Economic growth of 3% was projected for the current year by last night's budget, and that growth is forecast to accelerate further to 3.5% in 2015. After that, the Maltese economy is expected to continue growing over 2016 and 2017 - rising by 3.4% in 2016, and to "slowly converge to its potential" and reach 2.9% in 2017.

At the same time employment growth is expected to maintain its "strong momentum" and rise by an average of 2% in 2014 and 2015. Inflation is expected remain relatively low during this year at an average of 0.7% but it is expected to increase moderately to 1.5% in 2015.

After bringing the deficit down from 3.7% in 2012 to 2.7% of GDP in 2013, the government is aiming to reach a deficit target of 2.1% of GDP by the end of this year, and to further reduce the deficit to 1.7% of GDP in 2015.

A number of structural reforms, according to the government - particularly in the transport and energy sectors - are expected to exert a "notable impact" on public finances. A number of fiscal consolidation measures are also being planned to mitigate the impact of higher expenditure commitments.

Budget 2015's fiscal targets are also to be supported by a range of structural economic policies, such as "the implementation of a number of supply-side policies aimed at raising the country's potential growth while ensuring responsible environmental management and social cohesion".

Private consumption to help spur economic growth

Overall growth in 2014 is expected to reach 3% in real terms, and will continue to be supported primarily by positive developments in the domestic sector of the economy. In this vein, the government expects private consumption to increase by 2.1% in real terms, sustained by robust growth in employment and real disposable income, the latter driven by an appreciation in wages, lower energy prices, and lower income tax rates.

Exports are expected to grow marginally by 0.7% during 2014, reflecting the subdued external demand counter-balanced by a weaker exchange rate. The strong domestic demand, particularly investment, is expected to drive up imports by 1.9%, resulting in a negative net trade contribution to growth.

Over 2015, economic growth is set to accelerate, growing by 3.5% in real terms, with domestic demand remaining the main driver. However, the government expects the negative trade gap forecasted for 2014 to be reversed with net exports contributing positively to economic growth. Domestic demand is expected to be supported by a positive performance in both private and public consumption expenditure and gross fixed capital formation.

Positive external developments are expected to be primarily underpinned by favourable exchange rates developments, whilst the foreseen recovery in imports is largely reflecting strong domestic conditions.

The Maltese economy is expected to continue growing over 2016 and 2017, rising by 3.4% in 2016, whilst growth is expected to slowly converge to its potential and reach 2.9& in 2017. Domestic demand is expected to remain the main driver of growth; yet the external sector is also set to contribute positively towards economic growth in both years.

Private consumption is expected to remain robust in 2016 and to grow less strongly in 2017, rising by 2.1% and 1.4% respectively. Public consumption is set to remain positive over the period, albeit at subdued growth rates in line with the government's fiscal consolidation targets, rising by 0.9% in 2016 and by 0.5% in 2017. Growth in gross fixed capital formation is set to remain steady for the outer years of the forecast period, with expected rates of 6.1% and 5.1% in 2016 and 2017 respectively. In addition, the positive trade gap forecasted for 2015 is expected to persist during both years as net exports are forecast to increase by an average rate of 0.4% and by 0.5% in real terms respectively.

The positive developments in the Maltese economy are expected to be sustained by a strong and resilient labour market. Growth in employment is expected to remain robust as it is set to increase by 2.1% and 1.9% in 2014 and 2015 respectively and by an average of 1.5% thereafter.

Congruently, the harmonised unemployment rate is expected to continue declining from a forecasted rate of 6% in 2014 to 5.7% by 2017. This is well below the expected EU average rate and reflects efforts in ongoing active labour market policies.

The HICP inflation rate is expected to average 0.7% in 2014 and it is expected to remain broadly stable at around 2% over 2015 and 2017.

Fiscal deficit target 'on track'

The fiscal deficit in 2013 was reduced from 3.7% in 2012 to 2.7% of GDP, well below the headline target recommended by the European Council of 3.4%, and the 3% of GDP red line.

Government expenditure is projected to rise by 6% in 2014, reflecting increases in compensation of employees and intermediate consumption. Gross fixed capital formation is expected to remain strong over the second half of the year and increase by 14.3% in 2014, largely on the back of a large-scale project in the energy sector, the absorption of EU funds and the recovery in construction activity.

Between January and September 2014 government revenue and expenditure against budget estimates shows that on the revenue side, was €15.6 million lower than expected - mainly the result of lower than expected revenue from customs and excise duties amounting to €67.4 million, on account of accrued payments of excise duty on fuel by Enemalta which are owed to government and are expected to materialise by the end of this year.

Direct tax revenue was €69.4 million higher than forecasted as a result of higher than expected revenue from both income tax and social security contributions. Income tax revenue was €54 million higher than projected while social security contributions were €15.4 million above the baseline.

This overall positive performance in direct tax revenue reflected the impact of higher than forecasted economic and employment growth.

With regards to indirect tax revenue, lower than projected revenue of €72.2 million resulted from lower than estimated revenues from customs and excise duties and licenses, taxes and fines. In contrast, revenue from VAT was €9.5 million higher than projected, reflecting the robust growth in consumption over the period.

Non-tax revenue was €12.8 million lower than forecasted, mainly attributed to the under-performance in revenue from fees of office but this is expected to be reversed towards the end of this year. This negative variance more than offset the marginally higher than expected revenue from miscellaneous receipts of €1.5 million.

On the expenditure side, the comparative analysis shows that actual government expenditure between January and September 2014 was €58.4 million higher than projected mainly stemming from higher than projected expenditure in programmes and initiatives (€27 million), personal emoluments (€23.3 million) and contributions to government entities (€12.7 million). On the other hand, expenditure on operations and maintenance was €4.5 million lower than projected.

As a result, between January and September 2014, the central government's negative balance was €74.1 million higher than the budgetary estimates. However, when accounting for the negative variance in customs and excise which is related to the payment of Enemalta arrears expected by the end of the year, the shortfall between revenue and expenditure for the period was €6.7 million.

According to the government, "Considering a consolidated planning total of €2.7 billion, the negative variance in the consolidated balance suggests that the government is on track in reaching the deficit target for this year. Nevertheless, the government will continue controlling and monitoring monthly revenue and expenditure figures to ensure that the fiscal targets continue to be attained".

 

'Snowball effect' to lead to public debt reduction

Despite the reduction in the deficit, a strong economic recovery, and the attainment of a primary surplus, the national debt ratio increased to 69.8% of GDP over 2013 on account of a debt increasing stock-flow adjustment.

During 2014, the debt-to-GDP ratio is expected to increase to 70.1% mainly due to a stock flow adjustment of 1.7 percentage points.  In 2015, the government forecasts the debt-to-GDP ratio to fall by 1.1 percentage points of GDP to 69% mainly on account of a positive primary surplus.

The 'snowball effect', according to the government, is also expected to contribute significantly to the reduction of the debt ratio in 2015, attributed to a debt decreasing effect exerted by real economic growth and inflationary pressures which more than offset the effect exerted by interest payments.

The other factors contributing to changes in the debt-to-GDP ratio are represented by the estimated stock flow adjustment, which is estimated at 0.6 percentage points for 2015.

In the outer years of the forecast horizon, the debt-to-GDP ratio is expected to decrease to a level of 62.7% by 2017.