The European Commission yesterday called on Malta to take the necessary "ambitious" decisions to reduce its debt and deficit and to implement "profound reforms of social protection" if it wants to avoid deteriorating public finances which would put social benefits and pensions in jeopardy in the coming years.

The warning comes after the publication of the EU's 2009 Sustainability Report on public finances, in which Malta, together with 12 other EU member states, has been categorised as "high-risk" in terms of long-term sustainability of public finances.

The report, which comes in the run-up to the 2010 budget, is based on Commission financial projections.

"The long-term budgetary impact of aging is well above the EU average, mainly as a result of a relatively high increase in pension and health-care expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population aging on the sustainability gap," the Commission report states.

The Commission's sustainability analysis of Malta's public finances shows that on the basis of the current budgetary position of 2009, based on the Commission's 2009 services' spring forecast and the projected increases in age-related expenditure, Malta has a sustainability gap of seven per cent of GDP, which is above the EU average (6.5 per cent of GDP).

"This means that to put public finances on a sustainable path, Malta should improve its structural primary balance in a durable manner by seven per cent of GDP."

"In principle, this adjustment could take place via both an increase in revenues and cuts in expenditure. Additionally, the social protection system (in particular public pensions, health care and long-term care) would have to be reformed to decelerate the projected increase in age-related expenditure," the report states.

The need for deep reforms in social security and health care has been highlighted in every economic analysis carried out by the Commission in the past years.

With regard to the government debt, the report projects that this will continue to grow from 67 per cent of GDP in 2009 to 68 per cent in 2010. Although below the EU average, Malta's debt is still above the 60 per cent ceiling set by the Maastricht criteria.

At the same time, while it calls for reform, the Commission also advises prudence, due to the current economic climate.

"High primary surpluses over the medium term and further reforms of the social security system aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances," the Commission states.

"Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis."

Apart from Malta, the UK, Spain, Greece, Ireland, Latvia, The Netherlands, Lithuania, Romania, Slovenia, Slovakia, the Czech Republic and Cyprus have been identified by the Commission as countries of high-risk public finances sustain ability.

According to the Commission, the governments of these countries have little choice but to make budget cuts and labour market reforms that could raise potential growth.