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EU approves Malta Budget but forecasts lower growth than Govt for 2021

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The European Commission has green-lighted Malta’s budget for 2021, noting that it was largely in line with Council recommendations made earlier this year, with most initiatives intended to supporting economic activity against the background of considerable uncertainty.

In a detailed assessment, the Commission said that Government’s COVID-19 pandemic-related measures coupled with an emigration-related reduction of the labour force are expected to prevent a major increase in the unemployment rate, which is projected to reach 4.8 % in 2020 before declining to 4 % in 2021 as the economic environment improves. Overall, Government’s projections underpinning the 2021 Draft Budgetary Plan are in line with the Commission 2020 autumn forecast. The Commission projects a larger fall in private consumption and investment in 2020 but a swifter recovery in those categories in 2021, while the rebound in external demand is expected to be more moderate.

Brussels noted that while both Government and the EU Commission are expecting a significant contraction in GDP, exceeding 7%, this year, the Maltese Government was more optimistic on next year’s targets, forecasting a 5% growth rate as opposed to the Commission’s 3%. Government is hedging this more positive forecast on the hope that this year’s drop would be mitigated by growing public consumption, wwith the external continuing to act as a drag on the economy.

The Commission took note that Budget 2021 estimates the headline deficit to reach 9.4 % of GDP in 2020, driven by revenue shortfalls and COVID-19 pandemic-related measures on the revenue and expenditure side. In 2021, the Draft Budgetary Plan targets a deficit of 5.9 % of GDP. However, for these two years, the EU executive has already indicated that it will not be applying the excessive deficit procedure in view of the current situaton.

Strong incentives towards recovery

Photo: DOI

The Commission highlighted Government’s efforts at pushing Malta’s economic regeneration estimating that the stimulus measures with a direct budgetary impact in 2020 in response to the COVID-19 outbreak to reach 5.8 % of GDP.

Expenditure-side measures amount to 5.4 % of GDP and include wage supplements to sustain employment, the financing of medical supplies and equipment to strengthen the healthcare system, a voucher scheme to support domestic demand, and
measures providing direct support to the most-affected businesses in the form of rent and utility subsidies.

On the revenue side, a reduction of transaction taxes on immovable property is expected to be retained. In addition, Malta adopted measures without an immediate fiscal impact to alleviate liquidity constraints of the corporate sector. Budget 2021, announced last month, had estimated tax deferrals to reach some 1.5 % of GDP while the COVID-19 guarantee scheme serviced by Malta Development Bank amounts to 2.8 % of GDP. The takeup of the guarantees as of August 2020 is estimated at 0.4 % of GDP.

The European Commission also highlighted the longer-term proposals enshrined in Budget 2021, which include funds to incentivise the circular economy and transform Malta into a resource-efficient economy in line with the European Green Deal. Corporate liquidity will be supported through government loanu guarantees and interest rate subsidies.

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