The European Commission yesterday issued a positive assessment on how the Maltese government is projecting the country's economic and budgetary performance in the next three years but warned there are certain risks that need to be tackled.
The Commission said that "the overall conclusion is that the stability programme envisages continued progress towards reaching the medium term objective (MTO) so that the island reaches the goal of having a balanced budget by 2010".
At the same time, the Commission said the island needs to take care of certain prevailing risks.
"There are risks to the achievement of the 2010 budgetary targets, in particular due to the reliance of volatile tax revenue items in 2008; the recent decision to subsidise energy prices without compensating measures; the macroeconomic outlook after 2008 and the lack of information about the underlying measures, especially as regards the envisaged continued restraint in the public wage bill."
As a result, the Commission has recommended the EU Council to invite Malta to pursue further fiscal consolidation so as to reach a balanced budget by 2010 and ensure that the debt-to-GDP ratio is reduced accordingly by spelling out the measures supporting the planned consolidation, especially on the expenditure side.
The Commission is also recommending that Malta enhances the efficiency and flexibility of public spending, among others by accelerating the design and implementation of a comprehensive health reform.
According to EU rules, member states must submit updated macroeconomic and budgetary projections every year, which are then assessed by the European Commission.
Malta's plan, the first of the so-called stability programmes, follows the island's entry into the eurozone and was presented to Brussels last November.
Before entering the euro club, Malta used to submit convergence programmes as it was still not meeting the EU strict economic and monetary rules, also referred to as the Maastricht criteria.
In its report, the EU executive praised Malta's economic and fiscal policy performance adopted since its accession to the EU.
"Since 2004, economic performance improved primarily due to favourable cyclical conditions but also owing to wage moderation and a recovery in productivity.
"On the fiscal side, euro area entry followed a period of considerable consolidation, with debt as a per cent of GDP on a declining path since 2005, as well as progress towards lower inflation."
According to Malta's plan, the island is to have a budget surplus of 0.9 per cent of GDP by 2010.
"From the current available information this may be plausible," the Commission said.
However, the Commission insisted that Malta is still appearing to be at medium risk with regard to the stability of public finances on the long term.
"Improving the budgetary position, by enhancing the efficiency and flexibility of public spending, such as in the fast increasing health care expenditure, would contribute to reducing the risks to the sustainability of public finances."
The Commission's assessment will now be discussed during the next meeting of EU Finance Ministers on March 4.