Brussels expects the deficit this year to be a whole percentage point higher than the Government’s projection of 2.7 per cent of GDP.
In its spring economic forecast out yesterday, the European Commission projects a figure of 3.7 per cent on the back of an “expansionary” Budget approved last month. Last year the deficit was 3.3 per cent.
Although the Commission expects economic activity to pick up, it said higher tax revenues as a result of more growth will only partly compensate for the disappearance of one-off revenues registered last year.
But tax revenue growth will also be stunted by a decision to lower the top income tax rate for those earning up to €60,000, Brussels added.
The deficit is expected to improve slightly to 3.6 per cent of GDP in 2014.
In an immediate reaction to the figures, Finance Minister Edward Scicluna said the Government wanted to “determine on what grounds the Commission reached its conclusion”.
He reiterated the Government’s commitment to keep the deficit below the three per cent threshold and honour its pledge to end the year with a deficit of 2.7 per cent.
Despite the Commission’s “disappointing forecast”, he added, the Government was confident it could reach its target.
When reading the Budget last month Prof. Scicluna had revised this year’s deficit figure upward by a percentage point over the forecast made by the previous government in November.
He said the only difference between the Budget he presented and the one proposed by the previous government was the inclusion of unaccounted for expenses as a result of collective agreements concluded before the election.
On the positive side, the Commission said higher domestic demand was expected to fuel economic growth, which was slated at 1.4 per cent this year and 1.8 per cent in 2014.
“Household consumption is forecast to become the main contributor to economic growth... on the back of stable labour market conditions and improving consumer confidence following the parliamentary elections in March.”
Job creation was forecast to remain strong, with a projected annual rate of growth hovering around two per cent. The services sector and increased female participation in the labour market will drive job creation, the Commission noted.
Debt is expected to increase to 73.9 per cent of GDP this year, going up to 74.9 per cent in 2014 as the country will still be running deficits. However, the Commission said debt projections could be conditioned by Enemalta’s financial situation as the public utility company may need additional subsidies.
Reacting to the spring forecast, the Nationalist Party urged the Government to curb expenditure. It said the decision to have a larger Cabinet was partly to blame for its higher spending.
The PN took the credit for reducing the deficit by €57 million in the first three months, laying the blame on the Government for projection covering the rest of the year.
The statement did not point out that Government expenditure at the start of the year was capped by a constitutional provision after the Budget failed to be approved.
Meanwhile, Prof. Scicluna and European Affairs Minister Louis Grech yesterday met European Commissioner for Economy and Finances Olli Rehn in Brussels, where they explained the Government’s strategy on reducing its fiscal imbalance and generating economic growth.
The meeting was held in light of last year’s deficit, which went over the three per cent limit imposed by the EU and now puts Malta at risk of facing an Excessive Deficit Procedure.
ksansone@timesofmalta.com