The deficit must be brought down to “an acceptable level”, the European Commission insists, adding that the Government must further strengthen its financial situation.

The European Commission is arguing that the increase in the statutory retirement age should be accelerated by introducing a link with life expectancy

It is demanding that the island “adopt additional consolidation measures of about 0.4 per cent of GDP in 2013” on top of the measures already taken.

Brussels has already told the Maltese Government to cut its deficit by 1.4 per cent over two years (by the end of 2014).

The Commission made specific recommendations for Malta to come in line. These include a reform in the pension system and curbing the projected increase in expenditure, “including by accelerating the increase in the statutory retirement age”.

The Commission’s decision to start its third excessive deficit procedure against Malta since 2004, following another slippage in the deficit last year, was expected following recent public declarations by both Prime Minister Joseph Muscat and Finance Minister Edward Scicluna.

Dr Muscat said in Parliament on Tuesday that the Commission would not demand any Budget cuts.

The Opposition said that, contrary to the impressions given by Dr Muscat and Prof. Scicluna, the Commission had not accepted the Government’s explanations and was insisting it take “corrective measures” by October. In the Budget presented by Labour a few weeks after winning the election, Prof. Scicluna had announced a revision of the overall deficit targets for 2013.

While the previous Administration had projected the deficit would drop to 2.7 per cent in 2012, Prof. Scicluna said this had effectively reached 3.3 per cent, overshooting the three per cent of GDP limit allowed by EU rules.

At the same time, he had indicated he would try to persuade Brussels not to open an EDP procedure as the 2012 figures were just a temporary slip-up and the deficit would once again fall to 2.7 per cent this year. In its latest recommendation, which is expected to be adopted by EU Finance Ministers in July, the Commission explained it was expecting the deficit this year to grow to 3.7 per cent. The current Budget, it says, includes “expansionary measures on the revenue and expenditure side as well as the already planned equity injection into Air Malta (0.6 per cent of GDP)”.

Disagreeing that the 2012 deficit slippage was temporary, the Commission’s recommendation obliges Malta to introduce measures by October to further cut its deficit by another 0.4 per cent of GDP to make sure it ends this year with a deficit of 3.4 per cent.

For 2014, by which time Malta must come in line, the Commission wants another correction of 0.7 per cent to end the year with a deficit of 2.7 per cent.

The Commission says its new recommendations were meant to help the Government put Malta’s economy on a sound footing.

The main recommendation, and probably the most difficult to implement, is a further revision of the pensions reform to cut rising expenditure.

The Commission is arguing that the increase in the statutory retirement age should be accelerated by introducing a link with life expectancy.

In a statement, the Government described the Commission’s recommendations as “a positive sign for its economic and fiscal plan”. It welcomed the EU’s decision not to impose additional measures on the Budget.

The Government also noted that the Commission was not insisting on a reform of the cost-of-living-adjustment mechanism “thanks to the strong defence mounted by the Government”.

The Chamber of Small and Medium Enterprises – GRTU asked for an urgent meeting of the Malta Council for Economic and Social Development to discuss the Commission’s “negative” decision.

Excessive deficit recommendations

1. Malta should put an end to the present excessive deficit by 2014.

2. Deficit should be cut to 3.4 per cent in 2013 and 2.7 per cent in 2014.

3. All windfall gains are to used for deficit reductions.

4. By October 2013, Malta has to take effective action to report in detail the consolidation strategy to achieve the targets.

Country specific recommendations

Fiscal
• Correct deficit by 2014.
• Reach balanced Budget by 2017.
• Increase tax compliance and fight tax evasion.

Economy
• Reform pensions system and accelerate increase in retirement age.
• Pursue healthcare reforms to increase cost-effectiveness.
• Reduce length of public procurement procedures.

Education
• Reduce early school leaving.
• Continue to improve labour market participation of women.
• Enhance provision and affordability of childcare and out-of-school centres.

Energy
• Continue efforts to diversify energy mix.
• Ensure timely completion of electricity link with Sicily.

Banking
• Strengthen provisions for loan-impairment losses in the banking sector.

Judicial
• Improve the overall efficiency of the judicial system, for example by reducing the time needed to reduce insolvency cases.