The EU said in a report published by the European Commission that pursuing fiscal consolidation to achieve the MTO (medium-term budgetary objectives) is a key challenge for Malta.

In an overview of the most fiscal-policy relevant Council recommendations of 12 July, it is recommended that Malta should ensure correction of the excessive deficit in 2011, bring the high public debt ratio on a downward path and ensure adequate progress towards the medium-term objective.

A report published by credit rating agency Moody’s last week, which downgraded Malta’s bond ratings, also refers to the need for the country to improve its debt metrics, saying it would change the negative outlook to stable in the event that the Maltese economy proves resilient in the face of a large economic shock and debt metrics improve to levels consistent with an A2 rating.

The European Commission said the economic crisis has taken a heavy toll on EU states’ public finances, making debt sustainability a major challenge across the EU. At the same time, a major overhaul of EU fiscal surveillance is under way.

The debt to GDP ratio in the EU is continuing to rise and is set to reach 83.3% of GDP in 2012 – an increase of over 20 points of GDP from its level of 2007. The consolidation measures that have been introduced are addressing this rising level, and the member states have indicated plans to intensify these in their Stability and Convergence Programmes.

Following through on these plans would lead to debt stabilising by 2012; the challenge is therefore to ensure that these more ambitious plans are indeed put into practice while preserving appropriate differentiation across member states in accordance with available fiscal space.

With a view to strengthening the credibility of the medium-term consolidation strategy, Malta is advised to define the required broad measures from 2013 onwards, embed the fiscal targets in a binding, rule-based multi-annual fiscal framework and improve the monitoring of budgetary execution.

On the pension system, the EU said Malta should ensure the sustainability of the system and said it could take action by accelerating the progressive increase in the retirement age and by linking it to life expectancy.

Malta is urged to accompany the higher statutory retirement age with a comprehensive active ageing strategy, discourage the use of early retirement schemes and encourage private pension savings.

The overview states that the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections is slightly favourable, especially in the later years of the Stability Programme period. From 3.6% of GDP in 2010, the Stability Programme plans to bring the general government deficit below the Treaty reference value by this year.

The debt ratio is projected to decline from its 2010 peak of 68% of GDP to 63.7% in 2014, due to a positive and strengthening primary balance.

The average annual structural adjustment effort in the period 2012-2014, as calculated by the Commission, is broadly in line with the Stability and Growth Pact. However, budgetary outcomes could be worse than targeted because of possible expenditure overruns and the lack of information on the measures underpinning the consolidation effort after this year.

“Pursuing fiscal consolidation to achieve the MTO is a key challenge for Malta. While the budget for 2011 put in place measures to correct the excessive deficit in 2011, additional action would be required in case of slippages. The credibility of the medium-term consolidation strategy, which is not yet underpinned by concrete measures, would be enhanced by a stronger multi-annual budgetary framework.

“A key weakness is the non-binding nature of the multi-annual targets, which implies a relatively short fiscal planning horizon. The Stability Programme states that the introduction of an expenditure rule is being considered.”

Malta’s downgraded credit rating

In its report of last week, credit rating agency Moody’s said Malta “has exhibited weak debt metrics for some time and the anticipated improvement in the government’s balance sheet at the time of EMU (European Monetary Union) accession has not materialised”.

Reacting to the report in which the credit rating agency downgraded Malta’s foreign-currency and local-currency government bond ratings to A2 from A1 and revised the outlook to negative, the Finance Ministry said the government is committed to take all necessary action to strengthen and ensure the country’s economic and financial stability.

The ministry said that while Malta’s foreign and local-currency government ratings were reclassified by Moody’s, the country as a whole maintains an ‘A’ credit rating.

But the PL hit out at the government, saying that the first thing the Labour Party would do if elected to government is that it would be honest about the real situation of public finances.

Opposition leader Joseph Muscat said the PL believes that there is still hope and the economy can start growing again.

“We’re still in time to change direction, but the government is in denial. Change is necessary to ensure that the situation doesn’t worsen.”

Alternattiva Demokratika expressed concern over the Moody’s downgrade, saying that the Moody’s outlook gave high importance to the fact that Malta is caught in the midst of economic crises in the eurozone.

Michael Briguglio, AD spokesman for finance and the economy said: “We support measures that improve fiscal discipline and which properly manage budgetary deficits and public debt. The government’s expenditure programmes should be sustainable, while aiming to improve environmental, social and economic targets, as this would result in higher educational standards, increased job opportunities – including opportunities for vulnerable groups – and more purchasing power.”

A sustainable spending programme should also be matched with a sustainable source of government revenue. In particular, AD believes that Malta should stop being over-dependent on unsustainable real estate and sectors that are based on speculation.

Property speculation should be taxed from third vacant property onwards. Increased investment in green jobs and discouragement of wasteful energy use are also important for a sustainable economy, concluded Mr Briguglio.

Economist Alfred Mifsud, a former high-profile consultant to the Labour Party, said on the Moody’s report: “The downgrade is no big tragedy and understandable in view of what is happening around us. It is not surprising that we are also suffering.

“What is a bit more worrying is the negative outlook and the fact that debt metrics are not even consistent with an A2 rating.”

Asked what measures he felt the government should take to try to improve the situation, he said that one thing that is really necessary is a total reorganisation of the tax structure.

Gordon Cordina, who heads the Department of Economics at the University of Malta, said that there is a message that cannot be ignored in Moody’s downgrade of Malta credit’s rating from A1 to A2.

Dr Cordina said that both he and the governor of the Central Bank of Malta have been, for the past several months, saying that Malta’s economy was growing and in some cases it was even doing better than the economies of several other countries – but the dangers were ever present.

“The feeling out there is that the world is turning nastier,” he commented.

He added that the downgrade might result in a re-think of economic models and policies.

“Models and policies which we were comfortable working with so far might not continue to serve us so well in the future. We might need a re-think,” said Dr Cordina.