Deficit to grow slightly in 2015 but EC says Malta weathering ‘choppy waters’

Economic activity in Malta has continued to outperform the weak growth in the EU in the first half of 2014, with a strong rebound in investment projected to boost growth to 3% in 2014, before moderating somewhat over the forecast horizon.

The European Commission said Malta’s economy was “sailing smoothly in choppy waters” with a budget deficit projected to gradually decline over the forecast horizon, and government debt forecast to remain stable.

The Commission said Malta’s deficit appeared to be under control despite growing spending.

The general government deficit is expected to improve marginally in 2014 to 2.5% of GDP, from 2.7% in the previous year, and current revenues are projected to increase thanks to the favourable macroeconomic outlook as well as to the revenue increasing measures included in the 2014 budget, namely increases in indirect taxation, the new programme to grant Maltese citizenship to foreign individuals and families and the introduction of a new tax regime for rental income.

In July, a new scheme intended to enable taxpayers to adjust past irregular declarations of income was launched.

“Despite the restrictions on recruitment envisaged by the 2014 budget, employment in the public sector has increased due to the temporary nationalization of the transport system as well as higher recruitments mainly in the health and education sectors. Therefore current expenditure is expected to increase, also due to higher than expected subsidies to the transport sector as well as intermediate consumption,” the EC said.

Net capital expenditure is expected to fall due to a lower capital injection into Air Malta, compared to the one in 2013.

In 2015, under the no-policy-change assumption, as the 2015 budget was not presented before the cut-off date of the forecast, the deficit is expected to increase marginally to 2.6% of GDP, also due to a further capital injection into Air Malta, higher than the previous year one (0.5% of GDP).

In 2016, using the no-policy-change assumption, the deficit is expected to decline to 2.0% of GDP, thanks to a favourable growth outlook and to the expiration of the public support for Air Malta.

After having decreased by more than 1 percentage point of GDP in 2013, the structural deficit is projected to stabilise in 2014 and to deteriorate marginally in 2015. In 2016, the structural deficit is expected to improve by 0.5 pp. of GDP.

The general government debt-to-GDP ratio increased to 69.8% in 2013, also on account of a debt-increasing stock-flow adjustment. Despite the expected repayment of some tax arrears from Enemalta, the debt ratio is projected to continue increasing in 2014 thanks also to a higher cash buffer at the end of the year, before moderating somewhat by 2016.

Overall, real GDP growth is projected to reach 3% in 2014 and moderate gradually to 2.9% in 2015 and 2.7% in 2016. Large scale energy projects, including the construction of a power plant in 2014-15 are expected to be a major driver of growth over the forecast horizon. Improving business sentiment and the absorption of EU funds, as projects funded under the 2007-13 financial framework are coming to an end, are expected to provide a further boost.

Private investment in equipment and machinery is set to benefit from improving financing conditions, reflected in a gradual decline in interest rates, but bank credit standards for the construction sector are not expected to loosen notably.