The European Union has urged Malta to speed up the process for a higher retirement age.
In a Council Recommendation on Malta's 2012 national reform programme, the European Commission recommended that Malta should reinforce its budgetary strategy with additional permanent measures so as to ensure adequate progress towards keeping the deficit below 3% of GDP without recourse to one-offs.
It said that Malta should take action to ensure the long-term sustainability of the pension system. This action should include 'a significant acceleration of the progressive increase in the retirement age compared to current legislation', a clear link between the statutory retirement age and life expectancy and measures to encourage private pension savings.
The commission said Malta also needs to take measures to increase the participation of older workers in the labour force and discourage the use of early retirement schemes.
In other recommendations, is said that Malta should take steps to reduce the high rate of early school leaving, pursue policy efforts in the education system to match the skills required by the labour market and enhance the provision and affordability of more childcare and out-of-school centres with the aim of reducing the gender employment gap.
A fresh call was made for the government, in consultation with the social partners and in accordance with national practices, to reform the system of wage bargaining and wage indexation, so as to better reflect developments in labour productivity and reduce the impact of prices of imports on the index.
In order to reduce Malta's dependence on imported oil, Malta also needs to step up efforts to promote energy efficiency and increase the share of energy produced from renewable sources, the commission said. This could be done by carefully monitoring the existing incentivising mechanisms and by prioritising the further development of infrastructure, including by completing the electricity link with Sicily.
In its report the report says that: "Based on the assessment of the 2012 stability programme pursuant to Council Regulation (EC) No 1466/97, the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections is optimistic, especially in the outer years of the stability programme period when compared with potential growth as estimated by the Commission.
"The objective of the budgetary strategy outlined in the programme is to gradually reduce the deficit, to 0.3% of GDP in 2015, after the planned correction of the excessive deficit in 2011. The programme confirms the previous medium-term budgetary objective (MTO) of a balanced position in structural terms, which is to be achieved beyond the programme period.
"The MTO adequately reflects the requirements of the Stability and Growth Pact. There are risks that the deficit outcomes could be worse than targeted, stemming from (i) lower revenue given the slightly optimistic macroeconomic scenario; (ii) possible overruns in current primary expenditure; and (iii) the ongoing restructuring of the national airline (Air Malta) and financial situation of the energy provider (Enemalta). Based on the (recalculated) structural budget balance6, annual progress towards the MTO is planned to be in line with the 0.5% of GDP benchmark in the Stability and Growth Pact. Using the Commission’s identification of the one-offs included in the budgetary targets, average progress towards the MTO is slightly higher (¾% of GDP) but spread very unevenly, with no progress in 2012 followed by an effort of 1¼% in 2013.
"According to the information provided in the programme, the growth rate of government expenditure, taking into account discretionary revenue measures, would be in line with the expenditure benchmark of the Stability and Growth Pact throughout the programme period.
"The risks to the budgetary targets imply, however, that the average adjustment towards the MTO could be slower than appropriate. After peaking at 72% of GDP in 2011, the general government gross debt ratio is planned in the programme to start decreasing and to reach 65.3% of GDP in 2015 (still above the 60% of GDP reference value). According to the plans in the programme, Malta is making sufficient progress towards meeting the debt reduction benchmark of the Stability and Growth Pact at the end of the transition period (2015) but this assessment is subject to risks as the debt ratio could turn out higher than planned given the possibility of higher deficits and stock-flow adjustments.
"Malta's medium-term budgetary framework remains non-binding, implying a relatively short fiscal planning horizon. The programme announces that the Maltese government is considering reforms to the annual budgetary procedure, including timelines, and introducing a fiscal rule embedded in the Constitution, including monitoring and corrective mechanisms, in line with recent changes to the euro area governance framework.
"Malta remains at high risk as regards the long-term sustainability of its public finances, with a projected long-term increase in age-related expenditure exceeding considerably the EU average. A very low activity rate of older workers, including of older women; a relatively low exit age; and recourse to early retirement schemes add to the scope of the challenge. An independent Pensions Working Group submitted proposals for further pension reform in December 2010, including a link between the retirement rate and life expectancy, as well as the introduction of additional pillars to the pension system. This has been subject to consultation with stakeholders but the government has yet to announce its position. Moreover, the National Reform Programme does not propose a comprehensive active-ageing strategy. While noting the measures introduced by Malta to combat undeclared work, its incidence also risks exerting undue pressure on the sustainability of public finances."