 

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 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for 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  21  March 
2019.  On  21  November  2018,  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  date,  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  21  March  2019.  On  9  April  2019,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘Recommendation  for  the 
euro area’).  

(2) 

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 

1 

OJ L 209, 2.8.1997, p. 1. 

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(3) 

(4) 

(5) 

full and timely implementation of the Recommendation for the euro area, as reflected 
in recommendations (1) and (2) below.  
The  2019  country  report  for  Malta2  was  published  on  27  February  2019.  It  assessed 
Malta’s progress  in  addressing the country-specific recommendations adopted by the 
Council  on  13  July  2018,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Malta's progress towards its national Europe 2020 targets.  

On 16 April 2019, Malta submitted its 2019 National Reform Programme and, on 30 
April  2019,  its  2019  Stability  Programme.  In  order  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  ('ESI  Funds')  for  the  2014-2020 
period.  As  provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the 
European  Parliament  and  of  the  Council3,  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 ESI Funds to sound economic governance4.  

(6)  Malta is currently in the preventive arm of the Stability and Growth Pact. In its 2019 
Stability  Programme,  the  government  plans  a  decrease  in  the  headline  surplus  from 
2% of GDP in 2018 to 0.9% of GDP in 2019, followed by a marginal increase to 1.0% 
of  GDP  in  2020  and  further  to  1.1%  of  GDP  in  2021  and  2022.  Based  on  the 
recalculated  structural  balance5,  the  medium-term  budgetary  objective  —  a  balanced 
budget in structural terms — continues to be overachieved 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  46%  of  GDP  in  2018  to  around  33%  in  2022.  The 
macroeconomic scenario underpinning those budgetary projections is plausible. Based 
on the Commission 2019 spring forecast, the structural balance is forecast to register a 
surplus of 0.6% of GDP in 2019 and 0.8% of GDP in 2020, 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 2019 and 2020. 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. 

(7) 

The increase in age-related spending represents a risk to the long-term sustainability of 
public finances. Age-related public spending in the pension and healthcare systems is 
expected to increase significantly compared to other EU countries, indicating a risk of 
rising  debt  in  the  long  term.  Several  measures  aim  to  increase  the  adequacy  of 

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SWD(2019) 1017 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. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

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pensions  also  through  strengthening  incentives  for  private  pension  savings  and 
voluntary  occupational  retirement  pensions.  Ongoing  efforts  have  helped  to  increase 
the supply of labour and prolong working lives, with a positive impact on employment 
rates  for  women  and  older  workers.  In  2018,  the  government  made  adjustments  to 
include contributions made after pensionable age and allowed self-employed and part-
time  working  pensioners  under  65  years  to  pay  contributions  proportionate  to  their 
earnings,  thereby  promoting  longer  working  lives.  However,  the  statutory  retirement 
age, gradually increasing from its current level at 62 years, is set to remain unchanged 
after  2027  at  65  years  despite  a  projected  further  growth  in  life  expectancy.  The 
Pension  Strategy  Group  established  in  2018  is  expected  to  publish  a  report  by 
December  2020,  outlining  recommendations  for  improving  the  adequacy  and 
sustainability  of  the  pension  system.  Regarding  healthcare,  measures  to  decentralise 
services from hospitals to primary care and to improve the provision of long-term care 
services  are  ongoing.  Current  plans  to  expand  the  capacity  of  public  hospital 
outpatient  care  can  help  in  tackling  long  waiting  times  for  certain  specialties. 
Nevertheless, other measures to reduce unnecessary referrals to specialists and redirect 
inappropriate use of emergency care to outpatient have so far not been fully used thus 
preventing improvements in efficiency of the system. A new concept for primary care 
centres and investments to gradually expand the use of eHealth are carried out with a 
view  to  decentralise  services  from  hospitals  to  primary  care  level.  Reflecting 
increasing demand for long-term care, new types of community-based and home care 
services  were  introduced  in  2017-2018.  Despite  their  potential,  the  impact  of  the 
measures  in  the  area  of  pensions  and  healthcare  on  fiscal  sustainability  has  yet  to 
materialise. 

In the last decade, Malta experienced a pronounced shift towards the services sector, 
with a strong focus on internationally oriented areas such as financial services, tourism 
and remote gaming. The expansion of the services sector contributed to fuel economic 
growth  and  to  develop  a  large  surplus  in  the  current  account.  At  the  same  time,  the 
increasing reliance on sectors that are considered vulnerable to financial integrity risks 
creates  challenges  to  the  governance  framework,  putting  pressure  on  the  supervisory 
and enforcement capacity. In particular, the size of the financial and the gaming sector, 
the  efforts  to  attract  crypto-currency  operators  require  an  effective  anti-money 
laundering enforcement. The recent increase in the human and budgetary resources of 
the Financial Intelligence Analysis Unit as well as the enhancement of its procedures 
and  processes  are  positive  steps.  Governance  shortcomings,  particularly  in  the  fight 
against  corruption,  may  also  adversely  affect  the  business  environment  and  weigh 
negatively on investment. In particular, there is a risk of conflict of interest at various 
levels  of  government.  Furthermore,  the  police’s  Economic  Crimes  Unit  is  currently 
understaffed.  In  this  context,  it  is  important  to  couple  a  strengthened  legislative 
framework  with  timely  and  thorough  implementation.  Improving  the  governance 
framework  and  ensuring  an  effective  implementation  is  a  key  element  to  preserve 
Malta’s attractiveness and protect the economy from reputational risks. 

(8) 

(9) 

The  insurance  sector  is  exposed  to  risks  of  passive  supervision,  where  cooperation 
between  domestic  and  external  supervisors  is  essential.  In  contrast  to  the  banking 
sector,  the  supervision  of  subsidiaries  in  the  insurance  sector  are  subject  to  home 
supervision, i.e. insurance companies registered in Malta and writing business in other 
countries  are  under  direct  supervision  of  the  Maltese  regulator.  However,  the 
supervisory  capacity  has  not  been  sufficiently  strengthened  yet.  In  addition,  the 
complexity  of  insurance  business  models  and  products  with  increased  appetite  for 

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establishing  and  expanding  specialised  insurance  vehicles,  calls  for  stringent 
supervision. 

(10)  Reforms aimed at continuing to improve independence of the judiciary and the justice 
system  are  ongoing.  This  includes,  in  particular,  the  establishment  of  a  new 
prosecution  service,  independent  from  the  Attorney  General  and  the  police  as  also 
recommended  by  the  Council  of  Europe’s  Commission  for  Democracy  through  Law 
(the  Venice  Commission)  in  an  opinion  on  Malta,  adopted  in  December  2018. 
Moreover, a strengthened governance framework, including effective judicial and anti-
corruption enforcement, is a prerequisite to obtaining the full benefits of investment. 

(11)  The  proportion  of  innovative  enterprises  is  still  lagging  behind.  Research  and 
innovation  performance  need  to  be  strengthened  by  smart  specialisation  so  that  this 
may contribute to growth in productivity. Malta has not yet set up the formulation of a 
coherent,  comprehensive  and  long-term  competitiveness  strategy  for  moving  the 
domestic  economy  up  the  value  chain.  Given  Malta's  specialisation  in  fast-growing 
services and its aspirations for block chain technology, it is critical to invest even more 
in administrative and supervisory capacity. In addition, increasing Malta’s innovation 
performance  will  require  further  investments  in  intangible  assets  including  research 
and development, addressing skills deficits and gaps and facilitating science-business 
links, all within more effective governance of the research and innovation system. 

(12)  Malta  needs  to  promote  the  shift  towards  a  more  sustainable  and  resource-efficient 
economy, for example by investing in  the untapped potential for energy efficiency and 
renewables,  water-management  cycle,  waste  management,  tackling  the  growing 
emissions  from  air  conditioning,  climate  action  and  sustainable  mobility  that  will 
contain  emissions  from  road  transport.  Due  to  limited  transport  and  commuting 
alternatives  to  driving  as  well  as  high  car  penetration,  road  congestion  is  one  of  the 
weakest  aspects  of  Malta’s  business  environment  and  remains  a  major  challenge. 
Moreover, greenhouse gas emissions from road transport have increased over the last 
5  years.  The  share  of  renewables  in  the  energy  mix  has  increased  to  7.2%  in  2017, 
slightly  above  the  2017/2018  indicative  trajectory  level  of  6.5%.  However,  Malta’s 
final  energy  consumption  is  continuously  increasing.  Further  investments  across 
sectors  are  needed  in  the  short  term  in  order  to  meet  the  2020  national  renewable 
energy  and  energy  efficiency  targets.  Research  and  development  funding  or  support 
measures  should  be  implemented  to  develop  new/improved  technologies  addressing 
environment  and  climate  change.  The  environmental  and  social  costs  of  the  housing 
boom require closer monitoring. Circular economy principles should be applied to the 
disposal  of  construction  waste  to  limit  its  environmental  impact.  The  economic  and 
social consequences of the increase in the cost of housing require attention.  

(13)  The employment  rate in  Malta, now above EU  average, is still increasing.  A special 
emphasis in this regard could benefit people with disabilities. The gender employment 
gap  remains  the  largest  in  the  EU  and  women's  participation  in  the  labour  market 
declines  strongly  from  their  mid-thirties,  largely  due  to  caring  responsibilities.  More 
labour  market  support  for  unemployed  informal  carers  could  address  this  gap.  The 
increasing reliance on foreign labour to address the labour and skills shortages creates 
social  and  sustainability  challenges.  Policy  initiatives  in  the  areas  of  labour  market, 
skills and social inclusion could benefit from better monitoring and evaluation.  

(14)  Malta  invests  relatively  high  amounts  in  education  and  training  but  this  is  not  yet 
reflected in better outcomes for all. The investment strategy would benefit from further 
focus on correcting social disadvantage, to be in line with the Social Pillar principle on 

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quality  and  inclusive  education.  Despite  measures  to  tackle  early  school  leaving,  the 
rate  is  still  one  of  the  highest  in  the  EU.  Recent  measures  also  seek  to  improve  the 
inclusiveness of tertiary education, but attainment at this level remains below the EU 
average and results in skills challenges. Participation in adult learning is increasing but 
is still low for the low-skilled and the inactive.  

(15)  The  fight  against  aggressive  tax  planning  is  essential  to  make  tax  systems  more 
efficient  and  fair  as  acknowledged  in  the  2019  euro  area  recommendation.  Spillover 
effects of taxpayers' aggressive tax planning strategies between Member States call for 
a  coordinated  action  of  national  policies  to  complement  EU  legislation.  Malta  has 
taken  measures  against  aggressive  tax  planning,  but  the  high  level  of  royalty  and 
dividend payments as a percentage of GDP suggests that Malta’s tax rules are used by 
companies that engage in aggressive tax planning. The  absence of 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 Notional Interest Deduction regime will help to reduce the debt equity 
bias, the scheme’s anti-abuse rules, combined with a generous rate and a stock-based 
regime,  warrant  close  monitoring  to  prevent  any  misuse  for  aggressive  tax  planning. 
Although  Malta  Individual  Investor  Programme  and  Malta  Residence  and  Visa 
Programme do not  automatically grant  residence for tax purposes, if requirement are 
met, income may be exempt under the ‘non-dom’ regime, if income is not remitted to 
Malta,  without  substantial  physical  presence  requirements.  They  may  facilitate 
aggressive  tax  planning  practices  and  have  been  listed  by  the  OECD  as  having  a 
potentially  high  risk  for  being  misused  to  circumvent  the  automatic  exchange  of 
financial accounts 

(16)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex D to the country report6. This would allow Malta to make the best use of those 
funds in respect of the identified sectors. 

(17) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Malta’s  economic  policy  and  published  it  in  the  2019 
country  report.  It  has  also  assessed  the  2019  Stability  Programme  and  the  2019 
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.  

(18) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  2019  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 2019 and 2020 to: 

1. 

2. 

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Ensure the fiscal sustainability of the healthcare and the pension systems, including 
by restricting early retirement and adjusting  the statutory  retirement  age in view of 
expected gains in life expectancy.  

Address  features  of  the  tax  system  that  may  facilitate  aggressive  tax  planning  by 
individuals  and  multinationals,  in  particular  by  means  of  outbound  payments. 

SWD(2019) 1017 final. 

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Strengthen  the  overall  governance  framework,  including  by  continuing  efforts  to 
the  ongoing  progress  made  on 
detect  and  prosecute  corruption.  Continue 
strengthening 
regarding 
framework,  notably 
laundering 
enforcements.  Strengthen  the  independence  of  the  judiciary,  in  particular  the 
safeguards  for  judicial  appointments  and  dismissals,  and  establish  a  separate 
prosecution service. 

anti-money 

the 

3. 

Focus  investment-related  economic  policy  on  research  and  innovation,  natural 
resources  management,  resource  and  energy  efficiency,  sustainable  transport, 
reducing traffic congestion and inclusive education and training. 

Done at Brussels, 

For the Council 
The President 

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