Malta will continue to have an excessive deficit over the next two years, according to European Commission forecasts that contradict the Government’s projections.

Specifying that the forecasts were drafted before Monday’s Budget was presented, the Commission said that “on a no-policy-change assumption” it was forecasting the deficit would soar to 3.4 per cent of GDP in 2014 and 3.5 per cent in 2015.

The EU’s forecasts contrasts sharply with the deficit projections announced in the Budget speech, with the Government expecting to close this year with a deficit of 2.7 per cent, dropping to 2.1 per cent by the end of 2014.

For the first time, Malta had submitted its projections to the Commission by the beginning of October as required by new fiscal rules adopted by the EU.

The Commission is expected to issue its formal assessment on the Budget next week.

Saying Malta’s “(economic) wind in the sails is gaining strength”, the Commission published positive forecasts on a number of other important economic indicators, predicting economic growth next year of 1.9 per cent.

The Government is only projecting 1.7 per cent in 2014.

According to the Commission, employment growth will reach 1.8 per cent next year, down from 2.3 per cent this year. Exports are expected to grow by 4.5 per cent.

“Despite weaker-than-expected domestic demand, real GDP surprised positively and grew to 2.8 per cent in the first half of 2013, driven by higher net exports as imports contracted more than exports,” the Commission said.

Malta’s (economic) wind in the sails is gaining strength

“As overall economic sentiment dipped in the third quarter, economic growth is projected to slow down in the second half of this year. Still, real GDP is forecast to grow by 1.8 per cent in 2013 as a whole, up from 0.8 per cent in 2012.”

With regard to the state of public finances, the Commission said that after having widened to 3.3 per cent of GDP in 2012, due to slippages in current expenditure, “the deficit in 2013 is expected to increase slightly to 3.4 per cent”.

“In the absence of consolidation measures, as the 2014 Budget was not adopted by the Government before the cut-off date of this forecast, the 2014 deficit ratio is expected to stay unchanged.”

The Commission is also predicting an increase in Malta’s debt, from the current 72.6 per cent this year to 73.3 per cent next year.

“The debt-to-GDP ratio is projected to continue increasing over the forecast horizon, as the primary balance remains insufficient to allow a reduction in the debt ratio,” the forecasts state.

“The main risk is related to the financial situation of Enemalta, which could entail additional subsidies.”

The Government’s energy sector initiatives could also help the economy as Brussels said structural reforms “are likely to drive down industry costs if properly and timely implemented, and strengthen the medium-term growth outlook.”