EU calls for early pension and healthcare reforms

Malta is on track to correct its excessive deficit by 2006 but still needs to implement crucial structural reforms in the pension and healthcare systems, the European Commission said yesterday.

In its opinion on the update of the convergence programme submitted by the government, the Commission said the reforms were essential for Malta's long-term financial sustainability.

The update of the convergence programme was submitted by the government on December 7. The Commission's assessment will be submitted for approval at the next EU finance ministers meeting on February 17, to be attended by Prime Minister Lawrence Gonzi.

The Commission said: "Overall, the economic policies outlined in the update are broadly consistent with the country-specific broad economic policy guidelines in the area of public finances.

In particular, the programme is in line with the reduction of the general government deficit recommended by the Council".

However the Commission insists that important reforms in the pensions and healthcare systems should be addressed without delay.

"Other important structural reforms in tax-benefit systems and the healthcare system remain to be undertaken. There are risks with regard to the long-term sustainability of public finances, reflecting the projected cost of an aging population.

"The strategy for ensuring sustainability outlined in the programme is dependent on the achievement of the budgetary targets. It also includes reforms of the pension and healthcare systems that have not yet been defined or implemented.

"While failure to achieve budgetary targets would definitively put sustainability at risk, the pursuit of the reform process is also important for the containment of the increase in age-related public expenditure in the long term."

The Commission also assessed the main economic and financial indicators outlined in the government's report.

It said the macroeconomic scenario presented projects a gradual acceleration of economic activity. The estimated GDP growth rate for 2004 (0.6 per cent) is lower than in the Commission's autumn 2004 forecast (one per cent) while growth projections for 2005 (1.5 per cent) and 2006 (1.8 per cent) appear plausible and fully in line with the Commission's projections.

Growth is expected to accelerate further at the end of the programme period and attain 2.2 per cent in 2007.

On inflation, the Commission said this receded somewhat during recent months and is estimated at 2.9 per cent for the whole of 2004.

Projections over the programme period assume that inflation will be kept in a downward path attaining 2.4 per cent in 2005 and 1.9 per cent in both 2006 and 2007.

"The effective exchange rate of the Maltese lira recorded a modest appreciation during 2004 in nominal as well as in real terms. The nominal effective exchange rate of the lira is expected to remain broadly unchanged over the programme period. The Central Bank maintains short term interest rates, its main policy rate unchanged at three per cent (100 basis points above the euro area level) since September 2003. Interest rates are projected to increase by half a percentage point in 2005 and remain at 3.5 per cent until 2007."

Regarding the deficit, the Commission said that "recent information on the implementation of the 2004 budget indicates that the deficit target of 5.2 per cent of GDP, set for that year and confirmed in the programme, seems within reach. Deficit targets up to 2007 have also been confirmed in the update.

"Specifically, the convergence programme still aims at reducing the deficit below the three per cent of GDP reference value in 2006. The general government deficit is projected to fall from 5.2 per cent of GDP in 2004 to 3.7 per cent in 2005 and 2.3 per cent in 2006 and to decline further in 2007 to 1.4 per cent of GDP."

The Commission said that the prudent underlying macro-economic scenario, the nature of the announced measures aimed at reducing the deficit and budgetary projections set in the programme make the consolidation path broadly plausible.

Gross government debt is estimated to reach 73.2 per cent of GDP in 2004, up from 70.4 per cent of GDP in 2003.

According to the programme, the debt ratio should fall to 72 per cent in 2005 and to go back to a figure close to 70 per cent by the end of the programme period.

The Commission said that "the Maltese authorities foresee that economic growth, gradual improvements in the primary balance and the sale of assets will drive the reduction of the debt-to-GDP ratio since 2005.

"However, the projected debt dynamics call for a more detailed information on, and closer monitoring of, below-the-line operations, which partially offset the effects of significant privatisation proceeds (more than two per cent of GDP in 2005 and 2006)."