Last Updated on Thursday, 19 September, 2024 at 12:11 pm by Andre Camilleri
Malta’s strong economy, and a deficit which is slowly decreasing, gave government room to announce tax reductions without damaging fiscal policy in the upcoming Budget for 2025, Finance Minister Clyde Caruana said in the presentation of the pre-Budget consultation document for 2025.
Speaking at a press conference on Wednesday, Caruana offered an overview of the country’s progress in tackling some of the world’s most pressing recent challenges, noting that Malta performed exceptionally well in many areas compared to other nations.
Caruana said that government is in a position to continue providing food and energy subsidies, as it predicts that Malta will reach its deficit and debt goals with the aid schemes remaining in place.
“I’ve always said we are running a marathon, and not a sprint. The country can sustain this level of spending, as it is one of the most important characteristics as to why we are in the position we’re in today,” Caruana said, adding that only Malta is doing this in the European Union, and it will continue to do so.
He emphasized that economic growth would have fallen drastically if government did not subsidize food and energy, and the economy did not feel the negative effect which would’ve been multiplied had the country suffered such a “shock” due to inflation, commending government’s decisive move and commitment, albeit forking out millions.
Caruana said that the amount allocated towards subsidies is 0.7% of government expenditure, meaning approximately €150 million out of €7 billion expenditure.
The Finance Minister said that this week, government will be submitting its Medium Term Fiscal Plan to the European Commission, which is obliged for all countries undergoing an excessive deficit procedure, which includes Malta.
Government will be insisting on keeping food and energy subsidies, whilst promising to adhere to its deficit targets.
Caruana said that the rules impose a four-year strategy deadline where the country must reduce its deficit percentage by 0.5% every year.
Malta is expected to decrease its deficit from the 4% expected by the end of 2024 (4.4% currently), to 3.5% in 2025, down to 3% in 2026, the percentage the EU Commission wants countries to adhere to. Caruana said that this means that the targets are expected to be reached within two years rather than four, to exit the deficit procedure.
In 2027, the deficit is expected to record at 2.6%, and then at 2% or 2.1% in 2028.
“We will do whatever it takes to reach these numbers, and we will continue to provide subsidies. It is important to be fiscally disciplined and this discipline is leading to us reaching these numbers, and do what is needed for the country, because we are obeying the rules of the game,” Caruana said.
Caruana said that economies around the world will be resting more throughout 2025, as everything indicates that the large world economies will be marginally better than they were this year.
Malta’s economic real growth (excluding rate of inflation) was stable in 2024, registering at 4.6%. In 2025, this is expected to continue to stabilise to around 4.3%, with Caruana citing sustainability, and said that everything indicates that the economy will continue to grow and puts Malta at the forefront compared to other EU countries.
In comparison to other Member States, Malta is doing better than larger economies such as that of Germany, whose economic growth registered lower than 5%, leaving extraordinary shocks to the country’s supply chain, Caruana said.
Malta can achieve highest employment rate in EU
On employment, Caruana said that in the past 11 years, the country has gone through a large transformation, with the overall participation rate for Malta in the first quarter of 2024 recording at 82.4%, compared to the 75.3% registered employment in the EU.
In fact, Malta recorded the second highest employment rate in the EU, second only to the Netherlands by a few percentage points. The rate is 7% higher than the EU average.
“If we keep this rate, till the end of the legislature, Malta can achieve the highest rate of employment in the EU despite all the challenges,” Caruana said, adding that through positive reforms, the country went from being low on the list, to being at the peak of classification.
He said that despite global economic turmoil, the 80% rate that needed to be reached by 2027, was reached even before that.
Unemployment in the country is also low, where Malta recorded the third lowest unemployment rate in the EU in July 2024, recording 3.1%. The EU average that month was 5.8%, while the EA average was that of 6.3%.
“Government has always made fiscal decisions at the right moment, which led to the result that our unemployment rate is less than half of the EU’s average, and we are not expecting this figure to change in the coming times,” Caruana said.
Government expected to collect further €200 million in taxes this year
On inflation, Caruana said that in the coming years, the country will once again enter the normality it enjoyed before worldly events and said that the inflation rate is expected to decelerate from 5.6% in 2023 to 2.5% in 2024, and it is expected to decline further to 2.1% in 2025, and marginally increase to 2.3% in 2026.
He spoke about fiscal policy and revenue generated, where he took the chance to thank the Malta Taxes and Customs Administration (MTCA) and said that part of the ‘secret’ as to why the deficit has decreased, and will continue to decline, is because this administration is doing an exceptional job quietly.
Caruana said that this year, a further €200 million more in taxes is expected be collected due to the MTCA’s work in cracking down tax evasion, as well as significant increase in compliance.
“This is happening, despite not adding or increasing any taxes, and this country will not need to add or increase taxes if the department continues to do its work,” Caruana said, adding that tax collections from more sectors are expected. Last year, €500 million more was collected in taxes than the department did in the previous year, Caruana added.
Government said that a sole entity with a sole agreement should continue to work on this, and Caruana said that the department is investing in an AI system which is looking at how much is being paid in VAT, and checks if people are paying their dues.
He said that the system is ready, and is currently undergoing trial testing, which has already determined that over 40% of companies were evading taxes.
Government’s expenditure, both current and capital are under control, Caruana said, adding that while it did increase by €200 million between 2022 and 2023, as was needed, government also collected €500 million extra in taxes.
“That is how we are ensuring that the country’s deficit continues to decrease,” he said, acknowledging that government spending is a subject of criticism.
Minister aims to target debt and deficit
Malta’s debt currently stands at 50.4%, well below the EU average and 60% threshold, Caruana said, where the EU average stands at 82%, and the EA average stands at 88.7%.
He acknowledged that the debt has increased, but not compared to other countries whose debt stands at 90%. Caruana said that Malta’s debt is projected to remain low.
“Our economy is the strongest one in the EU and it will remain strong. Despite government’s fiscal policy being expansionary as government is spending more than it is receiving, that expansion is being contracted year by year, and deficit is slowly being reduced without bumps in the economy,” Caruana said.
He said that this is what gave the country room to announce reduction in taxes for all families in the most responsible way, as it will be giving the people more disponible resources without damaging government’s fiscal policy.
“As a Minister, I always limit myself to target the deficit and debt, and if I reach those aims, government can continue with its electoral programme and give the people what they need, with responsibility,” Caruana said, emphasizing sustainability and responsibility.
Speaking to the media after the press conference, Caruana was asked if the tax cuts could result in a disastrous situation, to which he replied that this is not the case, as the risks of inflationary effects has reduced, and the level of inflation will continue to reduce.
He reiterated that the country’s deficit will continue to decrease as government nets more wealth in an expansionary economy which is slowly contracting.
Caruana was also asked both by media and social partners in attendance about the population growth and the decreased productivity of the current labour force. He was also asked about transforming the economy into one of less numbers and more quality.
He said that transforming the entire economy needs holistic discussion and cooperation from all social partners with consultation.
Caruana also confirmed that the Cost-of-Living Adjustment (COLA) given to address the higher cost of living will continue to be taxed, while government revises tax bands that should address all concerns.
He said that government’s top three priorities for the upcoming Budget is its base of fiscal responsibility and sustainability, increasing added income for the people, tax reductions for all families, and bettering the livelihoods of people.
