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Document 52012SC0384
COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta in view of a possible abrogation of Council Decision 2009/587/EC on the existence of an excessive deficit in Malta
COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta in view of a possible abrogation of Council Decision 2009/587/EC on the existence of an excessive deficit in Malta
COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta in view of a possible abrogation of Council Decision 2009/587/EC on the existence of an excessive deficit in Malta
/* SWD/2012/0384 final */
COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Malta in view of a possible abrogation of Council Decision 2009/587/EC on the existence of an excessive deficit in Malta /* SWD/2012/0384 final */
1.
Introduction
As the general government deficit in Malta
increased to 4.7% of GDP in 2008, from 2.2% in 2007, the Council decided, on 7 July
2009, that an excessive deficit existed in Malta and addressed recommendations
to the national authorities in accordance with Article 104(7) of the Treaty
establishing the European Community (TEC)[1] with a view to
bringing an end to that situation by 2010[2]. In its
recommendations, the Council established a deadline of 7 January 2010 for
effective action to be taken. On 16 February
2010, on the basis of a Commission recommendation, the Council concluded that Malta had taken effective action in compliance with the above recommendations, but
unexpected adverse economic events with major unfavourable consequences for the
government finances were also considered to have occurred. As a result, the
Council extended by one year, to 2011, the deadline for correcting the
excessive deficit, in accordance with Article 126(7) of the Treaty. Specifically,
Malta was recommended to achieve the 2010 deficit target set in the budget,
if necessary by adopting additional measures, and to ensure in 2011 a fiscal
effort of ¾% of GDP, so as to contribute to bringing the government debt ratio
back on a declining path. To limit risks to the adjustment, the Council also
recommended to strengthen the binding nature of Malta's medium-term budgetary
framework and better monitor budget execution throughout the year. On 6 January
2011, the Commission adopted a Communication to the Council concluding that, based
on information available at the time, Malta appeared to have taken action
representing adequate progress towards the correction of the excessive deficit
by 2011 and that no further steps under the excessive deficit procedure were
needed at that stage. At the same time, the Maltese authorities were requested to
closely monitor budgetary developments and be ready to take corrective measures
should risks materialise. On 18 January 2011, the Council concluded that it
shared these views. On 11 January 2012, the Commission adopted a second Communication to the Council concluding
that, based on the available information, Malta appeared again to have taken
effective action towards a timely and sustainable correction of the excessive
deficit. In particular, the Commission services' 2011 Autumn Forecast projected
the general government deficit for 2011 at 3% of GDP, while the 2012 budget,
adopted by the Maltese authorities after the cut-off date of that forecast,
included measures that appeared to ensure a deficit below the threshold also in
2012. In view of the above assessment, the Commission considered that no
further steps in the excessive deficit procedure of Malta were needed at that
time. This paper examines budgetary developments
in Malta since the Commission Communication to the Council of 11 January 2012,
with a view to assessing progress towards a timely and sustainable correction
of the excessive deficit. The
basis for the assessment is the Commission services' 2012 Autumn Forecast.
2.
Recent Economic and Budgetary developments
The Maltese economy has weathered the
global economic and financial crisis relatively well. In 2009, real GDP
contracted mildly compared to the euro area, on the back of a resilient
performance by net exports and a contained decline in employment, partly thanks
to government assistance. Economic activity rebounded in 2010, to 3.4% for the
year as a whole, due to improving external trade and a pick up in business
investment. The positive momentum continued in 2011 but economic activity
started losing pace towards the end of the year and slipped back into technical
recession in the final quarter of 2011 and the first quarter of 2012. Still, in
2011 as a whole, real GDP growth expanded by 1.9%, outperforming the average
for the euro area (1.4%). Table 1: Comparison of macroeconomic developments and forecasts || 2011 || 2012 || 2013 || 2014 || Outturn || COM || SP || COM || SP || COM || SP Real GDP (% change) || 1.9 || 1.0 || 1.5 || 1.6 || 2.0 || 2.1 || 2.0 Contributions to real GDP growth || || || || || || || Final domestic demand || 0.9 || -0.1 || 0.9 || 1.3 || 1.1 || 1.8 || 1.2 Changes in inventories || -1.6 || -1.5 || 0.0 || 0.0 || 0.0 || 0.0 || 0.0 Net exports || 2.6 || 0.6 || 0.6 || 0.3 || 0.9 || 0.3 || 0.8 GDP deflator (% change) || 2.3 || 2.8 || 2.1 || 2.5 || 2.4 || 2.4 || 2.5 Nominal GDP (% change) || 4.2 || 3.9 || 3.6 || 4.2 || 4.4 || 4.5 || 4.4 Employment (% change) || 2.5 || 0.9 || 1.0 || 1.3 || 1.6 || 1.6 || 1.6 Total compensation per employee (% change) || 0.8 || 1.1 || 0.9 || 2.1 || 0.5 || 2.0 || 0.6 Note: COM – Commission services’ 2012 Autumn Forecast; SP – Stability programme 2012 Sources: National Statistics Office, Commission services, national authorities The Commission services' 2012 Autumn Forecast
projects real GDP growth to moderate further to 1.0% in 2012 on the back of
weaker household consumption. Economic growth is projected to strengthen in
2013 and 2014, reflecting an improving outlook for domestic demand. Data released by Eurostat in its second
notification on deficit and debt for 2011, following the 2012 October reporting
by Malta, show that the general government deficit declined to 2.7% of GDP,
from 3.6% of GDP in 2010, against the background of a weakened GDP growth. This
compares with a targeted deficit of 2.8% of GDP set in the 2011 stability
programme. The nominal adjustment between 2010 and 2011 was driven by buoyant
current revenues, coupled with lower net capital expenditure. Measures in the
2011 budget to increase excise duties and VAT boosted indirect revenues, while
direct taxes benefitted from one-off proceeds of the extension to 2011 of a tax
scheme lauched in 2010 to collect arrears of direct taxes and social
contributions. Capital expenditure decreased thanks to the one-off sale of shipyards
assets and of buildings of the City gate project, as well as lower subsidies to
investments, partly offsetting more dynamic current primary expenditure driven
by intermediate consumption. Table 2: Budgetary developments, 2008-2014 Malta's
consolidation strategy continues to rely on measures that, according to the
Commission services' methodology and in line with past practice, qualify as
one-off. In 2011, deficit-reducing one-off measures amounted to 0.7% of GDP,
mainly due to the the extension to 2011 of the 2010 scheme for the collection
of income tax and social security contributions' arrears; in the absence of
these measures, the 2011 deficit would have been at 3.4% of GDP, above the 3%
of GDP reference value. Still, the structural balance, i.e. the
cyclically adjusted budgetary balance excluding one-off measures, is estimated
to have improved by 1 pp. of GDP in 2011. This exceeds the fiscal effort of at
least ¾% of GDP recommended by the Council.
3.
Deficit projections for 2012 and beyond
According to the Commission services' 2012
Autumn Forecast, the general government deficit in 2012 is projected to narrow
slightly further, to 2.6% of GDP. The forecast incorporates the impact of the
measures adopted with the 2012 budget and the January review of spending
allocations. Capital expenditure is set to decline as a result of one-off proceeds
from the concession fee on the local lottery operator, which are recorded as
negative capital asset sales[3]. Primary current
expenditure is set to rise by 0.6 pp. of GDP compared to 2011 on the back of
higher social transfers (as the expected savings from the gradual impact of the
2006 pension reform will materialize only gradually) and subsidies to the
national energy company (Enemalta). Continued hiring restrictions in the public
sector will help contain growth in the wage bill despite the new public sector
agreement and increased spending related to some components of the wage bill
(i.e. allowances and overtime) especially in the education and health sector.
As economic growth in 2012 is driven by net exports, while domestic demand
appears to be rather weak, the current revenue ratio is projected to increase
only slightly compared to 2011 despite, among others, measures to increase VAT
revenue collection. According to the Commission services Autumn
2012 forecast, net of one-off measures - i.e. proceeds from the sale of real
assets, a concession fee from the local lottery operator as well as the
proceeds expected from the tax arrears' collection scheme - the deficit in 2012
would still be above the reference value, at 3.6% of GDP. In the April 2012 update of the stability
programme of Malta, the deficit target for 2012 was 2.2% of GDP, with real GDP
growing by 1.5%, driven by stronger domestic demand. Despite the
better-than-estimated 2011 deficit outturn, the deficit projection for 2012 was
revised slightly upwards, to 2.3% of GDP, in the October 2012 notification. The
difference between the projected deficit in the Commission services forecast
and the national projections is due to more dynamic revenue growth in the
latter. For 2013, the Commission services' 2012 Autumn
Forecast projects the general government deficit to rise to 2.9% of GDP. The
forecast is based on unchanged policies, hence the 2013 Budget presented at the
end of November/beginning of December, is not included. The current revenue
ratio is projected to decline slightly, as the one-off revenue projected for
2012 disappears. Primary current expenditure is forecast to drop by 0.3 pp. of
GDP, reflecting a continuation of the tight recruitment policy in the public
sector as well as less pronounced growth of social transfers as the 2006
pension reform gradually kicks in. Net capital expenditure, including the
planned additional equity injection into Air Malta of 0.6% of GDP, is expected
to grow by 0.5 pp. of GDP. In 2014, the deficit is projected to
narrow, also due to a lower equity injection into Air Malta as well as higher tax revenue following the expected domestic demand-driven recovery
in economic activity. The main downside risks to the Commission
services' forecasts relate to the vulnerable financial situation of the energy
provider (Enemalta), which could entail further subsidies (in addition to the
planned injection of 21 millions already incorporated in the Commission
services' forecast) as well as to possible overruns in current primary
expenditure, as has happened in the past. Risks also arise from the economic
growth outlook. According to the Commission services' 2012
Autumn Forecast, the projected adjustment path towards the MTO over 2012-2013 is
not in line with the at least 0.5% of GDP annual structural adjustment that is
stipulated in the Stability and Growth Pact for Member States that have not yet
reached their MTO and are faced with a debt ratio exceeding 60% of GDP. In
fact, the structural deficit is projected to remain unchanged in 2012, and, on
a no-policy-change basis, to improve by just ¼ pp. of GDP in 2013, before
improving by ½ pp. of GDP in 2014. The real growth rate of government
expenditure, net of discretionary revenue measures, according to the Commission
services' 2012 Autumn Forecast, is projected to be negative and below the
benchmark reference medium-term rate of potential GDP growth in 2012. However,
on a no-policy-change basis, the real growth rate of expenditure is projected
to increase significantly in 2013 and 2014, thus breaching the benchmark
reference rate.
4.
Debt developments and projections and compliance with
the debt reduction benchmark
Data released by Eurostat on 22 October
2012 in its second notification on deficit and debt for 2011 show a general
government debt at 70.9% of GDP in 2011, more than 2 pps higher than in 2010
and about 9 pps. of GDP above the level recorded at the time of accession to
the euro area in 2008. The debt increase in 2011 compared to 2010
was driven by a high stock-flow adjustment (including for the rescue loan of
0.8% of GDP that the Maltese government agreed to provide to Air Malta[4]
to meet its cash-flow requirements as well as for the EFSF issuances and
bilateral loans to Greece), which was only partly offset by the increasing
primary balance, which in 2011 turned into a surplus for the first time since
2007. According to the Commission services' 2012
Autumn Forecast, the debt ratio is expected to increase further in 2012, driven
by the stock-flow adjustment essentially because of the impact of the
guarantees to the EFSF, bilateral loans to Greece and the participation in the
capital of the ESM and despite the repayment to the government of the rescue
loan to Air Malta. According to the Commission services' 2012
Autumn Forecast, on a no-policy-change basis, the debt ratio is projected to
increase further and peak in 2013, driven by a debt-increasing stock-flow
adjustment. An increasing primary surplus would result in a slight decline in
the debt ratio in 2014. Risks associated with budgetary developments also apply
to the debt-to-GDP ratio. It should be noted
that with the entry into force of the Six-Pack end-2011,
Member States have to comply with a debt reduction benchmark, as defined in Article
2(1a) of Regulation (EC) No 1467/97. The legislation foresees a three-year
transitional period for the Member States that were in EDP at the time of the
entry into force of these new legal provisions - which is the case of Malta. According to Article 2(1a), the requirement under the debt criterion shall be
considered fulfilled if, from the correction of the excessive deficit, Malta makes sufficient progress towards compliance. Table 3: Debt
developments, 2008-2014 [1] The corresponding article in the Treaty on the
Functioning of the European Union, which entered into force on 1 December 2009,
is Article 126(7). [2] All EDP-related documents for Malta can be found at the following website: http://ec.europa.eu/economy_finance/sgp/deficit/countries/malta_en.htm [3] The 2012 stability programme classified the concession
fee as a revenue among the category "Taxes on production and imports".
To make it possible to compare the Commission services' forecast and the 2012
stability programme, the concession fee has been reclassified as a negative capital
asset sales in the 2012 stability programme. [4] In November 2010, the Maltese government agreed to
provide Air Malta with a rescue loan to meet its cash-flow requirements until
May 2011, after which a restructuring plan has been presented to the
Commission. The loan was granted at market conditions and no debt financing was
allegedly required, with government deposits used to make the necessary
payments. Therefore the rescue loan is not incorporated in the Commission
services’ 2011 Autumn Forecast deficit and debt projections.