The European Commission today recommended that Malta be placed under an Excessive Deficit Procedure. It also called for reforms in pensions and healthcare and sustainable public finances.
The Commission recommends to the European Council that Malta should address its excessive deficit situation by 2014. Specifically, Malta should reach a headline deficit target of 3.4% of GDP for 2013 and 2.7% of GDP in 2014, which is consistent with an annual improvement of the structural balance of 0.7% of GDP in 2013, and 0.7% of GDP in 2014.
This adjustment path would allow bringing the deficit below the 3% of GDP reference value by 2014 while at the same time ensuring that the debt ratio will approach the 60%-of-GDP reference value at a satisfactory pace.
In a statement issued in Brussels, the Commission said:
"Malta faces important entrenched challenges that affect the sustainability of its public finances and its potential growth, and it was one of the countries identified by the Commission as experiencing macroeconomic imbalances, pertaining in particular to the financial sector and public finances.
"Malta made limited progress in implementing the 2012 country-specific recommendations. On the positive side, in the area of public finances, adequate action has been taken towards strengthening tax compliance and fighting tax evasion, but concrete results are yet to materialise.
Relevant, albeit insufficient, measures were introduced in the labour market, in particular towards devising an early-school-leaving strategy, improving the links with education and training and encouraging female employment. Steps have also been taken towards improving the security and diversification of the energy supply.
Banking system reforms are in the pipeline, but concrete action has yet to be taken. In addition, no concrete action has been taken towards strengthening the fiscal framework, reducing the debt bias in corporate taxation, further reforms of the pension system and addressing potential risks linked to the wage indexation mechanism.
Finally, measures taken in energy, climate and transport are far from sufficient in view of the scale of the challenges in these areas. The identified challenges have hence remained broadly unchanged over the past year.
The Commission has issued five country specific recommendations (CSRs) to Malta to help it improve its economic performance. These are in the areas of:
Sustainable public finances and tax compliance
The slippages in Malta's fiscal deficit observed at the end of 2012 (3.3%) puts Malta further away from bringing its public finances back onto a sustainable path. Malta should correct this trajectory in a growth-friendly manner. Malta has adopted some measures to improve tax compliance but they must be properly implemented to achieve results.
Malta has moreover taken no relevant action to reduce indebtedness in corporate taxation.
Sustainable pension and healthcare systems
Malta’s public finances are expected to be unsustainable in the medium to long-term due to a projected increase in age-related expenditure.
Spending on pensions, as well as healthcare, is expected to add further stress to the public coffers. To counter this Malta should accelerate its ongoing pension reform, link retirement age with life expectancy, promote private pension savings, develop a comprehensive ageing strategy and increase cost-effectiveness in the healthcare sector.
Education, skills and family-friendly measures
Malta needs to make the best possible use of its greatest asset – human capital. The country however has one of the lowest employment rates in the EU (63.2%).
Malta still has a very high number of early school leavers (22.6%), while the number of students attaining tertiary education is relatively low (22.4%).
The number of women actively at work also remains very low (46.9%). Malta should therefore continue to take measures to address skills gaps and facilitate the integration of women in the labour market through providing affordable child-minding facilities.
Energy supply, efficiency and renewables
Malta’s energy sector poses a significant challenge to its competitiveness: it mainly depends on one source of energy (imported oil), it suffers from an inefficient transmission system, and the contribution of renewables is the lowest in the EU (0.1%).
While Malta has announced further plans to address these issues, there remains room for improving efficiency and reducing emissions through the promotion of renewable energies, including transport.Financial sector and efficiency of the judiciary
The exposure to the real estate market of Malta’s core domestic banks needs to be closely monitored and relevant measures should be put in place. While other banks operating from Malta have limited links with its domestic economy, they account for 790% of its GDP and therefore these should be strictly supervised to prevent the accumulation of imbalances.
Certain shortcomings in Malta’s judicial system need to be addressed, notably the length in resolving non-criminal cases, as these could affect the banking sector in times of economic difficulties."
More details and comparisons with other countries at http://ec.europa.eu/europe2020/europe-2020-in-your-country/malta/country-specific-recommendations/index_en.htm