Brussels calls for better fiscal discipline, more reform

The European Commission is urging Malta to take the necessary measures to address the medium- and long-term sustainability of public finances.

While acknowledging that the island is moving towards lowering its structural deficit to come in line with EU rules by the end of 2011, the Commission is not satisfied with the plans to achieve a positive budgetary balance.

The comments are made in the Commission's assessment of Malta's financial plans for 2010-2012, which plans are sent to Brussels every year as an update connected with the EU's Stability and Growth Pact.

According to Brussels, a correction is needed on some fronts, particularly through more robust financial planning. This in order to make sure the deficit continues to be cut after 2011 and the country's debt levels are put on a declining path.

Malta is also told to concentrate on further reform in order to cut its expenditure, particularly on healthcare and social services, and to consolidate its discipline in the implementation of annual budgets.

After Malta registered a 4.5 per cent structural deficit in 2008, particularly due to the recession and the shipyard's privatisation process, the EU last year started an excessive deficit procedure against the island to make it reduce its deficit to below three per cent of GDP by the end of 2011. This would bring it in line with EU rules underpinning the euro.

Malta's 2010 budgetary strategy is deemed broadly consistent with the Council recommendations to address the growing deficit, according to the Commission. However, in 2011, taking into account the risks to the deficit targets, the budgetary strategy may not be consistent with the recommendations.

"In particular, while the planned structural improvement amounts to the recommended 0.75 per cent of GDP, the consolidation plans for 2011 should be backed up by concrete measures while the authorities should stand ready to adopt further consolidation measures in case risks from less favourable GDP growth and revenue developments and from possible slippages on the expenditure side materialise.

"Provided these risks are adequately addressed and the consolidation plans fully implemented, the budgetary strategy seems to be sufficient to bring the government debt ratio back on a declining path in 2011-2012, broadly in line with the Council recommendations."

However, the Commission is worried about the projections for 2012 and onwards, when Malta should be moving towards achieving a balanced budget without any more deficits.

"For the outer year 2012, the programme envisages a move further away from the Medium Term Objectives rather than gradual progress towards its achievement, which is not in line with the requirements of the Stability and Growth Pact.

"A more ambitious pace of consolidation than foreseen in the programme would also be warranted in view of the high risks to the long-term sustainability of the public finances..."

In its recommendations, which will now have to be endorsed by EU Finance Ministers, probably next month, the Commission also called for measures to enhance the country's competitiveness, even through a more direct link between productivity and wage increases.