The European Commission has expressed concern over utility subsidies in Malta, saying they should be reduced and not increased.

In its assessment of Malta's financial stability programme for the next three years, the Commission noted that the subsidies currently granted by the Government may derail the country's commitment to reach a balanced budget by 2010. Any reduction of the surcharge was likely to make matters worse.

Commission officials told The Sunday Times: "In our report last week we have already indicated that we are not very happy with all these subsidies. Prices of electricity in the EU increased by an average nine per cent and this has been reflected in the price paid by customers all over Europe. Malta is no exception and subsidies will not solve the problem."

Published last Wednesday, the Commission's assessment of Malta's stability programme said that the island had made significant progress in the past three years to reduce its deficit and put the country's finances on a sound footing. However, the Commission also highlighted potential risks, including the subsidised price of utilities.

During 2008 "there is a possibility of expenditure 'slippings' linked for instance to the decisions to subsidise utility process without compensating measures," the Commission's report stated.

Last December, the Government announced that it had decided to retain the surcharge at 50 per cent until June, effectively subsidising energy and water by 40 per cent. The Government said that the decision was taken as a result of favourable oil hedging agreements and a better situation of the country's public finances.

"This could be unsustainable in the long term... Subsidies need to be removed and not increased. If the current surcharge is cut even further Malta's economy will be in trouble," Commission officials told The Sunday Times.

Labour is insisting it will halve the current surcharge if elected but Commission officials said Europe was moving away from subsidies, not getting closer.

"We will obviously have to ask your Government to give us further details and to indicate what impact this new measure will have on general Government finances. We will also need to know if Malta still intends to reach its balanced budget by the 2010 timeframe," the officials explained.

"It is very important that Malta sticks to its promises especially now that it is part of the eurozone where strict rules have to be adhered to."

The current surcharge was introduced in 2005 to compensate for higher prices of fuel oil, which is used for power generation in Malta. During the past years, the price of oil on the international markets shot up from $17 a barrel in 1995 to $99 a barrel a few weeks ago.

Despite the surcharge increase, the Government decided to subsidise part of the price, thus keeping it low compared with other EU member states.

In fact, with the inclusion of the surcharge, the price of energy in Malta is still one of the lowest in the EU.

Euros paid per 100 kilowatt hour of electricity on January 1, 2007
EU-27 15.28
Belgium 15.81
Denmark 19.49
Germany 19.49
Ireland 16.62
Greece 7.20
Spain 12.25
France 12.11
Italy 23.29
Cyprus 13.53
Luxembourg 16.84
Malta 9.86
Netherlands 21.80
Austria 15.45
Portugal 15.00
Slovenia 10.64
Finland 11.60
UK 13.16
Source: Eurostat