Malta’s public finances are on a sounder economic footing, with the deficit declining to 2.1 per cent of gross domestic product (GDP) over the current year and plummeting to 1.6 per cent of GDP next year, according to the European Union’s spring economic forecasts for 2007 and 2008.

The forecasts, released yesterday, also expect Malta’s unemployment rate to continue its downward trend of 0.9 per cent per year, and reach an overall unemployment rate of 7.3 per cent in 2008 – fuelled mainly by growth in information technology, financial services and new activities such as remote gaming and call centres.

The harmonised index of consumer prices (HCIP) inflation rate, which stood at 2.6 per cent last year, is expected to go down below 1.5 per cent this year and to rise once again to just over two per cent in 2008.

GDP is expected to grow at a “healthy” pace of three per cent this year while slowing marginally to 2.8 per cent next year. Economic activity is expected, this year and next, to be domestically driven, while the small negative external sector contribution felt this year is forecast to turn positive in 2008.

Private consumption is, meanwhile, forecast to have grown at a slightly faster rate of 2.8 per cent this year due to lower unemployment levels and lower energy prices. Private consumption in 2008 is, however, expected to decelerate slightly to a dissipation of the effects of recent tax cuts as well as higher oil prices anticipated for next year.

The HCIP inflation rate, which had grown to 2.6 per cent last year, is forecast to slow to slightly below the 1.5 per cent level this year, and to rise again to just over two per cent in 2008. Next year’s inflationary hike is expected to result from assumed energy price developments, as well as the assumption that the exceptionally low underlying inflation recorded over recent months will return to historic levels.

The public deficit is expected to fall to 2.1 per cent of GDP this year, mainly thanks to a deceleration in current expenditure due to a “significantly slower” rise in public sector wages and due to the government’s drive to contain spending.

Next year, under a no-policy-change scenario that excludes one-off operations, the deficit is pegged to drop to below 1.6 per cent of GDP thanks to a lower government gross fixed capital formation linked to the completion of Mater Dei.

Government debt, which had stood at 66.5 per cent of GDP last year, is expected to decline to below 66 per cent this year and to 64.3 per cent in 2008.

While private consumption is expected to grow by 2.8 percentage points in 2007, and at a slightly slower rate next year, public consumption, in a reflection of continued government fiscal consolidation, is expected to increase, albeit at a low rate, over this and next year.

Gross fixed capital formation is forecast to expand by a significant six per cent this year due to costs associated with the completion of the Mater Dei Hospital while 2008 should see a deceleration of 0.3 per cent.

An expected improved performance of the services sector, particularly in the remote gaming and tourism sub-sectors, is expected to lead to a recovery of exported goods and services in 2007. Next year, meanwhile, growth in exports is expected to remain unchanged.

Imports, meanwhile, are expected to climb by 2.7 per cent in 2007 due to this year’s relatively high growth in private consumption, buoyant investment and an expansion of exports.

The import growth rate is forecast to decelerate by to 1.8 per cent on the basis of expected decreases in investment activity and private consumption.