Update 2 | Opposition blames Muscat’s costlier cabinet over increased deficit forecast

Malta's deficit will widen to 3.7% of gross domestic product in 2013, EU forecasts released today indicate, with a slight improvement in 2014 of 3.6%.

The deficit reached 3.3% of GDP in 2012, up by 0.5%, due to higher social benefits and increase in public sector salaries through the renewal of collective agreements in health and education.

Capital expenditure in 2012 remained law, and revenue was bolstered by income taxes and national insurance, while dampened private consumption only generated a moderate growth of VAT receipts.

In 2013, current expenditure is set to increase by 0.1 percentage point of GDP, while tax revenue is expected to only partly compensate for the disappearance of one-off revenues registered in 2012. Income tax cuts for high earners will mean that revenues are projected to decline marginally.

National debt will be expected to increase as the deficit widens, with the main risk being for Enemalta's financial situation which depends on government subsidies.

Economic growth continued to decelerate in 2012 to 0.8% from 1.7% in 2011, driven mainly by net exports, tourism and financial services. Domestic demand however remained weak.

On the back of tax cuts, an increase in household consumption would see real GDP grow to 1.4% in 2013 and 1.8% in 2014.

Job creation will remain strong with a project annual rate of increase of around 2%, mainly within the services sector, and underpinned by increased female participation, while unemployment will moderate to 6.1% in 2014.

Government reaction

Finance minister Edward Scicluna said the government was  committed to keep its deficit below the 3% threshold, and end 2013 with a deficit of 2.7%, as announced last month in the budget.

The EC said the budget was "expansionary" and as a consequence the deficit would widen to 3.7% of GDP.

"It must be recalled that the 2013 approved budget is the same budget submitted by the previous government in November of last year and which forecasted a deficit of 1.7%. The Nationalist government had then stated that the budget for 2013 was evaluated and endorsed by the European Commission," Scicluna said.

"The only addition to the 2013 Budget was the inclusion of a number of collective agreements and other firm commitments undertaken by the previous government at the beginning of this year prior to the elections, and for which no financial provision was made in the budget estimates."

Scicluna said the government is committed to honour collective and other agreements entered into by the previous administration.

But he insisted that the deficit for 2013 will end in the region of 2.7%. "Despite the Commission's disappointing forecast, this government remains committed to closing 2013 with a deficit of 2.7&... this further confirms how unrealistic the previous administration's budget projection of 1.7% truly was and that Government was correct in revising it upwards when it presented the 2013 Budget in April."

Scicluna said he now intends to determine on what grounds the Commission reached its forecast. Both Deputy Prime Minister and EU Affairs Minister Louis Grech and Finance Minister Prof. Edward Scicluna are currently in Brussels for further discussions with European Commissioner for Economic and Monetary Affairs Olli Rehn.

Opposition's reaction

On its part, the Nationalist Party said that Joseph Muscat's decision to increase the size of his Cabinet and secretariats had led to an explosion in spending that was confirmed in the EC forecast of a 3.7% deficit.

"Not only has this government lost all hope of keeping to the target of 1.7% as proposed by the Nationalist government last year, but the EC is not even accepting its estimates. The Opposition expects the government to shoulder its responsibility, as it will be responsible for nine months of this year's expenditure and it cannot blame the previous administration," the PN said.

Joseph Muscat's enlarged Cabinet of 14 ministers and eight parliamentary secretaries has shot the cost of Malta's political offices up by 23%, or €1.9 million over and above the €8.1 million that Lawrence Gonzi's Cabinet was estimated to have cost had it been re-elected, an analysis by MaltaToday suggests.

A comparison of the line items appearing in Budget 2013 shows that Joseph Muscat's Cabinet of Ministers and their political offices comes at a cost of €10 million.

The PN said that in the three months preceding the elections, the deficit had fallen by €57 million compared to the same period in 2011.

The administration's spending was then constitutionally limited to 30% of its budgeted spending, since the 2013 budget was not approved in December 2012, leading to early elections that were held in March 2013.

"The Opposition has already warned the government to make a better effort in controlling its expenditure... at this rate, Malta will entre the excessive deficit procedure for breaching the 3% threshold, and increase debt well over the €600 million estimated within the three years."