The European Commission last Monday reopened its Excessive Deficit Procedure against Malta as the country’s budget deficit for last year mushroomed to 4.7 per cent, well above the 3 per cent maximum allowed by EU regulations.
Malta’s budget deficit is the third highest in the euro zone for 2008, following Ireland at 7.1 per cent and Greece at 5.0 per cent.
The country’s budget deficit is still being projected to stay above the 3 per cent Maastricht reference level at 3.6 per cent of GDP in 2009 and 3.2 per cent in 2010.
However, the Maltese Finance Ministry is disputing this, saying that in view of various one-off impacts on the 2008 Budget, “Government is not completely in agreement with the Commission assessment that within a no policy change scenario the deficit for 2009 would again exceed the 3 per cent mark.
“The Commission at this stage has requested the Maltese Government a reaction to this assessment - which has been submitted. Should this reaction not be found to be satisfactory only then will the commission institute formal proceedings,” the spokesperson for Finance Minister Tonio Fenech told Business Today.
“The rules of the game are very simple – a country which falls foul of the deficit Maastricht criteria, with a deficit of over 3 per cent to GDP, and within the following year, Commission forecasts will not show that the country’s fiscal position will move back into this criterion, will face an Excessive Deficit Procedure,” he added.
However, the Finance Ministry spokesperson also said that there were also delayed payments to Government revenue from enterprises “due to the international economic crisis” that together have brought this significant departure from original forecasts, costing the Government an additional €50 million in lost revenue during the first three months of this year.
“During the last 3 months of 2008, many enterprises delayed statutory monthly payments of income tax, national insurance contribution and other government dues clearly in an effort to ease their cash flow problems due to the prevailing international economic crises,” the Finance Ministry spokesperson told Business Today.
The final cost of the Malta Shipyards on the public finances for 2008 was €64.7 million (1.13 per cent of GDP), “which went beyond the cost of the early retirement schemes – which of the €57 million estimated the impact for 2008 was of €40.4 million – since a number of workers although taking up the scheme are still engaged to date with the Shipyards and would be paid the scheme payment when there contract is ended.”
Moreover, Malta Shipyards “had to be reclassified to what is termed as General Government because its subsidies were exceeding 50 per cent of its recurrent costs and therefore implying that the losses of the Shipyard, which stood at € 24.3 million, had to also be included in the Government deficit position.”
The Enemalta subsidy over and above those budgeted for 2008 was calculated at €45.6 million (0.72 per cent of GDP) “to cushion the high international energy prices.
These three factors had a cumulative impact on the Budget for 2008 of €160 million.
“When these three factors are deducted from the total general government deficit of €266.5 million, the departure from the 2008 targets is significantly explained,” the Finance Ministry spokesperson contended.
“When the two extraordinary one-offs are deducted – Shipyards 1.13 per cent and another 0.9 per cent in terms of total subsidies to Enemalta and WSC amounting to €53.1 – which will not recur in 2009, the deficit would go down from 4.6 per cent to 2.57 per cent of GDP,” the Finance Ministry spokesperson told Business Today.
EDP first suspended, then re-triggered
The latest statistics published by the NSO on 22 April 2009 showed that in 2008, Malta suffered a budget deficit of €266 million, equivalent to 4.7 per of the GDP – well above the Commission’s forecast of 3.5 per cent in the Commission’s initial assessment of Malta’s EDP in February.
Under the provisions of the Stability and Growth Pact, Member States have to respect two criteria: a deficit-to-GDP ratio of 3 per cent and a debt-to-GDP ratio of 60 per cent.
In 2008, according to the European Commission’s interim forecasts in January, Malta’s deficit-to-GDP rate shot to 3.6 per cent.
At the same time, Malta’s debt-to-GDP ratio for 2008 was revised upwards from 60 per cent to 62.9 per cent, exceeding the threshold set out by the Stability and Growth Pact.
For 2009, Malta’s debt-to-GDP ratio was revised upwards, from 57.2 per cent to 61.9 per cent, also in excess of the 60 per cent threshold.
If a Member State exceeded the deficit ceiling, the Excessive Deficit Procedure (EDP) was triggered at EU level. This entailed several steps – including the possibility of sanctions – to encourage the Member State concerned to take measures to rectify the situation.
The EDP is established in the Treaty and specified in the Stability and Growth Pact legislation.
The EDP legislation sets out criteria, schedules and deadlines for the Council to reach a decision on the existence of an excessive deficit.
However, no EDP procedure will be launched if the excess of the government deficit over the 3 per cent of GDP threshold is considered “temporary and exceptional” and the deficit remains close to the threshold.
Speaking at the presentation of the Stability and Growth pacts for 21 EU Member States including Malta on 18 February, Almunia had confirmed that the EC had adopted a EDP report on Malta, but had let the country off the hook for now.
“Because of the analysis of the closeness, temporariness and the other relevant factors we considered that Malta had a deficit above 3 per cent last year, but will not be followed by an excessive deficit procedure for the reasons we have analysed in the report,” Almunia had told journalists in Brussels.