Budget 2024: A healthy outlook for public finances, but mind the debt

People walking in Valletta. Photo: Chris Sant Fournier

Malta’s economy is growing faster than the government anticipated a year ago while the deficit is also being trimmed, figures released ahead of the Budget 2024 speech indicate.

Economic indicators released on Monday paint a fairly positive picture of the near future, with metrics for GDP growth, deficit and debt all reaching better-than-predicted levels for 2023.

The government expects to continue that positive trend over the upcoming three-year period leading to 2026 – though it will need to keep a close eye on rising debt levels and the annual cost of servicing that debt.

Data released by the finance ministry suggests the government has no intention of ending energy subsidies anytime soon, despite pressure from the EU and International Monetary Fund to do so.

Instead, the government is forecasting that subsidies will continue to eat up slightly under 5 per cent of its annual recurrent expenditure every year up to 2026.

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Economic growth and inflation

Malta’s economy is expected to grow by 4.1 per cent in real terms (adjusted for inflation) this year, higher than the 3.5 per cent rate that the government was expecting a year ago and well above the EU average of 0.8 per cent.

GDP growth is expected to reach much the same levels in 2024 (4.2 per cent).

Inflation also appears to be on a downward trend, judging by government projections. Having peaked at 6.1 per cent in 2022, local inflation is now likely to measure 5.7 per cent by the end of this year, before dropping significantly to 3.7 per cent in 2024 and to the European Central Bank’s target rate of 2 per cent by 2025.

Those projections will come as a relief to many households, which have struggled to keep pace with the rising cost of living in recent years, as well as policymakers who have found it hard to keep food inflation in check.

That is reflected in Malta’s rate of inflation when compared to its EU peers: the Harmonised Indices of Consumer Prices (HICP) is only a hair below the Eurozone average this year, despite the government having spent more than €300 million to put a lid on energy prices.

Deficit and debt

After years of strong improvement in its public finances, deficit and debt metrics saw a dramatic downward swing from 2020 onwards, as the COVID-19 pandemic forced the government to dig deep into its pockets to shore up the economy.

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But the size of the national deficit – the annual shortfall between what the government earns and what it spends – is now shrinking once again.

The government initially expected to end 2023 with a deficit of -5.5 per cent this year. It now thinks it will do better and close the year with a -5% deficit. The forecast is for the deficit to continue shrinking by 0.5 percentage points each year up to 2026.

That projection could raise some sceptical eyebrows, as the projected annual decrease of 0.5 percentage points is the minimum required of EU member states under new rules that the European Commission intends to introduce to encourage fiscal discipline.  

Under those rules, Malta will avoid any penalties for having a deficit higher than 3 per cent if it slashes that figure by 0.5 percentage points each year.

Malta is on safer territory when it comes to debt metrics, as the country’s debt-to-GDP ratio will remain safely under the EU’s 60 per cent cap for the foreseeable future.  

That ratio, which will likely stand at 52.8 per cent by the end of 2023, is expected to rise incrementally to 56.9 per cent by 2026. The total amount of national debt will also balloon to roughly €13 billion by that year, having ripped past the €9 billion mark some months back.

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Around €215 million in public money has been reserved in 2024 to capitalise the ‘new’ Air Malta, which will fly its maiden flight in the spring of that year.

As debt grows, so will the country’s interest payments to service it: Malta paid €173.6 million in interest on its debt in 2022, will spend €209 million this year and €270 million in 2024. Perhaps more concerning is the expectation that interest rates on that debt will rise from 1.1 per cent this year to 1.5 per cent in 2026.  

National deficit and debt also registered better-than-expected performance this year, preliminary figures indicate.

Government spending

Next year, €4.90 out of every €100 spent by the government will go towards keeping electricity and fuel rates unchanged.

Despite that significant outlay, the government expects to spend proportionally less on recurrent expenditure in the next years than it did in the previous ones: such spending will most likely drop to 32.4 per cent of GDP in 2024, having reached 37.4 per cent at the height of the COVID-19 pandemic.

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Capital expenditure – spending on things like infrastructural projects – will take a hit, however.

While the government will have forked out just over €1 billion in capital expenditure this year (5.6 per cent of GDP), spending will be trimmed to €905 million in 2024 (4.5 per cent of GDP) before resuming an upward trend in the following two years. By 2026, the government expects to be spending €1.1 billion (4.8 per cent of GDP) in capital expenditure.

The Finance Ministry justified this drop by saying that the high capital expenditure figure for 2023 was due to a disproportionate number of bills for capital projects co-funded by the EU coming due.