Confidence in deficit plan

Finance Minister Tonio Fenech yesterday stood by his deficit reduction plan for the next two years, despite a European Commission forecast that it will go up next year.

Malta, Cyprus, Belgium, Hungary and Poland have become the first EU member states to receive an “early warning” letter from Brussels. They have been asked to send the Commission convincing evidence, by the end of December, of “sufficient and permanent fiscal measures” to rein in their structural deficits in a sustainable manner.

The early warning system forms part of a new economic governance mechanism that gives Brussels closer scrutiny of fiscal affairs in member states. The EU executive can recommend fines for those member states which keep ignoring its warnings and recommendations.

According to Economic and Monetary Affairs Commissioner Olli Rehn, Malta is one of those member states which the Commission is forecasting will not be able to stick to its commitment and reduce its deficit to under three per cent of GDP by the end of this year.

“I have already given an early warning to the ministers of these countries during the last Ecofin Council (held on Tuesday) and will be sending letters with our requests to these specific member states,” Commissioner Rehn said.

“I hope they will use the time until mid-December to put their fiscal houses in order and send us full and detailed plans of their budgets for 2012.”

According to Commission sourc­es, Brussels will be assessing the situation once again at the beginning of next year after receiving the responses of member states.

Contacted by The Times following Mr Rehn’s comments, Finance Minister Tonio Fenech said the government was not surprised by the Commission’s letter as the EU executive was just “using the new tools given by member states’ for effective economic governance”.

He said the country was moving on the path of reducing its deficit as planned.

“We are working towards a deficit of 2.8 per cent this year and 2.3 per cent next year. I hope that with the figures to be presented at the next budget we will manage to convince the Commission that we are on the right track.”

He said Malta’s assumptions were always based on more recent and actual figures “while the Commission’s forecasts are more on the conservative side”.

The warning mechanism showed that member states’ flexibility on their budgets was now quite restricted as they must adhere to more stringent controls.

After building up a deficit of 4.2 per cent in 2008, Malta was put under an Excessive Deficit Procedure (EDP) in 2009 and forced to reduce its deficit by 2010.

The island was given an extension last year to put its house in order by the end of 2011 due to the impact of the global recession on its finances. The EDP procedure against Malta will only be dropped if Malta sticks to its promise and slashes its deficit to under three per cent of GDP this year.