Last week, I wrote about the situation in Russia and the war in Ukraine. Geopolitics is becoming increasingly complex, fuelling even more instability. However, despite mounting global uncertainty, Malta continues to perform well, registering one of the highest growth rates in the eurozone. According to the National Statistics Office, by the end of March, national debt stood at just under €10.8 billion, which is an increase of €844 million compared to the same period last year. While this figure may appear alarming in isolation and in absolute terms, as the Opposition seem to keep on repeating, the broader context tells a different story. The way debt is composed is mostly structured and strategic, deliberately aimed at cushioning the economy from external shocks.
The main contributors to the increase in debt are well documented. Over the past three years, the Maltese government has committed to broad-based subsidies on energy and fuel to buffer households and businesses from global price instability, mainly triggered by the war in Ukraine. I have written extensively about this topic. These subsidies, along with cost-of-living support, acted as automatic stabilisers. Without them, aggregate demand would have slowed or contracted sharply. Government intervention sent a clear signal to markets and investors that stability would be preserved and prioritised at all costs. Indeed, this strategy worked. Economic confidence remained intact, and consumption and investment were sustained, avoiding stagnation or perhaps stagflation, if such a strategy had not been implemented.
To some, this may sound like fiscal recklessness. But it is, in fact, Keynesian policy at work. When economies face external shocks, governments should intervene counter-cyclically, even if that means temporarily increasing deficits. More importantly, GDP growth is what ultimately keeps deficit-to-GDP and debt-to-GDP ratios in check. As long as Malta continues to grow, these indicators remain manageable. Beyond subsidies, public investment also played a role. New collective agreements that raise public sector wages, enhancements in healthcare and education, and targeted capital expenditure have all contributed to last year’s deficit. These are, however, long-term investments. Strategic debt that enhances the productivity of Malta’s future workforce should not be conflated with structural inefficiency. The government is simultaneously supporting demand while investing in the supply side. This is sound economic management.
But like all fiscal policies, such an approach has its limits. Debt is sustainable for now, but not forever. Sustainability depends not only on the headline number but also on debt composition, interest costs, and the efficiency of capital deployment. The Minister for Finance is doing a stellar job to keep within the established targets. For this reason, Malta appears to be on the right track. Indeed, the finance minister has committed to a phased deficit reduction strategy, frontloading fiscal prudence without compromising growth. Early indicators suggest that Malta is meeting its targets ahead of schedule, a fact that lends credibility to the consolidation process.
Obviously, debt becomes problematic when interest payments start crowding out productive investments in infrastructure, education and innovation. It becomes dangerous when the debt-to-GDP ratio approaches 65-70% without a roadmap for consolidation. At that point, the European Commission steps in to shape the annual budget. Malta’s current ratio, at around 52-54%, remains below the EU’s 60% threshold, but the fiscal space is narrowing. Should global interest rates rise, or GDP growth weaken, the burden could become unsustainable by 2029 or 2030. In this regard, the government’s role is to keep on attracting private investment to expand the economy.
There is also the issue of the quality of debt. Borrowing to finance recurrent expenditure, especially in non-productive sectors, creates liabilities without returns. The government must therefore prioritise public investment in areas that offer long-term economic benefits, such as renewables, digital infrastructure and human capital. Delays in realising these projects risk transforming strategic borrowing into structural debt. The shift to renewable energy is a case in point. The longer Malta remains dependent on fossil fuels, the longer subsidies will need to remain in place, increasing fiscal pressure.
When calls for cost-cutting are pronounced, especially by the Opposition, they mustn’t be misplaced and must be carefully calibrated. Undoubtedly, inefficient outlays, such as duplication within the public sector, should be trimmed. Unproductive capital projects should be reallocated to high-yield investments. Spending on education, healthcare and the green and digital transitions must remain untouched. These are the foundations of Malta’s future competitiveness. Certainly, rather than arbitrary cuts, the government should conduct a comprehensive spending review, adopt efficiency reforms and implement strict KPIs as outlined in the Malta Vision 2050. Public Private Partnerships should be leveraged to shift the burden from public to private capital, especially in infrastructure and innovation through government political stability. This approach preserves growth, ensures sustainability and maintains Malta’s investment-grade credit status.
This contrast in political stability has become even more evident following Tuesday’s resignation of the Leader of the Opposition. While internal divisions have long plagued the Nationalist Party, the resignation underscores a deeper structural weakness; one that has repeatedly hindered the Opposition’s ability to present a credible economic alternative. For investors and international stakeholders observing Malta, such developments reinforce the perception of continuity and cohesion within government, especially when the alternative appears fragmented. In this context, the responsibility of the Labour Party in government and its leadership must be to continue striving for unity, coherence and long-term vision, not merely to retain power, but to deliver consistent and effective governance. This is not the time to relax. Au contraire, it is the moment to reinforce the work being done to keep convincing people, retain the trust of the electorate and safeguard the solid majority, regardless of who succeeds Dr Bernard Grech.
On a political level, the government’s economic approach has strengthened its position. Internally, the Labour Party is experiencing renewed unity and purpose since its September restructuring. The cohesion at cabinet and parliamentary level is visible. Surely, strategic direction appears to be shared, and communications are disciplined. In the midst of a turbulent geopolitical climate, this internal alignment is not easy. Stability, both economically and politically, matters. As I stated in my preceding articles, it shouldn’t be the Labour Party that bears the brunt of those not keeping up with such cohesion, but those who fall short of it within government. Hitherto, the government succeeded in aligning its fiscal agenda with broader development goals. The public consultation on Malta Vision 2050 is another step in this direction. Long-term planning must go hand in hand with fiscal sustainability. This will ensure that Malta’s current resilience translates into tomorrow’s prosperity. What’s required now is speed. The greatest risk Malta faces is not over-spending but under-delivering on its investment pledges. Projects in renewables, smart mobility and the digital economy must be fast-tracked. Every delay is a missed opportunity to reduce long-term costs, enhance competitiveness and build investor confidence.
Certainly, the role of the state should be an enabler to build this confidence, not merely support. While government intervention is necessary in times of crisis, Malta must remain a pro-investment jurisdiction. Incentivising private sector-led growth is the best way to keep public spending under control and secure future-proof development. This is how Malta can avoid fiscal tightening while still honouring its social contract. Looking ahead, the government should continue along its current path, with phased consolidation, strategic investment and internal discipline.
The Labour Party’s renewed unity gives it the political capital to carry out necessary reforms. The economy is resilient, but resilience is not a reason for complacency. It is a window of opportunity. And the majorities that are being registered by the Labour Party in government, in every poll commissioned by different media outlets, must be attributed to the stability in policy and unity across its grassroots. And right now, such stability and unity remain within reach. Let’s keep it!
