The government may have welcomed the European Commission’s assessment of Budget 2020 on Wednesday and cherry picked the fact that it was deemed compliant with the Stability and Growth Pact but, according to the full assessment released yesterday, all is not quite so rosy.

In fact, the Commission has found a heavy reliance on the on the hard to predict Individual Investor Programme and has also recommended “careful” monitoring of expenditure developments for risks of falling foul of the Pact.  Recent measures to address pensioners, meanwhile, were found to not be contributing to the system’s long term sustainability.

While in 2019 and 2020 the structural balance is expected to remain above the medium-term budgetary objective of a balanced budgetary position in structural terms, the Commission assessed that, “At the same time, fiscal surpluses are heavily driven by Individual Investment Programme revenue, the development of which is difficult to predict.”

Also, although the budget’s expenditure benchmark pillar does not point to a risk of compliance for 2019 and 2020, based on the Commission 2019 autumn forecast, “the net public expenditure annual growth corrected for one-offs is expected to be one of the highest in the euro area.

“Hence expenditure developments should be monitored carefully, especially in light of possible future risks to the robustness of revenues, to safeguard compliance with the Stability and Growth Pact.”

The Commission is also of the opinion that Malta has made limited progress with regard to the structural part of its fiscal recommendations presented in July in the context of the European Semester, and “invites the authorities to accelerate progress”.

It also warned that a “comprehensive description of progress made with the implementation of the country-specific recommendations” will be made in the 2020 Country Report and assessed in the context of the country-specific recommendations to be proposed by the Commission in spring 2020.

The Commission’s 2019 autumn forecast also projects a “somewhat lower surplus due to lower projected revenue from social contributions reflecting an assumption of a less dynamic labour market and higher current expenditure for compensation of employees and social payments.

“In both forecasts, Individual Investor Programme revenue is an important contributor to positive fiscal balances,” the Commission highlights.

The Maltese economy is expected to grow by 5% in 2019 and 4.2% in 2020, down from 6.8% in 2018. In 2020, growth is set to slow down to 4.3%, reflecting mainly slowing household and public consumption growth, which will be only partly counterbalanced by increasing investment.

Net exports are projected to drag on growth with exports slightly slowing down and imports accelerating, mirroring a somewhat stronger investment activity.

The Commission minted how Malta had, after the July recommendations, to ensure the fiscal sustainability of the healthcare and pension systems, including by restricting early retirement and adjusting the statutory retirement age in view of expected gains in life expectancy, the Maltese authorities introduced a Home Equity Release scheme and strengthened the Third Pillar Pension Scheme and Voluntary Occupational Pension Scheme.

“These measures aim at improving pension adequacy and reducing dependency on state pensions,” the Commission noted, but added that, “Nevertheless, they do not appear to contribute significantly to the long-term sustainability of the public pension system.”

In 2020, Malta’s fiscal stance is expected by the Commission to be contractionary. The Draft Budgetary Plan does not envisage any tax increases but plans a series of tax-reducing measures in 2020. Their negative impact on revenues is projected to be broadly offset by an additional positive impact of measures adopted in previous years.

Here, the Commission makes a specific note: “i.e. Individual Investor Programme revenue”, in terms of the additional measures to address the projected shortfall.

The measures, the EC assesses, also include a lower tax rate for low-paid employees on overtime work, an increase in tax exemption thresholds for minimum wage earners and pensioners, and an increase in the tax exemption for non-public pension plans.

The Commission also highlights the how in the area of property taxation, a stamp duty exemption available for first-time home buyers was extended to 2020 and a reduced stamp duty on purchase of residential property in Gozo has also been retained.

The expenditure side measures, meanwhile, are expected to have a negative impact on budget balance amounting to 0.4% of GDP. The budget envisages a number of initiatives targeting pensioners (e.g. increasing pensions above the Cost of Living Adjustment index, providing additional allowance and grants for the elderly, allocating additional funds to cater for inequalities suffered by persons in the past due to changes in the pension system, free transport for persons over 75 years), families (e.g. a bonus for every new-born or adopted child) and the disabled.

The National Development and Social Fund, funded by the IIP, the Commission notes, projects an allocation of 0.2% of GDP to finance projects in specific areas as defined by respective legislation.