Malta’s future economic prospects look rosy but public spending might push the deficit higher than what the government expects, according to the European Commission.

In its twice yearly forecast, the Commission projected continued economic growth, sustained employment levels and a stable performance of public finances even though government expenditure was on the up.

The depreciation of the euro could also boost demand for Maltese exports from outside the EU

Inflation is expected to rise in the next two years after a lower growth rate this year as a result of water and electricity tariff cuts.

Describing the current economic activity as “expanding at a robust rate”, the Commission said annual real GDP growth was a positive surprise.

“Growth was driven by buyout domestic demand, particularly thanks to investment and public spending,” the forecast noted.

The Commission said large-scale energy projects, including the construction of a new power plant, were expected to be a major driver of growth over the next two years.

The assessment states that, despite delays in these projects, improvement in investor sentiment and foreign investment in the energy sector could provide a further boost in 2015-16.

“The depreciation of the euro could also boost demand for Maltese exports from outside the EU,” the report added.

While the Commission forecast a GDP growth of three per cent for this year, it predicted 2.9 per cent in 2015 and 2.7 per cent in 2016.

The deficit is predicted to improve marginally this year, down to 2.5 per cent of GDP, but it is expected to rise to 2.6 per cent next year due to a further capital injection in Air Malta.

In 2016, the Commission forecast the deficit would decline to two per cent of GDP thanks to a favourable growth outlook and the end of financial support for the airline.

However, the Commission noted the island’s higher public spending, particularly on the public wage bill. It said that,­ despite the restrictions on recruitment envisaged by the 2014 Budget, public sector employment increased due to the temporary nationalisation of the transport system, as well as more recruiting, mainly in the health and education sectors.

Government expenditure is expected to rise, partly due to higher-than-expected transport subsidies. According to the Commission, government debt will remain high next year, at 71 per cent of GDP.