The European Commission said that Malta's Draft Budgetary Plans are "not fully in line" with the Council Recommendation of 21 October 2024, as emergency energy support measures were not expected to be wound down before winter 2024-2025.

The report, which gave the Commission's opinion on the fiscal policies of Member States, also said that most of the energy support measures that are currently planned to remain in force do not appear to be targeted at protecting vulnerable households and firms and to preserve incentives for energy savings. In particular, cuts in indirect taxes on energy consumption and subsidies to energy production to compensate for the price increase of imported electricity and carbon emissions are assumed to remain in force, the Commission's report said.

In particular, cuts in indirect taxes on energy consumption and subsidies to energy production to compensate for the price increase of imported electricity and carbon emissions are assumed to remain in force, the Commission's report said.

At the same time, the Commission is of the opinion that according to the European Commission Autumn 2024 Forecast, Malta 's net expenditure growth in 2025 is consistent with what was recommended by the Council.  "According to the European Commission Autumn 2024 Forecast, Malta 's net expenditure is projected to increase by 5.6% in 2025, which corresponds to a cumulative growth of 12.0% in 2024 and 2025 taken together. The Commission is of the view that these net expenditure growth rates are in line with the Council recommendation of 21 October 2024 to limit the growth in net expenditure in 2025 to a rate consistent with reducing the general government deficit below the 3% of GDP Treaty reference value and keeping the general government debt at a prudent level over the medium term. Those net expenditure growth rates would be appropriate initial steps towards the correction of the excessive deficit by 2027, as the Commission recommends to the Council to recommend to Malta."

The report continued that according to the Draft Budgetary Plan, Malta 's real GDP is projected to grow by 4.3% in 2025 (4.9% in 2024), while inflation is forecast at 2.1% in 2025 (2.5% in 2024). According to the European Commission Autumn 2024 Forecast, Malta's real GDP is projected to grow by 4.3% in 2025 (5.0% in 2024), while inflation is forecast at 2.2% in 2025 (2.5% in 2024). "Overall, the macroeconomic scenario underpinning the budgetary projections in the Draft Budgetary Plan appears to be in line with the Commission's forecast for 2025 and 2024. Malta complies with the requirement of Article 4(4) of Regulation (EU) No 473/2013, since the Draft Budgetary Plan is based on independently endorsed macroeconomic forecasts."

The Council recommendation, in the context of the correction of the excessive deficit, says that Malta should ensure that the nominal growth of net expenditure does not exceed 6.0% in 2025, 5.8% in 2026 and 5.8% in 2027, which it complied with, as Malta's budgetary projections in its plan is in line with the Commission's forecast for 2025 and 2024.

Since the Commission's recommendation that Malta takes action to phase out energy subsidies by winter was not upheld, the Commission said that the net budgetary cost of energy support measures is projected at 1.0% of GDP in 2024 and 1.0% of GDP in 2025.

"This is not in line with what was recommended by the Council. The net budgetary cost of energy support measures not targeted at protecting vulnerable households and firms is estimated at 0.8% of GDP in 2025, of which 0.8% of GDP do not preserve the price signal to reduce energy demand and increase energy efficiency," the report said.

The Council had also recommended Malta to address remaining aggressive tax planning risks, by introducing a withholding tax on outbound payments or equivalent defensive measures and amending rules on non-domiciled companies.

The Commission said that the Draft Budgetary Plan mentions legislative changes related to inbound and outbound dividends, interest, and royalty payments to be implemented in line with RRP commitments. On the revenue side, policy measures with a fiscal impact in 2025 include a reform of personal income tax entailing changes of the income brackets and tax deductions.

On the expenditure side, the Commission said that these measures include an increase in social spending to support social inclusion. According to the Commission estimates, the overall additional impact of the revenue measures increases the general government deficit by 0.5% of GDP in 2025.

"Overall, the Commission is of the opinion that the Draft Budgetary Plan of Malta is not fully in line with the Council Recommendation of 21 October 2024, as, according to the European Commission Autumn 2024 Forecast, and taking into consideration the information included in Malta's Draft Budgetary Plan, the emergency energy support measures are not expected to be wound down before winter. Most of the energy support measures that are currently planned to remain in force do not appear to be targeted at protecting vulnerable households and firms and to preserve incentives for energy savings. At the same time, according to the European Commission Autumn 2024 Forecast, Malta 's net expenditure growth in 2025 is consistent with what was recommended by the Council on 21 October 2024."

It advised Malta to take the necessary measures within the national budgetary process to ensure that fiscal policy in 2025 is in line with the Council Recommendations of 21 October 2024.

The progress made with the implementation of the Council's country-specific recommendations will be assessed by the Commission in spring 2025, in the context of the European Semester Spring Package.

Overall, eight euro-area Member States's Draft Budgetary Plans are considered to be in line with the fiscal recommendations, while seven are not fully in line, one is not in line, and one risks not to be in line:

The report also read that according to the Draft Budgetary Plan, Malta 's real GDP is projected to grow by 4.3% in 2025 (4.9% in 2024), while inflation is forecast at 2.1% in 2025 (2.5% in 2024). "According to the European Commission Autumn 2024 Forecast, Malta's real GDP is projected to grow by 4.3% in 2025 (5.0% in 2024), while inflation is forecast at 2.2% in 2025 (2.5% in 2024). Overall, the macroeconomic scenario underpinning the budgetary projections in the Draft Budgetary Plan appears to be in line with the Commission's forecast for 2025 and 2024. Malta complies with the requirement of Article 4(4) of Regulation (EU) No 473/2013, since the Draft Budgetary Plan is based on independently endorsed macroeconomic forecasts."

According to the Draft Budgetary Plan, Malta's general government deficit is projected to decrease to 3.5% of GDP in 2025 (4.0% in 2024), while the general government debt-to-GDP ratio is set to increase to 50.1% at the end of 2025 (49.5% at the end of 2024), it said. "According to the Draft Budgetary Plan, net expenditure is projected to grow by 6.4% in 2024 and 5.6% in 2025. The growth rate of net expenditure in 2025 according to the Draft Budgetary Plan is below the growth rate in the medium-term fiscal-structural plan submitted by Malta on 20 September 2024. In turn, according to the European Commission Autumn 2024 Forecast, Malta's general government deficit is projected to decrease to 3.5% of GDP in 2025 (4.0% in 2024), while the general government debt-to-GDP ratio is set to increase to 50.4% at the end of 2025 (49.8% at the end of 2024). The decrease in the deficit is driven by a decrease as a share of GDP of subsidies, social expenditure, compensation of employees and public investment. According to the European Commission Autumn 2024 Forecast, net expenditure is projected to grow by 6.3% in 2024 and 5.7% in 2025."

On 21 October 2024, the Council also recommended that Malta take action to wind down the emergency energy support measures by the 2024/2025 winter. The emergency energy support measures are not wound down by the 2024/2025 winter. In particular, cuts in indirect taxes on energy consumption and subsidies to energy production to compensate for the price increase of imported electricity and carbon emissions are assumed to remain in force. According to the European Commission Autumn 2024 Forecast, the net budgetary cost11 of energy support measures is projected at 1.0% of GDP in 2024 and 1.0% of GDP in 2025. This is not in line with what was recommended by the Council. The net budgetary cost of energy support measures not targeted at protecting vulnerable households and firms is estimated at 0.8% of GDP in 2025, of which 0.8% of GDP do not preserve the price signal to reduce energy demand and increase energy efficiency

Since the Commission's recommendation that Malta takes action to phase out energy subsidies by winter was not upheld, the Commission said that the net budgetary cost of energy support measures is projected at 1.0% of GDP in 2024 and 1.0% of GDP in 2025.

"This is not in line with what was recommended by the Council. The net budgetary cost of energy support measures not targeted at protecting vulnerable households and firms is estimated at 0.8% of GDP in 2025, of which 0.8% of GDP do not preserve the price signal to reduce energy demand and increase energy efficiency," the report said.

The Council had also recommended Malta to address remaining aggressive tax planning risks, by introducing a withholding tax on outbound payments or equivalent defensive measures and amending rules on non-domiciled companies.

The Commission said that the Draft Budgetary Plan mentions legislative changes related to inbound and outbound dividends, interest, and royalty payments to be implemented in line with RRP commitments.

On the revenue side, policy measures with a fiscal impact in 2025 include a reform of personal income tax entailing changes of the income brackets and tax deductions.

On the expenditure side, the Commission said that these measures include an increase in social spending to support social inclusion. According to the Commission estimates, the overall additional impact of the revenue measures increases the general government deficit by 0.5% of GDP in 2025.

It advised Malta to take the necessary measures within the national budgetary process to ensure that fiscal policy in 2025 is in line with the Council Recommendations.

The progress made with the implementation of the Council's country-specific recommendations will be assessed by the Commission in spring 2025, in the context of the European Semester Spring Package.