EU expects Malta pension reform in 'coming months'

The European Union is expecting the long-awaited pension reform in Malta to commence in the coming months as this is deemed crucial for the long-term sustainability of Malta's public finances.

In its annual report on the state of public finances in the European Union, published on Wednesday in Brussels, the European Commission acknowledges the great strides forward made in Malta's public finances in the last year but argues that pension reform is now essential if Malta wants to have a sustainable system in the long term.

In the section on Malta, the report states that according to the March 2005 excessive deficit procedure notification, the general government deficit for 2004 reached 5.2 per cent of Gross Domestic Product (GDP). This is half the 2003 outcome (10.5 per cent of GDP) and consistent with the deficit target set out in both the May 2004 convergence programme and the updated version submitted last December following the budget.

The Commission said that part of the reduction last year, 3.2 per cent of GDP, reflects a one-off operation related to the restructuring of the shipyards in 2003. Another part is the result of the fiscal consolidation measures undertaken in the budget, amounting to around 1.5 per cent of GDP.

However, the Commission notes that the debt ratio is on the increase. In 2004 this amounted to 75 per cent of GDP, which is above the 72.1 per cent estimated in the convergence programme. According to the Commission, the difference is explained by the upward revision of the 2003 general government deficit.

The Commission is also forecasting that this year, the debt level is expected to increase to 76.4 per cent and to 77.1 per cent by 2006. These projections do not take into account possible stock-flow adjustments as a result of some privatisation operations foreseen by the government.

The Commission's report also analyses the measures taken during the last budget and states that they are "consistent with the commitments spelled out in the convergence programme to cut the budget deficit to below four per cent of GDP in 2005".

Forecasts show that the deficit will fall to 3.9 per cent of GDP in 2005, compared to a target of 3.7 per cent. The Commission said that "deficit reduction is reached through revenue-enhancing measures and expenditure restraint".

At the same time the report notes that only part of the revenue-enhancing measures announced during the budget are permanent (adjustments in taxes and strengthening of the fight against tax and benefit fraud) while others are one-offs, such as the funds of the Italian protocol.

However, the Commission is projecting a further consolidation of Malta's public finances stating that "based on a no-policy change assumption, the Commission forecasts a further decrease in the general government deficit to 2.8 per cent of GDP in 2006. This is above the deficit target of 2.3 per cent of GDP presented in the update of the convergence programme".

The report gives a lot of importance to the need for the implementation of the reform in the pension system and is expecting that the government introduces changes "in the coming months".

Referring to the government's White Paper, the Commission says that the main principle is that health funding should be separated from social security funding, and that the retirement age is gradually increased to 65 for both men and women.

The Commission report says that "the first measures to implement the reform of the Maltese pension system are expected in the forthcoming months".

Commenting on the global scenario of the 25 member states, the Commission said that member states should live up to their renewed commitment to sound budgetary policies and pledges to implement forcefully the reformed Growth and Stability Pact.

The report shows that the average budget deficit in the euro area and in the EU25 improved slightly in 2004 after having deteriorated for three consecutive years. However this was largely the result of a reduction in the comparatively higher deficits of the new member states, it said. Budgetary consolidation must remain a priority to reduce government debts, address the problem of an aging population and redirect public resources to growth-enhancing measures.