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2 maltatoday | SUNDAY • 23 JUNE 2024 NEWS NICOLE MEILAK nmeilak@mediatoday.com.mt Malta set to face Brussels' deficit procedure. ENHANCED STABILITY: Secure a lease title for fifty years. INCREASED INVESTMENT POTENTIAL: Encourages businesses to invest with confidence. INVESTMENT RECOVERY: More time to recoup your investment. Eligible businesses are encouraged to take advantage of this opportunity. MINISTERU GĦALL-ARTIJIET U L-IMPLIMENTAZZJONI TAL-PROGRAMM ELETTORALI IT'S been an economic point of contention for years across the Eu- ropean bloc. It was introduced to ensure that the different EU member states adhere to fiscal discipline, in an- ticipation of introducing the euro currency. Since then, it's been criticised for being inflexible, intensifying re- cessions and promoting austerity policies. The Stability and Growth Pact is an agreement between the 27 EU member states that established two main targets for fiscal policy. The first is that the annual gov- ernment deficit should not exceed 3% of GDP. The second is that the national overall debt should not exceed 60% of GDP. As a preventive measure, mem- ber states must submit a compli- ance report that is subject to the scrutiny of the European Commis- sion and the Council of the Euro- pean Union. Countries must also adhere to medium-term budget- ary objectives, which are set by the EU and updated every three years. Then there is the corrective arm, known as the excessive deficit pro- cedure. This regulation ensures that member states adopt certain poli- cies to bring their deficits or debt levels down to the required level should they breach the ceiling for these two markers of economic health. A country undergoing this pro- cedure is given three to six months to take effective action, and if it fails to do so, could face sanctions. Increased scrutiny Last week, the European Com- mission issued a recommenda- tion saying it intends on opening an excessive deficit procedure for Malta, as the general government deficit exceeded the 3% threshold – a reality provoked by the great government spending in 2020 and 2021 to fight the inertia caused by the COVID pandemic. It recom- mended the same for six other countries, including France. Economist J.P. Fabri says being subjected to the EDP means in- creased scrutiny from the Euro- pean Commission and potential requirements to implement struc- tural reforms aimed at reducing the deficit, a situation that can re- sult in a tricky balancing act. "On one hand, enhanced fiscal consolidation could help ensure long-term fiscal sustainability and maintain investor confidence, which is crucial for a small, open economy like Malta's. On the oth- er, overly aggressive fiscal tight- ening could impact economic growth, particularly if it results in reduced public investment or so- cial spending," Fabri says. Economics professor Philip von Brockdorff notes the procedure itself would not have an impact on the economy. Rather, the impact will result from how the govern- ment responds. "Will the government resort to austerity measures?" he asks. "Will taxes increase? Will government reduce public spending in a way that increases social inequality and redistributes income unfair- ly? I doubt the government will resort to such measures. What is more sensible is for the govern- ment to keep a tight rein on public spending and help boost econom- ic growth that generates tax reve- nue." In agreement, Fabri also says that the excessive deficit procedure is not inherently something to wor- ry about if managed prudently. "Rather, it serves as a reminder of the need for responsible fiscal management. If Malta can ad- dress its deficit through thought- ful, growth-friendly measures, the EDP can be a catalyst for positive economic reforms." The Stability and Growth Pact: too strict for comfort? Fabri says the pandemic has significantly altered the econom- ic landscape, and many notable economists and policymakers ar- gue that the rules should be more flexible to accommodate contin- ued fiscal support during the re- covery phase.