Brussels urges Malta to resume fiscal consolidation

Malta has got away with a mere warning to enhance the efficiency and effectiveness of its public spending after the European Commission yesterday decided to excuse the island for overstepping its structural deficit but urging it to resume fiscal consolidation.

Malta is also being pushed to accelerate the design and implementation of a comprehensive healthcare reform.

Analysing the government's budgetary plans up to 2011, the Commission concluded that although Malta last year broke the rules by posting a structural deficit of 3.3 per cent of gross domestic product but this was considered a "one-off temporary situation" and Malta should get back in line this year.

"We see this as a temporary issue, mainly due to the privatisation process of Malta Shipyards. We are not recommending the opening of an excessive deficit procedure against Malta," the EU's Commissioner for Economic and Monetary Affairs, Joaquin Almunia told a press conference in Brussels.

The overall conclusion is that, against a backdrop of weakening economic growth, Malta's updated programme envisages a return to budgetary consolidation from this year, brought about by expenditure restraint and, to a lesser extent, higher revenue projections.

The Commission report points out that the measures adopted by the government in response to the downturn are in line with the European Economic Recovery Plan and can be regarded as adequate given the high deficit and debt ratios and the competitiveness challenge.

However, the Commission warned there are risks to the achievement of the deficit and debt targets in the coming years stemming from the favourable macroeconomic scenario, the reliance on volatile revenue, the possibility of expenditure slippages and the lack of information on the consolidation measures.

Commenting on last year's slippage in expenditure, the EU Executive said the 2008 experience had shown public expenditure was still subject to discretionary decisions in the budget implementation phase.

In this context, the Commission recommended Malta should ensure it improved the effectiveness of the money it invested, especially in education, health, research and development and public infrastructure, which were weak.

Brussels also said that, according to its estimates, Malta's economy this year would suffer from the prevailing global recession.

According to the government, the macroeconomic scenario real GDP growth is expected to decelerate from 2.8 per cent last year to 2.2 per cent in 2009, before recovering to an average rate of 2.7 per cent until 2011.

However, according to the Commission's analysis, when assessed against information available now, "the (government's) scenario is based on markedly favourable growth assumptions because of relatively strong assumed recovery in exports".

"The possibility that further increases in public sector wages could give rise to overall wages rising in excess of productivity gains may result in a less favourable development in Malta's competitiveness than implied by the updated stability programme."

In view of this assessment, the Commission is inviting Malta to resume fiscal consolidation and ensure the general government debt ratio is reduced accordingly by spelling out the measures underlying the planned consolidation in the years covered by the programme.