While the European Commission’s assessment of Malta’s euro convergence programme fell just short of a harsh indictment on long term public finances, one would not have thought as much given the portrayal of the EC’s reply in certain media this week.

On Wednesday, the EC replied to Malta’s updated Convergence Programme, delivered in December, by casting the government’s healthcare reform programme and post-2007 financial projections in serious doubt, labelling them excessively favourable and optimistic.

As such, the EC requested 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 regarding the long-term sustainability of public finances and the fact that the EC is of the opinion that the country’s budgetary results after 2007 will be “worse than targeted due to the markedly favourable macroeconomic scenario underlying the update’s projections”.

This however is not to say that the government will not correct the state of affairs and meets its target E-Day of 1 January 2008, but some of the media spin applied to the news this week was blinkered and misleading to say the least.

One apolitical newspaper chose to lead a report on the assessment with a quote from the bottom of an EC press release, in which Commissioner Joaquín Almunia “praised” Malta for having come “a long way since its deficit was 10 per cent (of GDP) only four years ago”.

The Nationalist television media even went as far as to spring upon Opposition leader Alfred Sant and demand a reaction to the “positive assessment” of the government’s finances. Dr Sant appeared stumped for an answer, refused to comment, and provided the news outlet with a story, which, if Dr Sant had been properly briefed, surely would not have made the airwaves.

The truth of the matter, however, is not so rosy.

The convergence programme submitted by Malta in December aims to correct the country’s excessive deficit by 2006 and continue to improve the state of public finances in the following years.

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

The Commission also found that Malta’s medium term objective (MTO) reflects 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”.

But against this backdrop 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.”

Given that, the Commission “invited” Malta spell out its long-term budgetary strategy, especially on the expenditure side. It also 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 making further progress in the design and implementation of the healthcare reform.

The EC also cast doubt on Malta’s general economic growth projections.

“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 added, “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.”