The long-term sustainability of Malta’s public finances was deemed to be at ‘high risk’ by the “Sustainability Report 2009” published by the European Commission this week.

Malta’s particular concern as far as the long-term sustainability of its public finances is concerned, was about paying for its ageing population, according to the report.

To combat the state of affairs, the Commission observed that Malta will have to reform its social protection system – in particular its public pensions, health care and long-term care – so as to decelerate the projected increase in age-related expenditure.

Malta’s so-called sustainability gap was gauged at seven per cent of gross domestic, above the 6.5 per cent European Union average.

Although other high risk countries such as Ireland, Greece, Spain, Slovenia and the UK had sustainability gaps far higher than Malta’s at over double the EU average, it was the meteoric rise in the sustainability gap since 2006 and the country’s significantly higher long-term cost of ageing that is of concern.

The 2006 Sustainability Report had given Malta a sustainability gap of just 0.3 per cent of GDP, while this year’s report placed the gap at 7.3 per cent.

Breaking the differential down, the Commission points out that the increase stemmed mainly from the increase in the long-term cost of ageing, of 4.6 percentage points, the initial budgetary position, which deteriorated less markedly, by 1.6 points, while the extension of the projection period from 2050 to 2060 also had an impact.

Malta’s sustainability gap, the report notes, is compounded by the initial budgetary position, what is required to stabilise the debt ratio, which stands at 1.4 per cent of GDP, well below the 3.3 per cent EU average.

But, in parallel, the required cost adjustment for the long-term cost of ageing was of 5.7 per cent, and far above the 3.2 per cent EU average. The long-term rising cost of ageing, the report adds, is mainly driven by increases in pension and health care expenditure – at 5.1 and 3.1 per cent of GDP respectively by 2060. Long-term care, meanwhile, contributes less, but significantly, at 1.6 per cent of GDP.

According to the report, by 2060 Malta’s working age population is set to decrease by 14.8 per cent while the old age dependency ratio is to explode by 39.7 per cent, and total age-related expenditure is set to rise by 10.2 per cent.

“Malta appears to be at high risk with regard to the long-term sustainability of public finances,” the report concluded. “The long-term budgetary impact of ageing is well above the EU average, mainly as a result of a relatively high increase in pension and health-care expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap.

“High primary surpluses over the medium term and further reforms of the social security system aimed at curbing the substantial increase in age-related expenditures would contribute to reducing risks to the long-term sustainability of public finances. Reforms should however be pursued in a manner that do not amplify the fallouts of the current economic and financial crisis.”

A total of 13 countries, including Malta, were placed in the high-risk category, another nine were at medium risk while five were found to be at low risk.

The high-risk countries, the Commission said in a statement, need to set out “ambitious” budget programmes to reduce debt and deficit in the coming years and make deep reforms to social welfare spending.

The other high-risk states were the UK, Spain, Greece, Ireland, Latvia, The Netherlands, Lithuania, Romania, Slovenia, Slovakia, the Czech Republic and Cyprus.

In a statement, the Commission told all EU nations that they could not rely on fast economic growth to reduce debt because Europe faces a problem that will “dwarf the effect of the crisis many times over” – an ageing population where fewer workers will pay higher pension and health care for more retirees.

That, it said, means that governments have little choice but to make budget cuts and labour market reforms that could raise potential growth.

The EC is also calling on governments to set out an “exit strategy” for how and when they will start paying back debt. Finance ministers from the 16 eurozone nations signalled on 1 October that they might set a 2011 deadline to start such efforts if forecasts confirm a recovery.

“Fiscal exit strategies aimed at achieving ambitious and realistic medium-term objectives need to be designed now, and implemented in a coordinated manner as soon as the recovery takes hold, taking into account the specific situations of individual countries,” the Commission said in a statement.

“To support the required reforms and enhance the credibility of fiscal adjustment – which will inevitably extend over a number of years – member states may also need to further develop their own budgetary frameworks. In terms of the Stability and Growth Pact, debt sustainability should get a very prominent and explicit role in surveillance procedures.

“Addressing the long term sustainability of our public finances is one of the key drivers of our exit strategy,” said Economic and Monetary Affairs Commissioner Joaquín Almunia. “We need to continue supporting the recovery but in a context of severely deteriorated public finances, measures to increase confidence and support demand can only be successful if they are perceived by markets and public opinion as temporary and consistent with long-term sustainability.

“By designing clear strategies for the aftermath of the crisis we will strengthen the effectiveness of the support measures in the short term and create the conditions for a sustained and balanced economic growth in the future.”