Assessing Malta’s latest Convergence Programme, the European Commission (EC) yesterday deemed Malta’s post-2007 projections as “optimistic” and called on Malta to “spell out its budgetary expenditure control strategy and progress further on the road of healthcare reform”.

The EC also placed Malta at medium risk in terms of the long-term sustainability of public finances and worse-than-targeted budgetary outcomes after 2007 due to the markedly favourable macroeconomic scenario underlying the update’s projections.

The Commission was yesterday responding to Malta’s latest euro convergence plan for 2006 to 2009 submitted at the beginning of December, in which the government had projected a correction of the deficit to well below the three per cent of gross domestic product (GDP) threshold provided by the Maastricht Criteria, in 2006, as well as a reduction of public debt to below 60 per cent of GDP by 2009.

Replying to the positive projections, however, the EC found that “The budgetary outcomes after 2007 depend, however, on growth expectations that are on the optimistic side” and invited Malta to supply further information on its strategy to reign in budgetary expenditure and its healthcare reform plans.

Malta’s convergence programme aimed to correct the country’s excessive deficit by 2006 and at further improving the state of public finances thereafter.

The Commission found that the medium-term objective (MTO) of the budgetary position supplied by Malta is a “balanced position in structural terms to be reached only after 2009”, and that the structural deficit is expected to improve gradually over the programme period. Furthermore it found that “the pace of adjustment is broadly in line with the Stability and Growth Pact after the correction of the excessive deficit”.

Against this backdrop, however, the Commission notes, “There are, however, risks of worse-than-targeted budgetary outcomes after 2007 due to the markedly favourable macroeconomic scenario underlying the update’s projections. Malta appears to be at medium risk as regards the long-term sustainability of public finances.”

The Commission highlighted the importance of maintaining a budgetary position robust enough to offset possible growth reversals, especially in light of the recent build-up of external imbalances.

Given that, the Commission yesterday “invited” Malta to pursue adequate progress towards the MTO and ensure that the debt-to-GDP ratio is reduced accordingly, while also spelling out the budgetary strategy, especially on the expenditure side, with a longer time perspective. It additionally requested Malta, in view of the level of debt and the projected increase in age-related expenditure, to improve the long-term sustainability of public finances by achieving the MTO and making further progress in the design and implementation of the healthcare reform.

On the general growth of the economy, the EC notes, “The macroeconomic scenario underlying the programme envisages that real GDP growth will hover around three per cent over the programme period. Assessed against currently available information, this scenario appears to be based on favourable growth assumptions for 2007 and markedly favourable ones thereafter, especially due to the optimistic medium-term evolution of the external sector. Less favourable net exports in the medium term than foreseen in the programme could heighten the external imbalance recorded in recent years.”

Referring to Malta’s pension reform exercise, the EC believes the government’s programme will result in higher pension expenditures leading to a higher increase in age-related expenditure, close to the EU average.

It adds, “Although at a somewhat slower pace than historical trends, projections for healthcare spending show an increase of around 1.75 per cent of GDP in the long term, if current trends persist. The current budgetary position would not ensure a steady reduction of debt to below the reference value. Therefore, improving the budgetary position, as projected in the programme, would contribute to reducing the risks to the sustainability of public finances.”

But, overall, the EC found Malta’s programme to be consistent with a correction of the excessive deficit by 2006 and the debt ratio seems to be diminishing at a satisfactory pace towards 60 per cent of GDP.

“Malta has come a long way since its deficit was 10 per cent (of GDP) only four years ago. After the correction in 2006, which we expect to see confirmed soon, the challenge is to continue on a virtuous path and reduce the deficit and the debt to more sustainable levels,” commented Economic and Monetary Affairs Commissioner Joaquín Almunia.