The government has ignored European Commission projections that the economy will fare badly next year and is instead banking on a growth rate of 2.3 per cent to put the deficit on a downward trajectory.
This optimistic outlook translates into higher tax revenues that will allow the government to cut the deficit to 2.3 per cent of GDP next year, well below the euro benchmark of three per cent.
These projections jar with the Commission’s autumn forecast published last week that put Malta’s deficit at 3.5 per cent in 2012.
According to the financial estimates presented by the Finance Minister, economic growth will result in higher government revenues: income tax will increase by €18.6 million; national insurance by €45.8 million and VAT by €44.9 million.
The government is also expected to rake in an additional €12.5 million from Customs and excise taxes and €36.3 million more from licences, taxes and fines.
5.8 per cent
– The minimum excise duty that will be levied on each packet of 20 cigarettes
Some of the increases will come from higher excise taxes and new fees to be introduced but the bulk will come as a result of increased economic activity.
Revenue from direct and indirect taxes is expected to top the €2.5 billion mark. However, this will be partly offset by an increase in expenditure to the tune of €92.6 million.
The deficit for next year will be €153.9 million, which represents a drop from this year’s projection of €181.7 million. Cutting the deficit was a major policy plank in the run-up to the adoption of the euro on January 1, 2008. The government had cranked down the deficit to below three per cent, which was a condition imposed by the Maastricht criteria.
However, the deficit-cutting programme went haywire in 2008 as a result of higher government spending because of the election held in March and the global recession that developed in the last quarter of the year. The deficit soared to 4.6 per cent.
A combination of measures that saw subsidies being cut and some taxes increased, helped contain the deficit in subsequent years and the government is now projecting a deficit of 2.8 per cent this year.
Last week, Malta was one of the first EU member states to receive an “early warning” letter from Brussels. The country was asked to send the Commission convincing evidence by the end of December of “sufficient and permanent fiscal measures” to rein in its structural deficit in a sustainable manner.
On the downside, the country’s debt level is expected to go up to 68.9 per cent in 2012.
Inflation, which reached 2.7 per cent in the 12 months to September, is expected to moderate to 2.1 per cent next year. As a result of the above-average inflation this year, the wage increase calculated by the cost-of-living-adjustment stood at €4.66 per week.
This statutory wage increase will come into force in January.