Malta's economy grew "strongly" last year, but the government's substantial energy subsidies drove the deficit up to a level that is "among the highest in the EU," according to the EU's latest economic forecast for Malta published on Monday.

The report said strong 6.9 per cent GDP growth last year was in large part due to the recovering tourism sector, export of services and increase in domestic demand for goods and services.

It expects growth to slow down to 3.9 per cent this year due to increasing inflation which is stifling families' spending power, with 4.1 per cent growth expected for 2024.

But the country's deficit - the annual shortfall between its spending and income - is way over what the EU generally permits.

The EU is poised to reintroduce spending limits, having suspended them during the pandemic to allow member states fiscal flexibility to prop up their economies.

The EU Commission would now like member states to run a deficit of less than three per cent of GDP and keep their debt under 60 per cent of GDP. That proposal must be debated in parliament and approved by national governments before coming into effect. 

Malta ran a 5.8 per cent deficit in 2022, with the EU Commission report describing that as "among the highest in the EU". 

That is in large part due to a government decision to cap energy prices through a state-funded subsidy that is costing the country hundreds of millions of euros a year. 

Deficit expected to drop, despite retained subsidies

The Commission said it expects Malta to retain measures keeping energy prices unchanged through 2023 and 2024. 

Despite that, it expects the deficit to gradually decrease and for public debt - the total amount owed by the country - to remain below the 60% threshold "thanks to robust GDP growth." 

Malta's debt is lower than the EU average, thanks to years of surpluses in the past decade, but the deficit is much higher than the EU average due to energy subsidies and pandemic aid.

Finance Minister Clyde Caruana has repeatedly acknowledged the growing deficit and warned that inflation worldwide will likely last longer than expected and the government therefore needs to be more disciplined than ever in the way it spends its money.

He also said Malta will need to wane off energy subsidies eventually.

The government spent €400 million on energy subsidies last year. The outlay is expected to be a bit less this year, but will still run into hundreds of millions.

The EU's spring economic forecast published on Monday said Malta's deficit is "expected to decrease from 5.8 per cent of GDP in 2022 to 5.1 per cent in 2023, remaining at a significant level. It is then set to decrease, albeit slowly, to 4.5 per cent in 2024."

The EU attributes the projected decrease to the decreasing international energy prices, the complete phasing out of the pandemic measures, the phasing out of Air Malta's early retirement schemes costs, and increased tax revenue, among other things.

'Robust growth, employment increase impressive'

The report also noted that the real GDP growth last year was higher than what it had projected in winter, that the services sector performed strongly and tourism "rebounded quickly and above earlier expectations", both in the number of tourists and the amount of money they spent.

It also noted that employment grew by an "impressive" six per cent last year and that it is set to continue growing at a "robust pace" this year and next year as Malta attracts more foreign workers

"Labour and skills shortages are expected to remain the main limiting factors for the Maltese economy over the forecast horizon," the report said.

Inflation remained high

The report also noted that despite the government's hefty energy subsidies, inflation remained high last year, reaching 6.1 per cent, 'even though the energy prices were fixed at 2020 levels by government intervention'.

"Nonetheless, inflation in 2023 is expected to stay high at 5.4 per cent, pushed by increasing prices for imported goods (especially food), tourism services and housing maintenance services," it said. "In 2024, inflation is projected to slow to 2.8% as price growth in Malta’s main trade partners moderates."

Prime Minister Robert Abela welcomed the EU forecast, noting it predicted Malta would have the EU's second-highest growth rate and lowest rate, with inflation slashed "by more than half".