The European Council is set to reopen the Excessive Deficit Procedure against Malta, less than six months after the procedure was last withdrawn, following recommendations made by the European Commission.

This will be the third time in which Malta is placed under the EDP since joining the EU in 2004. The last time the procedure was opened was in July 2009 – Malta’s deficit had soared in the wake of the global financial crisis, which the government mainly attributed to its efforts to ensure local industries did not go bust. The issue at stake is the budget deficit. The new framework stipulates that the deficit must not be higher than 3 % of GDP. In other words, you can only spend 3 % more than what you recoup. Anything over that figure is deemed to be unsustainable.

Following the crisis in late 2008 and 2009, the deficit fell year after year, going below the 3% of GDP threshold in 2011. The 2012 deficit was projected to have fallen even further, to 2.3%, and in light of this, the second EDP for Malta was withdrawn only last December.

But when the new government announced its 2013 budget last April, based on the previous one’s measures, it revised the 2012 deficit figure up by 1 percentage point, to 3.3%. While it projects that the deficit will go down to 2.7% this year, the Commission is unconvinced: According to its latest spring forecast, Malta’s deficit is actually expected to widen to 3.7%.

As a result, the Commission calculated that last year’s deficit could not be qualified as exceptional or temporary, and recommended the reopening of the EDP. Malta was the only EU member state in which the opening of an EDP was recommended by the European Commission.

Despite the fact that Malta was the only country set to be placed under a fresh EDP, the Maltese government insisted that the Commission’s recommendations were a positive sign for its own economic and fiscal plan. The government also stressed that it remained committed to bring Malta’s excessive deficit below the 3% threshold this year, even though it had been given the freedom to delay doing so until next year.

Malta was also urged to increase tax compliance and fight tax evasion, which the Commission states continue to pose a challenge to the quality of public finances. The Commission also pointed out that tax incentives for companies to take on debt remained very high, and that this could lead to excessively high corporate leverage and inefficient allocation of capital.

The Commission also urged Malta to reform the pension system to ensure the long-term sustainability of public finances, reiterating its call for accelerating the increase in the statutory retirement age, introducing a link to life expectancy and by encouraging private pension savings. Both the present and previous Maltese governments have opposed any changes to the retirement age.

The Commission also emphasised the need to reduce Malta’s high proportion of early school leavers, as well as to improve the labour market participation of women, which remains the lowest in the EU.

It also calls for the government to continue efforts to diversify the energy mix and energy sources, particularly through increasing the take-up of renewable energy and the timely completion of the electricity interconnector. The country and the government knows that the deficit must be reined in. Prime Minister Joseph Muscat has already gone on record in saying that the way forward is through economic growth. We shall have to wait and see how it unfolds.