Brussels warns Malta to speed up deficit-cutting efforts

European Union Economic and Monetary Affairs Commissioner Olli Rehn has warned five EU member states, Malta included, to speed up their deficit-cutting efforts or face sanctions.

Belgium, Cyprus, Hungary, Malta and Poland need to provide “convincing evidence of permanent fiscal measures and preferably full 2012 budgets” by mid-December, Rehn told reporters today in Brussels.

"I am sending letters to specify our requests to the finance ministers of these five countries in the course of today,” Rehn said.

“I will make proposals for new council recommendations and if needed for sanctions, based on the new rule book immediately once the new rules have entered into force,” which will be “most likely around mid-December,” Rehn said.

The latest autumn forecast from the European Commission’s autumn forecast says Malta’s deficit is expected to widen to 3.5% of GDP in 2012 and 3.6% of GDP in 2013, with the primary balance turning negative again.

General government gross debt increased to 69% of GDP in 2010 and is expected to rise slightly further, reaching 71.5% of GDP in 2013, mainly reflecting the deterioration in the primary balance. Debt projections also include the impact of guarantees to the EFSF, bilateral loans to Greece and the participation in the capital of the ESM as planned at the cut-off date of this forecast.

In 2010 the general government deficit slightly narrowed to 3.6% of GDP, from 3.7% of GDP in 2009. Current primary expenditure rose by 3.6% as a result of moderate growth in compensation of employees and a more pronounced increase in intermediate consumption and social transfers.

However, according to the European Commission’s latest forecast, gross fixed capital formation remained flat reflecting weak absorption of EU funds, the postponement of some projects and one-off sales of shipyards assets.

“In spite of some revenue-enhancing measures (including a tax amnesty), tax proceeds grew less than GDP as the rebound in economic activity was driven by relatively tax-poor components, mainly exports,” the EC said.

The deficit is expected to narrow to 3% of GDP in 2011, when the primary balance is projected to be in surplus for the first time since 2007. Around two-thirds of the deficit reduction between 2010 and 2011 is related to the expiry of some temporary measures supporting the economy that were adopted with the 2010 budget.

However, primary expenditure is expected to increase by 4% due to compensation of employees and pensions. On the bright side, capital expenditure is set to rebound after the stagnation recorded in 2010, helped also by an increased absorption of EU funds.

On the revenue side, direct taxes are set to increase only slightly on the back of a deceleration in corporate profits’ growth. Indirect taxes should benefit from the increase in excise duties and the projected modest rebound in private consumption while social contributions are set to increase more moderately given the base effect from the 2010 tax amnesty.

The Commission also said the upcoming restructuring of Air Malta may give rise to additional government expenditure, thereby entailing upward risks for both the deficit and debt projections.