EU takes action against Malta over large deficit

The European Commission will be recommending the start of an Excessive Deficit Procedure against Malta to force the island to reign in its growing deficit. The move is, however, being contested by the government which maintains that the deficit will remain below three per cent this year, despite the current recession.

The Commission has forecast that Malta will remain in recession this year with the economy expected to contract by 0.9 per cent, far lower than the EU average. A slow recovery is expected in 2010 with growth at 0.2 per cent.

Publishing its spring economic forecast in Brussels yesterday, the Commission noted a shift in Malta's deficit and predicted that the situation this year will not improve as much as expected.

Malta managed to escape such a procedure in February after it last year registered a 3.3 per cent deficit - more than the three per cent allowed by EU rules.

The Commission had decided not to start a procedure against the island as this was only a "one-off" due to the Malta Shipyards privatisation and because it was forecasting a lower deficit of 2.6 per cent this year. However, according to yesterday's new data, the scenario changed when the recession's impact on government revenues was taken into account. As a result, the general government deficit, which declined progressively in the period 2005-2007, increased to 4.7 per cent of its gross domestic product in 2008.

The deterioration primarily reflected higher expenditure related to a one-off, deficit-increasing transaction of 0.8 per cent of GDP as a result of the early retirement schemes for Malta Shipyards' employees, as well as the re-classification of the yards into the general government sector. Lower tax receipts also contributed to the higher deficit ratio, reflecting weak economic activity.

The good news in this gloomy scenario, according to Brussels, is that this year's deficit and that of 2010 are both expected to be lower than in 2008, although not low enough to avoid the procedure.

The deficit is projected to decline to around 3.6 per cent this year since there will not be the one-off early retirement scheme and the shipyards will be liquidated. There will be a sizeable reduction in energy subsidies, while revenue-increasing measures were announced in the 2009 Budget. The economic downturn will still have a negative impact on the taxes the government collects, including receipts on property transactions, according to the forecast.

The government, however, insists that it will still manage to lower the deficit to below three per cent this year, while admitting that the current global recession is leaving its mark on the performance of Malta's economy.

Finance Minister Tonio Fenech told The Times before attending the Finance Ministers' meeting in Luxembourg that the government intended to reduce the deficit to around 2.57 per cent for 2009.

Mr Fenech said that according to government figures submitted to Brussels, the shipyards' early retirement schemes cost €64.7 million (1.13 per cent of GDP). The shipyard's losses, which stood at €24.3 million, had also to be included in the government's deficit.

The other expense consisted of €45.6 million that went above the projected subsidy to Enemalta to cushion the high international energy prices.

Mr Fenech added that during the last three months of 2008, in an effort to ease cash flow problems, many Maltese enterprises delayed statutory monthly payments of income tax, national insurance contributions and other government dues, negatively affecting government revenue by some €50 million.

"These three factors have had a cumulative impact on the Budget for 2008 of €160 million. When these three factors are deducted from the total deficit of €266.5 million, the departure from 2008 targets is significantly explained," he said.

In this scenario Mr Fenech said the government remained optimistic it would meet its deficit target of €98.8 million for 2009.

The recession is expected to leave a dent on the main sectors of the economy, leading to lower imports and exports, higher unemployment and lower consumption.

According to Brussels, Malta's tourism pillar is also set to suffer. Malta's gains recorded in the past years are expected to be reversed due to sluggish demand, particularly from the UK and Germany. This would be only partly offset by other services, specifically remote gaming, which would show some resilience to the global slowdown.

The EU's Monetary and Financial Affairs Commissioner Joaquin Almunia announced the start of a similar deficit procedure against Poland, Romania, Lithuania and Latvia. Last month, the EU decided to take similar action against France, Greece, Ireland, Spain, the UK and Hungary.

According to the EU's Stability and Growth Pact, member states have to restrict their annual structural budgetary deficits to below three per cent of GDP.

If they fail, the EU starts corrective measures through the mechanism known as the Excessive Deficit Procedure. This mechanism sets strict timetables and new targets which member states have to observe.

The corrective measures, decided by EU Finance Ministers, are monitored on a monthly basis by the Commission. If a member state fails to follow the recommendations made, it risks being fined or losing EU funds.