Documents considered by the Committee on 2 February 2011 - European Scrutiny Committee Contents

11   Stability and Growth Pact: excessive deficit procedure



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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

Legal base
Document originated6 January 2011
Deposited in Parliament13 January 2011
DepartmentHM Treasury
Basis of considerationEM of 27 January 2011
Previous Committee ReportNone
Discussed in Council18 January 2011
Committee's assessmentPolitically important
Committee's decisionCleared


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.


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, paragraph 27 and  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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