11 Stability and Growth Pact: excessive
deficit procedure
(32429)
18064/10
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COM(10) 809
| Commission Communication: Assessment of the action taken by Malta in response to the Council Recommendations of 16 February 2010 with a view to bringing an end to the situation of excessive government deficit
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Legal base |
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Document originated | 6 January 2011
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Deposited in Parliament | 13 January 2011
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Department | HM Treasury
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Basis of consideration | EM of 27 January 2011
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Previous Committee Report | None
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Discussed in Council | 18 January 2011
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Committee's assessment | Politically important
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Committee's decision | Cleared
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Background
11.1 The Stability and Growth Pact adopted by the Amsterdam
European Council in June 1997 emphasised the obligation of Member
States to avoid excessive government deficits, defined as the
ratio of a planned or actual deficit to gross domestic product
(GDP) at market prices in excess of a "reference value"
of 3%.[29] Each year
the Council of Economic and Finance Ministers (ECOFIN) issues
an Opinion on the updated stability or convergence programme of
each Member State.[30]
These Opinions, which are not binding on Member States, are based
on a recommendation from the Commission. The economic content
of the programmes is assessed with reference to the Commission's
current economic forecasts. If a Member State's programme is found
wanting, it may be invited by ECOFIN, in a Recommendation, to
make adjustments to its economic policies, though such Recommendations
are likewise not binding on Member States. This whole procedure
is essentially the Pact's preventative arm.
11.2 On the other hand, the Pact also endorsed
a dissuasive or corrective arm involving action in cases of an
excessive government deficit the excessive deficit procedure
provided for in Article 126 TFEU (formerly Article 104 EC) and
the relevant Protocol. This procedure consists of Commission reports
followed by a stepped series of Council Recommendations (the final
two steps do not apply to non-members of the eurozone). Failure
to comply with the final stage of Recommendations allows ECOFIN
to require publication of additional information by the Member
State concerned before issuing bonds and securities, to invite
the European Investment Bank to reconsider its lending policy
for the Member State concerned, to require a non-interest-bearing
deposit from the Member State concerned whilst its deficit remains
uncorrected, or to impose appropriate fines on the Member State
concerned.
11.3 In October 2009 the European Council endorsed
a fiscal exit strategy, incorporating four principles:
- it should be coordinated across
countries and should be consistent with the values of the Stability
and Growth Pact;
- a timely withdrawal of fiscal stimulus measures
and, providing that economic forecasts indicate the recovery is
strengthening, fiscal consolidation should start no later than
2011;
- the planned pace of fiscal consolidation should
be ambitious; and
- crucial supplementary policies should be implemented,
which should include strengthened national budgetary frameworks
and efforts to support long-term fiscal sustainability.[31]
11.4 On 7 July 2009 the Council adopted an excessive
deficit procedure Recommendation for Malta. On 16 February 2010
the Council revised the Recommendation, in view of the "unexpected
adverse economic events with major unfavourable consequences for
government finances".[32]
The document
11.5 In this Communication the Commission presents
an assessment of the action taken by Malta in response to the
Recommendation of 16 February 2010. It notes that the assessment
of Malta's actions was delayed to allow the Maltese government
to adopt a budget for 2011 on 25 October 2010 and that this delay
enabled the Commission to use the updated forecasts published
in November 2010.
11.6 The Commission says that:
- the Maltese authorities estimate
the deficit ratio in 2010 was 3.9% of GDP;
- its own forecast is for a higher deficit ratio
of 4.2%, mainly as a result of larger estimated shortfalls in
tax collection compared to the Maltese estimates;
- the economy grew faster than initially forecast;
- Malta introduced some one-off deficit-reducing
measures later in 2010, however these are balanced against primary
expenditure overruns and lower tax collection;
- there was some deviation from the Council recommendations
in 2010 and the more favourable economic conditions were not used
to accelerate deficit reduction;
- the Maltese authorities have a deficit target
of 2.8% of GDP in 2011;
- this will be met through a combination of continued
economic recovery, the phasing out of stimulus measures introduced
in response to the global crisis, enhanced tax collection and
greater public spending efficiency;
- a slightly higher deficit, at 3%, is expected
in 2011, mainly reflecting the carry-over from the Commission's
higher deficit forecast for 2010; and
- strict implementation of all the measures in
the 2011 budget represents a fiscal effort of 0.75% points of
GDP, in line with the Council's recommendations.
It is against this background that the Commission
concludes that Malta has taken effective action to correct its
excessive deficit by 2011.
11.7 In relation to fiscal governance the Commission
says that:
- some initiatives have been
taken to improve spending efficiency and reforms to the pension
system are currently under discussion;
- it does not expect, however, the government debt
ratio to fall over the forecast horizon; and
- Malta has made no progress towards meeting the
Council recommendations on improving fiscal governance.
11.8 The Commission's overall conclusion is that
Malta has taken action "representing adequate progress"
towards the correction of its excessive deficit. As such it considers
that no further steps under the excessive deficit procedure are
necessary. According to the Commission, the main risks to the
achievement of the 2011 deficit target are:
- problems in the repayment of
the government rescue loan to Air Malta;
- additional costs for the government resulting
from restructuring the airline; and
- the effect of a new collective agreement on the
public sector wage bill.
The Commission advises that:
- the Maltese authorities should
closely monitor budgetary developments and take corrective action
should any of these risks materialise; and
- Malta needs to be more effective in strengthening
the binding nature of its medium-term budgetary framework, as
well as introducing measures to improve the long-term sustainability
of the public finances.
11.9 The Communication is accompanied by a Staff
Working Paper, a technical document providing evidence in support
of the Commission's conclusions. In particular it reviews how
the Maltese budget was implemented in 2010 and how economic outcomes
compare to the forecasts underlying the current Council recommendations.
The Government's view
11.10 The Financial Secretary to the Treasury
(Mr Mark Hoban) says that:
- the Communication has no policy
implications for the UK; and
- the Government believes that Member States should
take forward fiscal consolidation as a priority to reduce their
deficits and support recovery.
Conclusion
11.11 We are grateful to the Minister for
his full description of the Commission's Communication. We have
no questions to raise and clear the document.
29 This obligation does not apply to Member States,
including the UK, whilst they remain outside the eurozone, but
they are required to endeavour to avoid excessive deficits. Back
30
The 17 Member States (Austria, Belgium, Cyprus, Germany, Greece,
Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia and Spain) that have
adopted the euro have Stability Programmes, whereas the other
10 Member States (including the UK) produce Convergence Programmes. Back
31
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/110889.pdf,
paragraph 27 and http://register.consilium.europa.eu/pdf/en/09/st14/st14765.en09.pdf.
Back
32
(30760) 11397/09 (30761) 11398/09 (30764) 11401/09 (30765) 11402/09:
see HC 19-xxvi (2008-09), chapter 23 (10 September 2009) and (31360)
5903/10 (31361) 6231/10: see HC 5-xiii (2009-10) chapter 7 (10
March 2010). Back
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