Strong economic growth, a narrowing deficit and a 'silent revolution' of the tax department will enable the government to deliver the biggest-ever cut in income tax, Clyde Caruana has said. 

He insisted during the Budget speech and in a briefing to reporters earlier that the budget measures were all sustainable because revenue and economic growth had given the government room to manoeuvre.

Details of the changes to income tax will be announced during the speech.

“It is the sort of room to manoeuvre which will enable us to retain the subsidies on energy, fuel and food while also significantly cutting taxes,” he said.

 “Four years ago I said I could not cut taxes as the government was allocating  5% of its spending to the energy and good subsidies,” he told reporters.  

He said Malta is expected to end this year with real GDP growth of 4.9%. Next year performance will ease to 4.3% but it will still remain significantly higher than the EU average, projected at 1.5% next year, fuelled by domestic demand. Jobs are expected to increase by 4.1%.

Inflation, Caruana said, is stabilising and has slowed significantly. It will be 2.5% this year and drop to the ECB reference figure of 2% next year “as long as matters do not worsen around us, particularly in the Middle East.” 

Deficit narrows more than projected

As for the deficit, he said that while last year he had projected that the government would end this year with a deficit of 4.5%, the deficit will actually be closer to 4%.

It will be narrowed further to 3.5% next year and 3% in the following year, achieving the target set by EU rules in half the number of years allowed under the Excessive Deficit Procedure.

On government debt, Caruana observed that the EU set a threshold of 60%. Malta's debt, he said, was comfortably below that at 50%.  Before the pandemic, the national debt was 43%.

“That means that despite the spending brought about by the pandemic and the explosion of energy prices, the debt has remained relatively stable and low,” he said.

The EU (and credit rating agencies) had told Malta to lift its energy subsidies, he said, but they would be retained because they were not burdening the economy and Malta was respecting EU rules.

And Caruana said no one could accuse the government of improving its financial position by cutting capital spending. Rather, whereas capital spending was €750 million three years ago, it would exceed €1 billion this year and next.