Are the Commission’s recommendations ‘spam’ in the minister’s inbox?

In its country specific report with regards to Malta, the European Commission last Monday asked Malta to correct the excessive deficit in a sustainable manner by 2014 and in 2015.

Now Malta might take as an example from the superficial response of some British Conservatives such as Dominic Raab, Conservative MP for Esher and Walton, who said: ‘Having helped bankrupt the Eurozone and delivered the biggest anti-EU election results in history, the Chancellor can be forgiven for treating the Commission’s advice as spam when it arrives in his inbox.’

In fact, the Maltese government’s response, later on Monday, said: ‘The Government welcomes the European Commission’s assessment that Malta is to strengthen its budgetary strategy and continue lowering its deficit in 2014 and beyond. Malta’s deficit in 2013 stood at 2.8%, while the projected deficit for 2014 is 2.1%.

‘The Government notes that “the macroeconomic scenario underpin- ning the budgetary projections, which has been endorsed by an independent body (the NAO), is plausible for 2014 and 2015.”

‘The Government is confident that, through attentive monitoring of ongoing expenditure and revenue collection, alongside efforts such as ongoing spending reviews, the Government’s projections would be achieved’ and on and on.’

But this, I hold, is a reductive reading by the government of the Commission’s recommendations as a close study of the Commission’s text, which, for reasons of space I cannot include here, will show.

This does not mean, of course, that what the Commission says is infallible, especially since macro-economic policy is not the Commission’s forte, as witnessed in previous years.

The fact remains that the Commission expresses doubt about some of the government’s assurances, specifically those of reducing the ex- cessive deficit in a sustainable manner by this year and that the economic growth projections for 2014 and 2015 are marginally lower than those in the Commission 2014 Spring Forecast for these years and the structural revenue increase planned over the programme period is not fully underpinned by measures and expenditure overruns could require higher than budgeted disbursements.

The Commission says that additional efforts are needed to bring the structural adjustment in line with the recommended one in 2014 and to ensure an appropriate path towards the medium-term objective as of 2015.

It adds that the non-binding nature of Malta’s fiscal framework and the short horizon of fiscal planning are not supportive of a sound fiscal position. The adoption of the legislation meant to come into force by the end of 2013 and aimed at fulfilling the requirements of the Directive 85/2011/EU on budgetary frameworks and the Fiscal Compact has been delayed.

However, according to the Stability Programme the Maltese government has recently endorsed a Fiscal Responsibility Act, which will be submitted for Parliament’s approval. The draft act foresees the introduction of a balanced-budget rule in structural terms, a debt rule, a threeyear rolling budgetary framework and a gradual set up of the fiscal council which would be charged with endorsing of the government’s official macroeconomic and fiscal forecasts as well as ex-ante and expost monitoring of the respect of fiscal rules.

Malta’s revenue departments are due to be merged into a single authority, which would streamline tax collection processes and counter tax evasion. In order to improve tax compliance and encourage the recovery of amounts due, the penalties in VAT legislation and the interest on taxes due have been revised.

Various other measures have been introduced that are also expected to consolidate Malta’s tax system. These measures go in the right direction, but their impact has yet to become apparent.

There is much more in the Commission’s recommendations – about pensions, healthcare systems, participation by women in the workforce, early school leaving, inefficiencies in the judicial system, etc for which I recommend close reading of the recommendations.

At the end, the Commission lists its recommendations:

• Strengthen the budgetary strategy to ensure the required structural adjustment of 0.6% of GDP towards the medium-term objective.

• Thereafter, pursue a structural adjustment of at least 0.5% of GDP each year, and more in good economic conditions or if needed to ensure that the debt rule is met in order to keep the general government debt ratio on a sustained downward path.

• It also asked Malta to finalise the adoption of the Fiscal Responsibility Act with a view to putting in place a binding, rule-based multiannual fiscal framework and establishing an independent institution charged with monitoring of fiscal rules and endorsing macroeconomic forecasts underpinning fiscal planning.

• Malta must also continue improving tax compliance and fighting tax evasion by ensuring the continued roll-out and evaluation of measures taken so far, while taking additional action, notably by promoting the use of electronic means of payment.

• And Malta must step up the ongoing pension reform, notably by significantly accelerating the planned increase in the statutory retirement age and by consecutively linking it to changes in life expectancy.

• Malta must also ensure that a comprehensive reform of the public health system delivers a cost-effective and sustainable use of available resources, such as strengthening primary care.

• Malta must continue policy efforts to address the labour-market relevance of education and training and improve basic skills attainment by stepping up efforts on the overdue reform of the apprenticeship system.

• It must also further reduce early school leaving, notably by finalising and implementing the announced national literacy strategy and further improve the labour-market participation of women, notably those wishing to re-enter the labour market by promoting flexible working arrangements.

• Malta must diversify the energy mix in the economy, including by increasing the share of energy produced from renewable sources.

• And finally, Malta must continue efforts to increase the efficiency and reduce the length of public procurement procedures; encourage alternatives to debt-financing of companies through facilitating access to capital markets and developing venture capital funds; and increase the efficiency of the judicial system by ensuring a timely and efficient implementation of the planned judicial reform.