Only weeks after the International Monetary Fund expressed concern over the widening deficit in Malta’s public finance, the European Commission has again reopened an excessive deficit procedure for the island.
The procedure, trigged when the deficit of a member State exceeds the three per cent deficit ceiling of economic output (GDP), demands corrective action. Unless this is done, sanctions may be taken against the country that fails to meet its targets.
So while there is reason for satisfaction that the island has managed to show “remarkable resilience” in the face of the crisis in Europe, as the IMF put it so well, on the other hand, all is not yet well in public finance.
Just before it reopened the excessive deficit procedure for Malta, the Commission said: ‘’Malta faces important entrenched challenges that affect the sustainability of its public finances and its potential growth and was one of the countries identified as experiencing macro-economic imbalances, pertaining in particular to the financial sector and public finances.”
When faced with such a stark statement, it was difficult to understand how the Government could declare in its first reaction that the Commission’s report on Malta showed that “it is confident in the new Government’s plan, which is a positive sign for the future of the Maltese economy”. Indeed, the contrary seems to be the case, for the Commission would not have otherwise raised the headline deficit forecast for this year to 3.4 per cent.
Calling for reforms in pensions and healthcare, two matters that have been worrying financial analysts for years on end, the Commission is recommending to the European Council that Malta should address its excessive deficit situation by 2014, which is relatively a short time frame.
On its part, however, the Government is insisting that it plans to bring down the deficit to 2.7 per cent this year. Although the deficit dropped in the first four months, it is too early to say who is likely to be right.
But perhaps it bears recalling here that, before the election, Labour used to consider projections by both the Commission and the IMF as “prudent”.
The Commission is recommending a raft of measures to improve economic performance and the IMF too believes that additional measures are needed to bring down the deficit to below the EU threshold of three per cent.
The task is therefore probably more difficult than the Government is making it out to be, even though it says that income streams are on track.
Malta is taking far too long to get to grips with reforms to ensure the sustainability of the health service. Pensions and stipends present other problems that have been ignored by both the major political parties.
The situation is made more difficult when certain decisions are taken, or not taken, on purely political grounds. Take the income tax cut, for instance, as well as the above.
Of concern too is that the country does not even know yet the likely economic impact of the cut. Surely, this is not the way to go about trying to bring down the deficit.
Instead of indulging, for political reasons, evidently, in the usual propaganda rhetoric, the Government ought to instead see to the Commission’s recommendations so that the country will once again fall in line with EU rules in the shortest time possible.