Recommendation for a
on the 2022 National Reform Programme of Malta and delivering a Council opinion on the 2022 Stability Programme of Malta
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, and in particular Article 5(2) thereof,
Having regard to the recommendation of the European Commission,
Having regard to the resolutions of the European Parliament,
Having regard to the conclusions of the European Council,
Having regard to the opinion of the Employment Committee,
Having regard to the opinion of the Economic and Financial Committee,
Having regard to the opinion of the Social Protection Committee,
Having regard to the opinion of the Economic Policy Committee,
(1)Regulation (EU) 2021/241 of the European Parliament and of the Council, which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transition, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility [was] updated on [XX] June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.
(2)On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the reaffirmed joint commitment of the Porto Social Summit of May 2021 to further implement the European Pillar of Social Rights proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Malta as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was adopted on 5 April 2022 by the Council, as well as the proposal for the 2022 Joint Employment Report analysing the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights, which was adopted by the Council on 14 March 2022.
(3)Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt for example through higher energy and food prices and weaker growth prospects. The higher energy prices weigh particularly on the most vulnerable households experiencing or at risk of energy poverty. The EU is also seeing an unprecedented inflow of people fleeing Ukraine. In this context, on 4 March 2022, the Temporary Protection Directive was triggered for the first time, granting displaced persons from Ukraine the right to legally stay in the EU, as well as access to education and training, the labour market, healthcare, housing and social welfare.
(4)Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any country-specific recommendations issued up to the date of submission of the modified plan.
(5)The General Escape Clause has been active since March 2020. In its Communication of 3 March 2021, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.
(6)Following the approach in the Council opinion of 18 June 2021 on the 2021 Stability / Convergence Programme, the fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures), excluding COVID-19 crisis-related temporary emergency measures but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other EU funds, relative to medium-term potential growth. Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally-financed primary current expenditure (net of discretionary revenue measures and excluding COVID-19 crisis-related temporary emergency measures) and investment.
(7)On 2 March 2022, the Commission adopted a Communication providing broad guidance for fiscal policy in 2023, aiming at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, based on the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020-2022 to a broadly neutral aggregate fiscal stance would appear appropriate in 2023, while standing ready to react to the evolving economic situation. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate across Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its Semester spring package of late May 2022.
(8)With respect to the fiscal guidance provided on 2 March 2022, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transition and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second round effects via targeted and temporary measures; fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, and be differentiated across countries depending on their fiscal and economic situation, including as regards the exposure to the crisis and the inflow of displaced persons from Ukraine.
(9)On 13 July 2021, Malta submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines of Annex V to that Regulation. On 5 October 2021, the Council adopted its Decision on the approval of the assessment of the recovery and resilience plan for Malta. The release of instalments is conditional on a decision by the Commission, taken in accordance with Article 24(5) of Regulation (EU) 2021/241, that Malta has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.
(10)On 15 April 2022, Malta submitted its 2022 National Reform Programme and, on 2 May 2022, its 2022 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Malta’s bi-annual reporting on the progress made in achieving its recovery and resilience plan.
(11)The Commission published the 2022 country report for Malta on 23 May 2022. It assessed Malta’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Malta’s implementation of the recovery and resilience plan, building on the Recovery and Resilience Scoreboard. Based on this analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Malta’s progress on implementing the European Pillar of Social Rights and on achieving the EU headline targets on employment, skills and poverty reduction, as well as progress in achieving the UN’s Sustainable Development Goals.
(12)On 23 May 2022, the Commission issued a report under Article 126(3) TFEU. This report discussed the budgetary situation of Malta, as its general government deficit in 2021 exceeded the 3% of GDP Treaty reference value. The report concluded that the deficit criterion was not fulfilled. In line with the Communication of 2 March 2022, the Commission did not propose to open new excessive deficit procedures in spring 2022 and it will reassess the relevance of proposing to open excessive deficit procedures in autumn 2022.
(13)On 20 July 2020, the Council recommended Malta to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Malta to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, based on data validated by Eurostat, Malta’s general government deficit fell from 9.5% of GDP in 2020 to 8.0% in 2021. The fiscal policy response by Malta supported the economic recovery in 2021, while temporary emergency support measures declined from 6.3% of GDP in 2020 to 4.7% in 2021. The measures taken by Malta in 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were temporary or matched by offsetting measures. Based on data validated by Eurostat, general government debt stood at 57.0% of GDP in 2021.
(14)The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic. The government projects real GDP to grow by 4.4% in 2022 and 3.9% in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 4.2% in 2022 and a higher growth of 4.0% in 2023. In its 2022 Stability Programme, the Government expects that the headline deficit will decrease to 5.4 % of GDP in 2022 and to 4.6 % in 2023. The decrease in 2022 mainly reflects the growth in economic activity and the net effect of the partial unwinding of support emergency measures, while new measures were introduced in response to the high energy prices. According to the Programme, the general government debt-to-GDP ratio is expected to increase to 58.6% in 2022 and to rise further to 59.4% in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission 2022 spring forecast projects a government deficit for 2022 and 2023 of 5.6% of GDP and 4.6% respectively. This is in line with the deficit projected in the 2022 Stability Programme. The Commission 2022 spring forecast projects a similar general government debt-to-GDP ratio, of 58.5% in 2022 and 59.5% in 2023.
Based on the Commission spring 2022 forecast, the medium-term (10-year average) potential output growth is estimated at 4.5 %. However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Malta’s potential growth.
(15)In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency support measures are projected to decline from 4.7% of GDP in 2021 to 1.3% in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission spring 2022 forecast are estimated at 1.0% of GDP in 2022 and 0.6% of GDP in 2023. These measures mainly consist of cuts to indirect taxes on energy consumption and subsidies to energy production to compensate for the price increase of imported electricity and carbon emissions. These measures have been announced as temporary. However, in case energy prices remain elevated also in 2023, some of these measures could be continued. Some of these measures are not targeted, notably the subsidies to energy production and the cuts in fuel excise duties. The government deficit is also impacted by the costs to offer temporary protection to displaced persons from Ukraine, which in the Commission 2022 spring forecast are projected at 0.1% of GDP in 2022 and 0.1% in 2023.
(16)On 18 June 2021, the Council recommended that in 2022 Malta maintains a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserves nationally-financed investment. It also recommended Malta to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term, and at the same time, to enhance investment to boost growth potential.
(17)In 2022, based on the Commission’s 2022 spring forecast and including the information incorporated in Malta’s 2022 Stability Programme, the fiscal stance is projected to be supportive at -1.5% of GDP as recommended by the Council. Malta plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.2 percentage points of GDP compared to 2021. Nationally-financed investment is projected to provide a contractionary contribution to the fiscal stance of 0.3 percentage points in 2022. Therefore, Malta does not plan to preserve nationally financed investment. At the same time, the growth in nationally-financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1.6 percentage points to the overall fiscal stance. This significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0.5% of GDP), as well as the costs to offer temporary protection to displaced persons from Ukraine (0.1% of GDP). Moreover, the government granted financial support to households (0.3% of GDP), increased contributory and non-contributory pension benefits in excess of the cost of living adjustment (0.2% of GDP), while the growth rate of the intermediate consumption (net of measures) remained strong (0.4% of GDP).
(18)In 2023, the fiscal stance is projected in the Commission 2022 spring forecast at 1.1% of GDP on a no-policy change assumption. Malta is projected to continue using the grants from the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.2 percentage points of GDP compared to 2022. Nationally-financed investment is projected to provide a contractionary contribution to the fiscal stance of 0.1 percentage points in 2023. At the same time, the growth in nationally-financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 1.3 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0.4% of GDP), of the temporary financial support to households (0.3% of GDP) and of the contributory and non-contributory pension benefits in excess of the cost of living adjustment (0.2% of GDP). In addition, intermediate consumption (net of measures) is expected to grow less than nominal GDP (0.4% of GDP).
(19)In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 4.6% of GDP in 2023, 2.8% in 2024 and to 2.4% by 2025. Therefore, the general government deficit is planned to go below 3% of GDP by 2024. According to the Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 58.6% in 2024, and a decline to 57.2% in 2025. Based on the Commission’s analysis, debt sustainability risks appear medium over the medium term.
(20)In accordance with Article 19(3), point (b), and Annex V, criterion 2.2, to Regulation (EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented by 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Malta by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a plan. In particular, the plan is ambitious and envisages reforms and investments to address the challenges identified in health, employment, education and skills, climate and digital transition, justice and the fight against corruption and money laundering. Good governance is one of the pillars of the government’s long-term economic vision, and the plan makes significant efforts to remedy the challenges in this area. Investing in education also features prominently in the plan, with relevant measures proposed to address weaknesses in the education system. A major part of planned investments focuses on the green and digital transition, thereby addressing the country-specific recommendations on investments in these areas. The challenges identified in aggressive tax planning, R&I and the sustainability of the pension system are partly addressed.
(21)The implementation of the recovery and resilience plan of Malta is expected to contribute to making further progress on the green and digital transition. Measures supporting the climate objectives in Malta account for 53.8% of the plan’s total allocation, while measures supporting digital objectives account for 25.5% of the plan’s total allocation. The fully-fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Malta swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the plan, to ensure broad ownership of the overall policy agenda.
(22)Malta has not yet submitted the Partnership Agreement and the other cohesion policy programming documents. In line with Regulation (EU) 2021/1060 of the European Parliament and of the Council of 24 June 2021, Malta shall take into account the relevant country-specific recommendations in the programming of the 2021-2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting the coordination, complementarity and coherence between these funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transition and balanced territorial development.
(23)Beyond the economic and social challenges addressed by the recovery and resilience plan, Malta faces a number of additional challenges related to features of the tax system that facilitate aggressive tax planning. Tackling aggressive tax planning remains key to improve the efficiency and fairness of tax systems, as acknowledged in the 2022 euro area recommendation. Spill over effects of aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Malta has taken steps to address aggressive tax planning practices by implementing previously agreed international and European initiatives, and by committing in its recovery and resilience plan, to carry out an independent study on outbound and inbound (i.e. between Union residents and third-country residents) payments to be followed up by implementing legislation in line with the study’s findings. Still, outbound payments of interests, royalties, and dividends made by Malta-based companies to zero and low-tax jurisdictions (hereby intended as any jurisdiction with a statutory corporate income tax rate below the lowest statutory corporate income tax rate in the EU, which is 9%), may lead to those payments avoiding tax altogether until withholding taxes, or equivalent defensive measures, are in place in Malta to ensure that such payments are properly taxed. Furthermore, the treatment of resident non-domiciled companies continues to pose a risk of double non-taxation for both, companies and individuals.
(24)In response to the mandate by the EU Heads of State or Government, set out in the Versailles Declaration, the REPowerEU plan aims to phase out the European Union’s dependence on fossil fuel imports from Russia as soon as possible. For this purpose, the most suitable projects, investments and reforms at national, regional and EU level are being identified in dialogue with the Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil fuel imports away from Russia.
(25)Malta is lagging behind in achieving its 2030 target of reducing, by 19% from 2005 levels, greenhouse gas emissions not covered by the EU emissions trading system (ETS), falling under the Effort-Sharing Regulation. Malta’s commitment to becoming climate neutral by 2050 will require sustained investment by households, firms and government alike. With increased EU climate ambition focusing on more affordable, secure and sustainable energy, more effort is required to further exploit its solar and wind potential, including floating offshore energy, given that renewables only account for 8% of the energy mix. Malta is heavily reliant on oil (48%) and natural gas (44%). Natural gas was used to generate 86% of Malta’s electricity in 2020. While it does not import any gas or oil from Russia, the rapid increase in energy prices has started to affect Malta. Malta intends to ensure better security of energy supply through the building of a second electricity interconnector. Reducing dependence on fossil fuels would also call for an upgrade of its electricity transmission and distribution grids, and investments in electricity storage in order to supply firm, flexible and fast responding energy. Targeting energy efficiency of buildings, particularly residential buildings, including by rolling out heat pumps and other green solutions, would help reduce energy demand. Further increase in ambition for reducing greenhouse gas emissions and increasing renewables and energy efficiency will be needed for Malta to be in line with the ‘Fit for 55’ objectives. In addition, road transport emissions are steadily growing, forming the largest source of non-ETS greenhouse gas emissions. Reducing traffic congestion would require an improvement in public transport, deployment of intelligent transport systems, and investments in soft mobility infrastructure (such as pavements and cycling lanes) for a safe alternative to private car use.
(26)While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Malta can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socio-economic impact of the transition. In addition, Malta can make use of the European Social Fund Plus to improve employment opportunities and strengthen social cohesion.
(27)In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion is reflected in recommendation (1) below.
(28)In view of the close interlinkages between the economies of euro area Member States and their collective contribution to the functioning of the Economic and Monetary Union, the Council recommended that the euro area Member States take action, including through their recovery and resilience plans, to implement the recommendation on the economic policy of the euro area. For Malta, this is reflected in particular in recommendations 1, 2 and 3 below.
HEREBY RECOMMENDS that Malta take action in 2022 and 2023 to:
1.In 2023, ensure that the growth of nationally-financed current expenditure is in line with an overall neutral policy stance, taking into account continued temporary and targeted support to households and firms most vulnerable to energy price hikes and to people fleeing Ukraine. Stand ready to adjust current spending to the evolving situation. Expand public investment for the green and digital transition and for energy security, including by making use of the RRF, RePowerEU and other EU funds. For the period beyond 2023, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions.
2.Proceed with the implementation of its recovery and resilience plan, in line with the milestones and targets included in the Council Implementing Decision of 5 October 2021. Submit the 2021-2027 cohesion policy programming documents with a view to finalising their negotiations with the Commission and subsequently starting their implementation.
3.Take action to effectively address features of the tax system that may facilitate aggressive tax planning by individuals and multinationals, including by ensuring sufficient taxation of outbound payments of interests, royalties, and dividends, and amending the rules for non-domiciled companies.
4.Reduce overall reliance on fossil fuels by accelerating the deployment of renewables, promoting and enabling investments in wind and solar energy, including in floating offshore energy, further upgrading Malta’s electricity transmission and distribution grids, and creating incentives for electricity storage to supply firm, flexible and fast-responding energy. Reduce energy demand through improved energy efficiency, particularly in residential buildings. Reduce emissions from road transport by addressing traffic congestion through improved service quality in public transport, intelligent transport systems and investing in soft mobility infrastructure.
Done at Brussels,
For the Council