Malta’s economy is forecast to grow at 3.5 per cent next year, outpacing the EU average but marking the slowest rate of GDP growth in more than a decade. 

The 3.5 per cent GDP growth projection represents a downscaling of the government’s ambitions, having said last year that it was expecting 4.5 per cent growth in 2023. It also heralds a significant economic slowdown, given the 6 per cent growth figure Malta is expected to register for 2022. 

The government’s original 4.5 per cent growth projection was made before Russia’s war in Ukraine disrupted the world economy and inflation rose to record levels across global markets. 

Finance Minister Clyde Caruana put a positive spin on expectations, telling reporters at a pre-budget briefing that Malta’s economy “is still in a much happier place than in other countries”, given the 1.5 per cent growth average that the EU is expected to register next year. 

Inflation

Having risen from near-zero levels to around 7 per cent in August within the space of a year, inflation is now expected to average around 5.7 per cent this year and then decline to an average of 3.7 per cent in 2023. 

That will come about due to an expected increase in interest rates in the US and the EU, Caruana said. 

Without energy subsidies, inflation would have topped 12.8 per cent this year, he added.

Deficits and spending

Despite the economic slowdown, Caruana is expecting recurrent revenue to outpace recurrent expenditure and, crucially, for the government deficit – the shortfall between what the government spends versus what it earns - to continue edging downwards.

The expectation now is that Malta will end 2022 with a deficit of 5.8 per cent of GDP, dropping to 5.5 per cent in 2023. 

Again, those figures are more pessimistic than the forecasts revealed one year ago, when Caruana was projecting a 5.6 per cent deficit for this year, dropping to 4.4 per cent by 2023. 

The deficit would drop next year, Caruana was keen to point out, despite the budget not introducing any new taxes and allocating an eye-watering 9.3 per cent of all government revenue to covering the cost of energy prices increases, allowing tariffs to remain at current levels. 

This was largely possible, he says, because the taxman managed to recoup an additional €120 million in taxes owed. 

Capital spending

Capital spending will be locked in at €920 million, thanks to a massive injection of EU funding covering roughly one-third of that total. 

It is clear, however, that the government is out to gradually trim its infrastructural spending and bring it down from the record €1.2 billion and €1.3 billion spent in 2020 and 2021.

Further confirming that impression, Caruana told reporters that spending on rebuilding Malta’s roads – the government’s flagship promise during the 2017 electoral campaign – would be slashed by 25 per cent in the coming year.

National debt

Continued deficits mean, inevitably, that national debt will continue rising too. 

National debt totalled €8.3 billion by the end of 2021– a steep increase from the €5.7 billion debt accrued by the end of 2019, before the COVID-19 pandemic threw a spanner in the works. 

That €8.3 billion figure represented 56.3 per cent of GDP. By the end of this year, the ratio is expected to stand at 57 per cent. And by the end of 2023, it will have risen to 59.1 per cent, returning Malta to where it stood in roughly 2016. 

Malta’s debt-to-GDP ratio was markedly higher in the late 2000s and early 2010s, following the great financial crisis, when it spiked past the 70 per cent level. Budget surpluses of the mid-2010s allowed the government to eat away at national debt, giving the government valuable wiggle room during leaner economic times such as these. 

The same cannot be said for many other EU member states, however: indicators released by Eurostat last week showed that the average EU member state has a debt-to-GDP ratio of 86.4 per cent, rising to 94.2 per cent for eurozone countries.