REPORT FROM THE COMMISSION Malta Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Malta, budget deficit, budget policy, economic consequence, economic recession, epidemic, gross domestic product, infectious disease, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 553 final  REPORT FROM THE COMMISSION Malta  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Malta 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1.  INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 
6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of  Regulation 
(EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic 
downturn.  In  its  Communication,  the  Commission  shared  with  the  Council  its  view  that, 
given  the  expected  severe  economic  downturn  resulting  from  the  COVID-19  outbreak,  the 
current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Maltese  authorities  on  31  March  2020  and  subsequently  validated  by 
Eurostat1 show that the general government deficit in Malta reached 0.5% of GDP in 2019, 
while general government gross debt stood at 43.1% of GDP. According to the 2020 Stability 
Programme, Malta plans a deficit of 7.5% of GDP in 2020, while debt is planned at 54.5% of 
GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Malta’s  compliance  with  the  deficit  criterion  of  the  Treaty.  Tthe  debt  criterion  can  be 
considered to be met as the debt ratio is below the Treaty reference value of 60% of GDP. It 
takes  into  account  all  relevant  factors  and  gives  due  consideration  to  the  major  economic 
shock linked to the COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

1 

 
 
 
                                                           
Table 1. General government deficit and debt (% of GDP) 

2016 

2017 

2018 

2019 

1.0 

3.3 

1.9 

0.5 

2020 
COM 

-6.7 

2021 
COM 

-2.5 

55.5 

50.3 

45.6 

43.1 

50.7 

50.8 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 

Note: Eurostat, Commission 2020 spring forecast 

2.  DEFICIT CRITERION 

Based on the Stability Programme, Malta’s general government deficit in 2020 is expected to 
reach 7.5% of GDP, above and not close to the Treaty reference value of 3% of GDP. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP in 2020 by 5.8%. 

The  planned  excess  over  the  Treaty  reference  value    would  be  temporary,  based  on  the 
Commission 2020 spring forecast, which projects the general government deficit to fall under 
3%  of  GDP  in  2021.  However,  those  projections  are  surrounded  by  an  exceptionally  high 
degree of uncertainty. 

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference value. The planned excess is considered to be exceptional as defined by the Treaty 
and  the  Stability  and  Growth  Pact,  while  the  nature  of  the  excess  is  currently  considered 
temporary. Hence, the analysis suggests that prima facie the deficit criterion as defined by the 
Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3.  RELEVANT FACTORS 

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. 

In the current  situation,  a key  additional factor to  take into consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results in  a highly  uncertain outlook. The pandemic has also  led to 
the activation of the general escape clause. 

2 

 
 
 
 
3.1. COVID-19 pandemic 

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

3.2. Medium-term economic position  

Malta’s annual real GDP growth of 7.3% in 2018 and 4.4% in 2019 was driven by domestic 
demand  underpinned  by  robust  private  consumption  and  investment.  In  2020,  Malta’s 
economy  will  be  severely  affected  by  the  COVID-19  pandemic.  The  Stability  Programme 
assumes  the  GDP  to  fall  by  around  5½%  in  2020  before  recovering  somewhat  in  2021. 
According  the  Commission  2020  spring  forecast  GDP  is  expected  to  contract  by  around 
5¾%.  Private  consumption  is  expected  to  fall  due  to  the  lockdown  and  closure  of 
nonessential businesses. Investment is also set to fall despite continuation of some large-scale 
investment projects in health and infrastructure. The weak external environment is projected 
to translate into a substantial decline in services exports, reflecting also halted tourism. The 
plunge  in  imports  will  be  lower  reflecting  mainly  falling  domestic  demand.  This  is  a 
mitigating factor in the assessment of Malta’s compliance with the deficit criterion in 2020.  

The economy is expected to rebound in 2021, as an easing of general restrictions is expected 
to re-stimulate domestic demand. Nevertheless, Malta is a small open economy and hence its 
economic  outlook  is  highly  sensitive  to  global  uncertainties  and  performance  of  its  trading 
partners. In the medium-term, Malta is expected to continue growing more strongly than the 
Union  average.  Potential  growth  in  Malta  is  supported  by  increasing  population,  capital 
accumulation and productivity growth.  

3.3. Medium-term budgetary position 

Malta is  subject  to  the preventive  arm of the Stability  and Growth  Pact and in  2019 it was 
required to ensure ongoing compliance with its medium-term budgetary objective (a balanced 
budget in structural terms). Based on outturn data and the Commission 2020 spring forecast, 
both  pillars  point  to  some  deviation.  Specifically,  the  growth  of  net  public  expenditure 
exceeded the rate allowed under the expenditure benchmark pillar and the structural balance 
in  2019  worsened  beyond  the  allowed  structural  deterioration.  The  overall  assessment  thus 
points to some deviation from the requirements of the Stability and Growth Pact in 2019. 

The 2020 Stability Programme for Malta projects a major worsening of public finances from 
a  surplus  of  0.5%  of  GDP  in  2019  to  a  deficit  of  7.5%  of  GDP  amid  the  COVID-19 
pandemic. The fiscal package to tackle the negative impact of the pandemic is estimated to 
amount  to  4.1%  of  GDP,  focussing  on  wage  supplements,  special  social  benefits,  and 
additional  healthcare  spending.  Moreover,  the  government  postponed  tax  payments  and 

3 

 
 
provided guarantees of some 2.8% of GDP, regarding which the statistical authorities are to 
examine whether there is an immediate budgetary impact at inception or not. The deficit also 
reflects  an  expected  fall  on  the  revenue  side,  reflecting  mainly  falling  household 
consumption.  In  2021,  the  deficit  is  projected  to  decline  to  3.6%  of  GDP.  That  projection 
depends  highly  on  the  assumed  modest  economic  recovery  driven  mainly  by  domestic 
demand,  which  is  expected  to  support  receipts  both  from  direct  taxes  as  consumption 
recovers and indirect taxes reflecting labour market improvements. Government expenditure 
is  expected  to  decline  as  temporary  policy  support  is  unwound.  In  the  medium  term,  the 
Stability Programme commits to  returning the debt-to-GDP ratio to  a declining path  and to 
reverting to the medium-term budgetary objective of a balanced budget in structural terms. 

4.4.  Other factors put forward by the Member State 

On 12 May 2020, the Malta authorities transmitted a letter with relevant factors in accordance 
with  Article  2(3)  of  Regulation  (EC)  No  1467/97.  The  analysis  presented  in  the  previous 
sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities.  Additional 
factors  not  yet  mentioned  above  are  those  related  to  strengthening  of  the  fiscal  framework, 
especially the institutionalisation of spending reviews.  

4.   CONCLUSIONS 

According to the Stability Programme, Malta’s general government deficit in 2020 is planned 
to increase to 7.5% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  and  currently 
considered to be temporary.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. Overall, since the planned deficit is well above 3% of GDP and taking into account 
all relevant factors, the analysis suggests that the deficit criterion as defined in the Treaty and 
in Regulation (EC) No 1467/1997 is not fulfilled.  

4