Yet, such strong economic growth comes with its challenges. For instance, Malta today faces two systemic challenges: housing unaffordability and chronic traffic congestion.

To understand why a nation that is much wealthier today, than some 10 or 15 years ago, struggles with such fundamental issues, one would have to look past traditional supply-and-demand metrics and view the problem through the lens of behavioural economics – the study of how psychological biases, status, and human habits override rational economic decisions.

Traditional economics suggests that when an economy grows, everyone’s purchasing power should scale accordingly. However, the prevalent economic growth model adopted in Malta has left many low-to-middle-income earners, particularly youths, priced out of the housing market.

Malta’s economic growth required a massive influx of foreign workers to sustain momentum, coupled with a massive growth in tourists’ numbers. This caused an abrupt population spike, triggering specific behavioral shifts among investors and landlords.

Maltese investors have long exhibited a cultural bias toward brick-and-mortar investments, viewing property as the only “safe” asset class. When the population grew, a herding mentality took over. Capital flooded into the buy-to-let market and short-term tourist rentals (like Airbnb) because landlords chased immediate, high-yield gains from foreign workers and tourists. Landlords looked at the highest-paying segment of the market – foreign tech and finance executives – and mistakenly treated this premium demand as the baseline for the entire market. As a result, the development of affordable, traditional family homes was abandoned in favour of smaller, high-density apartments aimed at transient workers. While average domestic wages grew steadily, they could not compete with the compounded momentum of capital, creating an environment where a young couple on average incomes can barely access a fraction of the market without substantial parental support. The psychological security historically attached to Maltese homeownership has transformed into an anxiety-inducing financial barrier. Add to this reality is that any fiscal incentive to help make housing more affordable will likely make housing more expensive, as this will likely result in a short-term demand boost.

If housing is an issue born of rapid population growth, gridlock is another issue born of population growth coupled with psychological paralysis. Ahead of general elections, political parties frequently float grand promises of mass transport solutions. From a behavioural economics standpoint, none of these multi-billion-euro systems will ever be feasible or self-sustaining unless any government actively introduces pain points (disincentives) for private car use.

After all, Malta already made its scheduled bus service completely free for residents. Yet, the roads remain paralysed. Why? Commuters prefer the immediate comfort, privacy, and perceived autonomy of their air-conditioned car today, even if they know it means sitting in gridlock. They heavily discount the long-term societal costs (pollution, wasted time, respiratory illnesses) because the immediate alternative (waiting for a bus in the summer heat) feels like a loss. Moreover, in Malta, the private vehicle is deeply tied to social status. Decades of outdated urban planning have conditioned the collective psyche to view public transport as a low-status alternative. All the research in the world indicate that human beings are far more motivated by avoiding a loss than acquiring a gain. Offering “free mass transport” is a gain, and clearly, it is not enough to break old habits. To trigger a genuine modal shift, private car use must be made inconvenient or expensive through disincentives like implementing strict parking management, reducing free street parking, introducing congestion charges in heavily choked urban cores or repurposing car lanes exclusively into bus and active-mobility lanes, deliberately tipping the time-advantage in favour of public transit. Without these uncomfortable “stick” measures, any new mass transit infrastructure will become a financial white elephant, under-utilised while drivers remain frozen in traffic.

In the meantime, while a comprehensive mass transit network remains a distant reality, a high-frequency, tech-driven shared ride ecosystem could offer the immediate intervention Malta desperately needs. However, for this to work, it must be backed by aggressive fiscal incentives – such as corporate tax rebates for shared employee commutes or direct subsidies that make ridesharing cheaper than running a private car. By pairing these financial carrots with the on-demand convenience and air-conditioned privacy of a personal vehicle, dynamic ridesharing can directly challenge the status of private car ownership, allowing drivers to surrender the hassle of parking while instantly cutting the single-occupancy vehicles paralysing the roads.

Going forward, Malta must urgently pivot toward an economic transformation where growth is driven not by the unsustainable scaling of physical inputs – such as importing more labour and pouring more concrete – but by maximising value-added output per worker: true productivity. This structural shift can only be realised by aggressively injecting digital investment into existing economic sectors and strategically attracting new, high-value-added industries that require a smaller physical footprint but yield higher economic returns. However, executing this transition is exceptionally delicate. Given Malta’s currently high government expenditure, policymakers face the added pressure of financing and managing this massive economic overhaul with precision, ensuring that the transition does not inadvertently trigger lower economic growth or disrupt near-term stability. Balancing the withdrawal of old growth drivers while simultaneously nurturing high-tech productivity, all without denting economic momentum, represents one of the most formidable economic challenges the island has ever faced.

Malta’s current predicament serves as a stark reminder that an economy is not a collection of isolated columns on a spreadsheet, but a massive, deeply interlinked ecosystem. You cannot aggressively expand the labour market without instantly shocking the housing market. You cannot fix the housing shortage by simply pouring more concrete without worsening urban density and strain on utilities. You certainly cannot fix the traffic crisis by building more infrastructure if you leave the psychological incentives of driving untouched. True economic stewardship requires managing the invisible threads that connect behavioral and cultural attitudes with wealth and environmental limits. If a country only manages the numbers that go up, it will eventually be crushed by the unintended consequences that follow. To avoid this requires stepping from our comfort zone of instant gratification and short-term measures to one based on discipline and longer-term mindset.

Ultimately the mindset and policy decisions that brought us strong economic growth, will not be what is now needed to achieve sustainable economic growth. That is the basic underlying common theme of Vision 2050, which should become a true action programme.

The post What got us here won’t save us first appeared on The Malta Business Weekly.

This evolving situation was laid bare at the International Charlemagne Prize ceremony in Aachen, Germany. The prestigious award was presented to former European Central Bank President and Italian Prime Minister Mario Draghi, recognised for his historic stewardship of the Euro. However, rather than delivering a celebratory retrospective speech, Draghi used the global podium to issue a chilling, clear-eyed deconstruction of post-Cold War Europe. He warned that the continent has arrived at a point of profound vulnerability, summarising the shift with the haunting observation that, for the first time in living memory, Europeans are truly alone together. The international framework that once guaranteed Europe’s security through the United States and fueled our growth through open trade with China has shattered.

Draghi argued that Europe’s traditional approach to governance, that of treating the Union as a post-political, purely administrative space governed by static rules and complex bureaucracy, is fundamentally obsolete. For decades, Brussels attempted to neutralise raw politics through market integration, but this reliance on external forces has left the continent dangerously exposed. Europe dismantled its external trade barriers and embraced global supply chains yet catastrophically failed to complete its internal market. Draghi correctly points out that Europe is now left with fractured capital markets, disconnected energy networks, and an economy heavily dependent on foreign demand. This structural failure is amplified by a widening chasm in innovation, particularly in Artificial Intelligence. Draghi warned that because AI advances exponentially with usage, early leaders will secure permanent advantages, and Europe is currently failing to mobilise the massive, coordinated capital required to compete.

To prevent systemic decline, Draghi called for a radical transition to “pragmatic federalism”. He urged European leaders to abandon the paralysing requirement for absolute consensus and the abuse of national vetoes, arguing that sluggish compromise is often more damaging than outright inaction. His solution demands an overhaul of institutional architecture, replacing an outdated EU budget focused on subsidies with a streamlined fund dedicated to joint sovereignty, innovation and defense. Crucially, Draghi reiterated that the sheer scale of this transition can only be financed through the issuance of common European debt, leveraging the collective financial might of the bloc to underwrite massive pan-European infrastructure.

Yet, the Aachen ceremony did not just reveal a unified path forward; it exposed the deep ideological rifts that shape today’s Europe. Standing at the same podium to deliver the eulogy, German Chancellor Friedrich Merz enthusiastically agreed with Draghi’s grim diagnosis but directly attacked his proposed cure. Merz agreed that Europe behaves like a twentieth-century bureaucracy unsuited for twenty-first-century challenges, endorsing a total modernisation of the EU budget away from traditional regional and agricultural subsidies toward raw military power and economic competitiveness.

However, Merz drew an unyielding line regarding how to fund this new era. He explicitly rejected the concept of joint European borrowing, stating that Germany cannot follow the path of new EU debt for constitutional reasons, and warning that excessive indebtedness threatens national sovereignty while limiting the capacity to act. Furthermore, Merz’s stance implicitly defended Germany’s export-driven economic model, clashing with Draghi’s view that an obsession with chasing external trade deals has allowed European nations to evade the painful internal reforms required to build a self-sufficient single market.

Notwithstanding any macro-fiscal disagreement on the underlying funding mechanisms, the strategic consensus on the imperative to transition toward a model of “pragmatic federalism” is rapidly gaining institutional momentum. Europe is increasingly realising that deeper integration is the sole mechanism viable to safeguard its economic hegemony and geopolitical relevance in a fragmented global economy. Down this hyper-integrated route, Malta—as the smallest EU member state—faces asymmetric vulnerability, particularly regarding its fiscal sovereignty. This shift could imperil vital competitive instruments like our current six-sevenths tax imputation system. This specific mechanism has historically generated robust corporate income tax yield, allowing Malta to offset structural deficits and maintain ever-expanding public expenditure within a sustainable macroeconomic remit. Whilst the domestic run-up to the general election features an escalatory cycle of expansionary promises that will inevitably bloat public recurrent expenditure, this evolving macroeconomic backdrop constitutes a binding constraint risk that cannot be ignored.

The post The reality that awaits us first appeared on The Malta Business Weekly.

Let us start with the facts. Below please find a quick overview of the trajectory of government finances between 2022 to 2025. One can see that on one hand government revenue increased by 43.7% between 2022 to 2025, while government expenditure increased by 31.8% for the same period.

Going forward one major unknown is how much Malta will need to spend in fuel and energy subsidies. In the height of the Ukraine war, between 2022 and 2023, Malta spent some €300-€400 million annually in such subsidies. Then come all the proposals flying around on a daily basis. A quick preliminary cursory estimate of the proposals put forward by each of the major political parties would cost the public purse something between €300 to €400 million annually in reduced tax revenue or increased government expenditure, if all are implemented at once.

If Malta’s economy is to experience a forecasted real GDP growth of 3.7% and assuming an average 3% inflation rate over the three years, Malta would hit a nominal GDP of €26.2b in 2026, €28b in 2027 and almost €29.9b in 2028. If this economic growth materialises as predicted, to remain within the 3% limit of annual deficit-to-GDP Malta could have annual deficits ranging from €800 to €900 million between 2026 to 2028. Assuming the 2025 baseline deficit of €545 million – achieved when energy and fuel subsidies had fallen to approximately €150 million – our so-called annual “war chest”, provided the projected GDP growth materialises, would amount to roughly €250-350 million per year. Which is why in my humble opinion, considering the instability and the unknown of the impact of the likely increased expenditure in fuel and energy subsidies in 2026, all the proposals flying around make some difficult reading. As I said above, all this is dependant that the forecasted economic growth for 2026 to 2028 will materialise as forecasted. As I write this I am reading the latest Moody’s credit rating report for Malta, which has reduced the 2026 economic growth forecast from 4% to 3.5% due to capacity constraints in tourism, labour shortages and geopolitical risks.

Besides the various eye-catching proposals by both parties, that impact government revenue and expenditure, there are also various proposals being put forward that will impact the labour market. These vary from extended maternity leave, paternity leave and also other rights in relation to flexible and remote working. I am not against such shifts, however, I am afraid that this could easily end up in a situation whereby we are putting the “cart before the horse”.

The below graph depicts the real labour productivity of Ireland, Denmark, Sweden, Malta and the EU average for the past years. You can see that Ireland stands in a league of its own, while Denmark is also on a strong upward trajectory, whereas both Sweden and the EU average have largely flatlined. Malta’s labour productivity trajectory has dipped in 2020 being the pandemic year, recovered a bit in subsequent years (but still not to pre-pandemic levels) and labour productivity is dipping down again in 2024 and 2025.

The challenge is clear. To be able to enjoy the benefits of an evolved labour market, we need first to boost our labour productivity by transforming our economy into growing further new high value-added economic sectors and by investing heavily in having present economic sectors become much more efficient by the use of technology. If we do not revert our present labour productivity trajectory and instead push through costly labour “reforms” we end up creating much more problems than the ones we are trying to address.

The data presented in this article serves as a stark validation of the Malta Chamber’s position in its open letter, issued on 2 May, to the leaders of Malta’s main political parties. By grounding its stance in hard facts and economic reality, the Malta Chamber has proven to be the leading balanced voice of reason in a landscape currently dominated by political posturing. Malta’s so called “war chest” is not infinite and Malta’s real labour productivity is dipping. It is within this context that the Malta Chamber rightly argues that implementing costly electoral proposals and labour reforms before boosting labour productivity does not serve the country’s common good.

The post The ‘war chest’ and productivity first appeared on The Malta Business Weekly.

My proposal or set of proposals are less costly and more targeted.

As many of you know, I work a lot with family businesses. Family businesses remind me of the infamous speech given by late Sergio Marchionne at the Confindustria Young Entrepreneurs Conference in Santa Margherita Ligure, Italy, on June 9, 2012. In this speech, he famously discussed the balance between “the epoch of rights” and the “sense of duty”. In a family business the “right” to a salary or a position is often secondary to the “duty” of ensuring the business survives for the next generation.

The family business owners are frequently the first to arrive, the last to leave, and the ones who forgo their own “rights” during lean times to protect their employees. Marchionne’s warning that “if we live of only rights, we will die of rights” resonates deeply with family business entrepreneurs because they know that a business cannot be sustained by what it demands from the market, but by the sacrifices and commitment it pours into the business. It is this background and reality I see on a daily basis through various family businesses, that inspires my proposal.

The transition of the ownership of the family business and assets used in the family business, from one generation to the next, often poses a significant financial threat, particularly when substantial fiscal burdens are involved. Recognising this, government has extended a pivotal fiscal incentive, even in the 2026 Budget, allowing for the transfer of business ownership and related property at a significantly reduced stamp duty rate of 1.5%.

This measure aims to bypass the standard 5% duty that typically applies to the transfer of immovable property and the 2% or 5% duty (trading company vs property company) on marketable securities (shares), ensuring that capital remains within the business to fuel growth rather than being diverted to the taxman during a sensitive transition.

Where a business is transferred during the owner’s lifetime (Inter Vivos), the law provides a pathway to this reduced rate under the Duty on Donations of Marketable Securities and Immovable Property used for Business (Exemption) Order.

The 1.5% rate is not universal; it is a targeted incentive for intra-family succession. Qualifying recipients include Spouses and partners in a civil union and descendants in the direct line (children, grandchildren) and their spouses.

With regards qualifying assets for the 1.5% rate, there are two primary asset classes that benefit from this stamp duty reduction i.e. the shares in the family-owned business and the real estate used specifically for the business (e.g., a factory, retail outlet, or office). To qualify, the property must have been used by the business for at least three years preceding the transfer.

To prevent abuse of the system, the law mandates that the recipient must not sell or transfer the family business or property for at least three years following the donation. In the case of property, it must continue to be used for the business for a minimum of three years post-transfer.

Based on all the above, my proposal is made of a number of fine tunings to ensure that family businesses are preserved in the critical juncture of succession. Moreover, whilst I personally preach and advise family businesses to prepare and plan for succession at an early stage, I am aware that there will always be cases whereby succession needs to happen because the unexpected has happened, like the unexpected, sometimes early, death of a family business owner and leader.  Ultimately there is an element of family business continuity that is a public good, regardless of the specific degree of kinship or minor administrative delays. Thus, the goal of my proposals is to ensure that when coming to the legitimate family business transfer there is an established safety net rate for scenarios that currently fall through the cracks.

Currently, if no ‘inter vivos’ succession transfer has taken place and, hence, a ‘causa mortis’ type of family business transfer has to be done, this would not qualify for  the reduced 1.5% stamp duty, but the standard 5% stamp duty rate would apply. My proposal is to have a safety net rate which is higher than the reduced 1,5% stamp duty rate for ‘inter vivos’ transfers and lower than the 5% standard rate. This, in my opinion, would spare  family businesses passing through a tragic situation from being ‘punished’ unnecessarily, without taking away from the more favourable reduced rate of duty for family businesses to plan ahead and go for an ‘inter vivos’ type of succession which, in the end, can bring more benefit to the family business and its future prospects.

Throughout Europe, tax relief for causa mortis (upon death) family business transfers is designed to prevent the fragmentation of small and medium enterprises and ensure operational continuity. Most jurisdictions recognise that high inheritance taxes or stamp duties can drain a company’s working capital, potentially forcing a liquidation or sale to external investors. For instance, Germany offers a robust “business succession” exemption where heirs can receive up to 100% relief from inheritance tax if they continue the business for seven years and maintain specific payroll levels. Similarly, the Netherlands utilises the Bedrijfsopvolgingsregeling (BOR), which provides substantial exemptions—often exceeding 80% of the business value—to ensure that tax liabilities do not jeopardise the company’s liquidity. The United Kingdom recently updated its Business Property Relief (BPR) to provide 100% relief on the first £2.5 million of combined business and agricultural assets, with a 50% relief thereafter. These measures collectively yield significant positive effects: they encourage long-term investment, protect local employment, and foster generational stability. By lowering the fiscal barrier to succession, European states effectively incentivise the survival of the family-owned model, which serves as a cornerstone for economic resilience and social cohesion across the continent. These reliefs ensure that the successor’s focus remains on strategic growth rather than servicing a sudden, massive tax debt during an already difficult period of transition.

Another issue that should also be addressed relates to the transfer of immovable property from the family business to a family member. As a practical example, let’s assume that a family business acquires a new warehouse but as part of the succession plan inter vivos, the owner chooses to pass that warehouse to one of his descendants. Should he choose to transfer the warehouse out of the business and to a family member, such a transfer would be subject to the full 5% duty because they missed the 3-year “pre-transfer usage” window by a few months. My proposal is to at least allow for a pro-rata reduction. If the property was used for less than 3 years but more than 1 year, the duty should be capped at a lower rate of 2.5%, provided the heirs commit to using it for the business for the subsequent 5 years.

In conclusion, the survival of a family business is important as these businesses are the bedrock of our economy, fuelled by family business owners who are fully committed to their business, often sacrificing everything to ensure the security of their employees and the future of their kin. By refining our tax laws to include this reduced duty safety net, we can ensure that we do not dismantle decades of hard work, by supporting the actively trading family businesses who pour their commitment into our community, ensuring that when the torch of leadership is passed, it is not extinguished by a tax burden, but remains a guiding light for the next generation.

The post My proposal first appeared on The Malta Business Weekly.

With the published accrual-based Government Deficit figure for 2025, the cash based Consolidated Fund Deficit figure published a few weeks ago has shrunk from €824 million to €545 million. How is this possible? The transition from the cash-based Consolidated Fund deficit to the accrual-based General Government deficit involves several significant accounting adjustments required by European methodology (ESA 2010). While the cash figure focuses on the timing of actual payments, the accrual figure reflects when the underlying economic activity occurred.

As can be seen in the below table, the primary and most significant adjustment was the so called “Time-adjusted cash transactions” that added €391.6 million back to the balance by aligning the recording of taxes and social contributions with the period they were earned rather than when they were collected. This large positive adjustment in 2025 indicates that while cash flow can be volatile, the underlying “accrued” revenue—what the government is legally owed—is growing more consistently than cash receipts might suggest. In fact Government revenue as a share of GDP has increased from 33.1% in 2022 to 34.8% in 2025. This indicates that revenue is currently outperforming the general growth of the economy.

Also, as can be seen in the below table also this is the first time since 2022, whereby the accruals based deficit ended up much lower from the cash based consolidated fund deficit, when the accruals adjustments where made. In previous year i.e in 2022, 2023 and 2024, this was never the case.

Thus, so far so good. With a final public deficit of €545 million and a 2025 provisional GDP at 24.53 Billion, we get a GDP to deficit of 2.2%. If the usual revisions are made to the 2025 nominal GDP, the GDP to deficit level could even go further down to around 2%.

As I had been repeating in my articles, considering the constant shocks the global economy is facing, resilience is key. Which is why beyond celebrating this excellent result, I believe we would do well to ensure that this can be preserved whatever comes our way.

The trajectory of Malta’s public finances from 2019 to 2025 illustrates a dramatic shift from a pre-pandemic surplus to a high-expenditure “crisis mode,” followed by a period of aggressive revenue-led consolidation.

Actually, the fiscal landscape can be divided into three distinct phases based on the data. There is first the pre-pandemic 2019 baseline. The period was when we had  a surplus of €67.1 million. Revenue and expenditure were closely matched at approximately 37% of GDP.

Then came the pandemic. As a response, Government expenditure surged to mitigate COVID-19 risks. In 2020, expenditure rose to €5,977.9 million (46.6% of GDP) while revenue fell to €4,677.8 million (36.5% of GDP). By 2021, expenditure peaked at €6,614.9 million.

Post 2021, the government entered a phase of rapid revenue growth. By 2024, revenue increased by €1,216.0 million in a single year to reach €7,784.2 million. By 2025, revenue reached €8,553.8 million, allowing the deficit to narrow to 2.2% of GDP, down from a peak of 10.1% in 2020.

The sustainability of this model depends on the relationship between revenue growth and the cost of maintaining a larger state apparatus. The data confirms that government revenue has, at times, grown faster than the economy itself. For example, in 2024, government revenue as a percentage of GDP rose to 34.6% from 32.0% in 2023. This rose slightly further to 34.8% in 2025. This suggests that revenue increases are not just coming from a larger economic “pie,” but also from more efficient tax collection. While the deficit-to-GDP ratio is shrinking, the absolute level of government expenditure has established a new, much higher “floor.” In 2019, the government spent €4,985.2 million. By 2025, expenditure had ballooned to €9,099.1 million. This 82% increase in spending over six years creates a structural dependency. If revenue growth slows while expenditure remains high due to social obligations or interest payments the fiscal position could quickly deteriorate.

In reality, continuous revenue growth at this velocity is unlikely for several reasons. Government Revenue remains heavily linked to GDP. While Malta’s GDP grew from €13.4 billion in 2020 to €24.6 billion in 2025, any cooling of the economy would immediately slash tax receipts. In 2025, government revenue boosts include “time-adjusted cash transactions” (an adjustment of €391.6 million in 2025) and surpluses from Extra Budgetary Units (EBUs) like the National Development and Social Fund. These may not be permanent fixtures of the revenue stream.

From an economic perspective, no economy can maintain high-percentage growth indefinitely without encountering structural limit. Growth requires labour and infrastructure. This puts the emphasis on productivity growth. If economic growth drops below 4% while spending stays high, the debt-to-GDP ratio will begin to climb again, potentially breaching the 60% limit in the long run. In conclusion, the current fiscal trajectory is sustainable as long as the economy avoids a slowdown or a recession. The larger, higher-spending public expenditure requires a high-octane economy just to maintain its current GDP-to-deficit and GDP-to-debt levels.

The Minister of Finance may be hesitant to commit to massive, multi-year capital projects because the current fiscal stability is built on a “high-expenditure/high-revenue” dependency. If the government locks into long-term, multi-billion-euro infrastructure commitments, it permanently raises the expenditure “floor” even further. Because the current revenue model is so tightly linked to high GDP growth, any cooling of the economy would immediately slash tax receipts while those infrastructure costs remain fixed. This creates a true chicken and egg situation. On one hand, it could be that the Minister of Finance fears that without constant high economic growth, the debt becomes unsustainable while on the other hand without infrastructure investment, the very economic growth required to fund the state’s current size will eventually hit a structural ceiling.

The post Time adjusted cash transactions first appeared on The Malta Business Weekly.

For Malta, the “downside risks” highlighted by the IMF are not merely theoretical – they represent immediate structural challenges.

The IMF notes a critical difference between this crisis and the 2022 energy shock. While 2022 saw a “steep supply curve” where prices could be brought down without a major slowdown, the 2026 supply curve appears much “flatter”. The IMF “reference forecast” now sits at 3.1% for 2026, a downward revision caused largely by the conflict. However, the IMF clearly outlines that if energy infrastructure is significantly damaged, global growth could plummet to 2%, bringing the world close to a recession.

Malta’s economy is fundamentally tied to its “connectivity”. The IMF identifies the direct effect of commodity price increases as a “textbook negative supply shock” that raises the costs of transportation and energy.

For Malta, which relies heavily on imported goods and international connectivity, the following global trends are most concerning. The closure of the Strait of Hormuz and damage to production facilities threaten an energy crisis on an “unprecedented scale” with global headline inflation projected to rise to 4.4% in 2026.

The IMF warns that “energy-importing countries” and those with “weaker tourism and business activity” will suffer most from the conflict’s spillovers. As a Mediterranean island, Malta is highly sensitive to the price of aviation fuel. The IMF notes that the direct effect of commodity price increases raises the cost of transportation. Sustained high fuel prices will lead to increased airplane ticket costs, potentially dampening the tourism boom Malta has been experiencing. Things could get worse if flights get cancelled due to the lack of aviation fuel from certain European airports. Moreover, higher inflation reduces the purchasing power of tourists from Malta’s core European markets, likely leading to reduced “discretionary spending” abroad.

A significant portion of the IMF report focuses on the urgency of rebuilding fiscal buffers. So far Malta has adopted a broad-based energy subsidies to protect households. However, the IMF explicitly warns that such measures are often “poorly designed and very costly for the public purse”. The IMF urges governments to shift from broad caps to support that is “temporary, targeted, and preferably delivered through existing social safety nets”.

To navigate this “profoundly changing economic and geopolitical landscape”, the IMF advocates for policies that are robust across multiple scenarios.

1. Aggressive Energy Diversification: The IMF emphasises that “accelerating energy transition” is a key pillar for energy security. For Malta, reducing dependence on global hydrocarbon transit routes is no longer just a green initiative – it is a national security priority.
2. Rebuilding Fiscal Buffers: Governments are urged to mobilise revenues and reprioritise expenditures to “replenish fiscal buffers for future shocks”.
3. Preserving Price Signals: The report argues that preserving price signals is essential to “transmit a critical market signal of scarcity” and encourage demand reduction.

I was recently following an interview with Economics Professor Steve Keen and I could not stop thinking on economic growth in Malta. Too often, we operate on the assumption that projected economic growth will occur regardless of external developments. However, this insightful interview clearly highlights several global macroeconomic forces that will shape the economic reality of any nation heavily reliant on international trade and energy imports. In this interview Professor Keen emphasises that our global production systems are far more fragile than economists realise. With the closure of the Strait of Hormuz, you have not only an energy choke point but also fertilisers. A war that cuts off a substantial amount of fertiliser supplies doesn’t just raise prices but it creates a physical shortage of food.

Malta, as an island nation, is particularly vulnerable to all this and no local policy can fully insulate a country from this magnitude of global contraction. So while macroeconomic growth may be externally dictated, Professor Keen suggests two ways to regain some degree of local control, for any country. He strongly advises moving away from oil dependency and investing in local solar power to insulate against energy price shocks and shortage and he also suggests that nations should look for ways to produce their own food to create a “bit of insulation” against global chaotic events.

In the view of Professor Keen, economic growth is currently at the mercy of geopolitical stability and resource availability. For a nation to have more control, it must shift away from a “fragile” globalised system towards a more self-sufficient model of energy and food production.

In conclusion, I believe the message is clear. Malta, like any country, needs to move beyond emergency responses toward a “comprehensive policy package”. By focusing on fiscal sustainability, labour upskilling and targeted support to create more supply resilience, Malta can mitigate the “acute macroeconomic trade-offs” that the IMF predicts will haunt the global economy for the remainder of 2026.

The post The 2026 IMF World Economic Outlook first appeared on The Malta Business Weekly.

In our collective psyche, the troubles of the distant Middle East often feel like a digital noise, filtered through the blue haze of our surrounding sea.

However, the luxury of distance has evaporated in today’s world as we have experienced even in recent years. The geography of our islands no longer grants immunity from global tremors.

The escalation of the Iran War, from the initial joint strikes on 28 February to the catastrophic closure of the Strait of Hormuz, has proven that while we may live on an island, we do not live in a vacuum. News coming in is not encouraging. The negotiations between the US and Iran in Pakistan have yielded no concrete way forward and Trump is now moving ahead to implement a total blockade in the Strait of Hormuz. This means that things are escalating further and it is very plausible to expect negative economic effects for at least the medium-term as a short-term solution is now rather difficult to envision.

The ripple effects of the conflict are no longer theoretical. They are manifesting in data points that are, or shortly will, directly impact everything and everyone.

The latest developing risk is the Jet Fuel shortage. Industry analysts warn of a systemic jet fuel shortage hitting the EU by May. For a tourism-dependent island, the threat of flight cancellations (already being considered by major carriers like Ryanair) is a direct hit to our connectivity. Without jet fuel, our vital “bridge” to the mainland effectively vanishes, also disrupting the supplies we rely on from air transport.

On the other hand the Maltese government remains the only one in the EU to have frozen fuel and energy prices through subsidised administered pricing, meaning that the fiscal cost is very likely to keep mounting, straining further our public finances. The recent DBRS credit agency report on Malta also highlight this point when saying: “Furthermore, potentially higher-for-longer global energy prices are a risk factor for the government’s fiscal balance given its fixed price energy policy. Maintaining the current freeze on domestic energy prices would necessitate higher energy subsidies, thereby adding to budgetary pressures.”

Malta is an import-dependent economy. The disruption of the Strait of Hormuz and the diversion of shipping routes around the Cape of Good Hope have added weeks to transit times and spiked freight costs. This isn’t just about delays, it affects fertilizer inputs for agriculture and raw materials for our manufacturing sector.

Despite subsidies, “imported inflation” is leaking into the local market. As shipping and production costs rise globally, the price of food and essential commodities in Maltese supermarkets will be felt. The European Central Bank has already revised its 2026 inflation projections upward, warning that a prolonged conflict could tip the overall Eurozone economy in recession.

In my humble view, in a world going from one crisis to another, we can no longer afford the “business as usual” approach where we assume the state will always be the ultimate shock absorber, which is the downside of subsidies beyond the peak time of a crisis.

Beyond dealing with the immediate Iran war induced crisis at hand we need to look ahead and take resilience more seriously. True resilience requires a fundamental shift in how we live, work, and plan for the future.

We must accelerate the transition from “subsidised fossil fuels” to “sovereign renewables”. Resilience means having a grid that isn’t tethered to the volatility of a Middle Eastern strait. Similarly, supporting local vertical farming and boutique agriculture isn’t just a “green” trend; it’s a national security imperative to ensure our food supply is not 100% at the mercy of global shipping lanes.

Malta’s implementation of the EU’s Critical Entities Resilience (CER) Directive must be prioritised. This involves “all-hazards” planning – meaning every major provider of water, digital services, gases and transport must have a redundant strategy for “Black Swan” events, such as a total cessation of shipping for 90 days.

Resilience also starts at home. In a world of volatile prices and “just-in-time” supply chains, the “business as usual” mindset is a liability. We must move from a culture of consumption to one of conservation, treating water and energy as precious, finite assets.

At a national and industrial level, we need to understand if and how we can beef up our dedicated strategic reserves of jet fuel and essential commodities to bridge any supply gaps created by global conflicts.

Our historic insular mindset was about looking inward to stay safe. The resilience mindset is about looking outward to stay prepared. By acknowledging that the smoke over the Persian Gulf eventually reaches our runways and our dinner tables, we can stop reacting to crises and start out-planning for when the next one will hit us. Many times I get the sensation that our baseline is based on the hope that our business-as-usual mindset will somehow carry us through – that by doing nothing, things will resolve themselves while we ride out the storm, hoping that our war chest will be enough to see us through and that nothing will derail our economic growth.

The post Resilience first appeared on The Malta Business Weekly.

Chapter 2 documents the development and implementation of a new analytical framework designed to strengthen the Council’s monitoring toolkit. In a small, highly open economy like Malta’s, where market dynamics shift rapidly, the MFAC identified the need for a structured instrument to synthesise diverse indicators into a coherent assessment. The resulting “heatmap” serves as both an early warning system and a monitoring tool to detect emerging macroeconomic and sectoral imbalances.

The methodology involves evaluating 27 distinct indicators across five thematic blocks – Prices and Competitiveness, Labour Market, External Balances, Credit and Financial, and Business Trends – against their long-run averages from 2010 onwards. By utilising Z-scores (measuring standard deviations from the mean), the Council can visually identify “heat” in the economy; large positive deviations appear in shades of orange, while negative deviations appear in blue. This iterative tool allows for a timely, quarterly assessment of whether the economy is operating at, above, or below its historical norms.

So far, the critical insights developed from this tool are that the Maltese economy continues to operate above its long-term historical average, but the “heat” of the rapid post-pandemic expansion is visibly cooling. This suggests a natural transition toward a more mature stage of the business cycle where growth rates align more closely with historical norms. Moreover, indicators signal persistent and extreme structural tightness in the labour market. Most importantly, while nominal wages increased by 4.1% in 2025, labour productivity growth has remained subdued. This has pushed Nominal Unit Labour Costs (ULCs) above their long-term average, posing a direct threat to Malta’s international price competitiveness. Finally, while house price inflation remains above historical norms, it is showing signs of deceleration. Crucially, building activity in Q3 2025 stood below its long-term average, indicating a property market transitioning toward more moderate expansion.

Chapter 3 provides a comprehensive examination of the evolution and composition of general government expenditure in Malta using the Classification of the Functions of Government (COFOG) framework. This international statistical classification groups spending by purpose such as, health, education, and social protection, rather than just administrative categories, offering deeper insight into how public resources are prioritised over time.

The analysis spans the period from 2000 to 2024 and applies a three-effect decomposition framework to disentangle the drivers of spending growth. This framework distinguishes between the GDP effect (spending increasing in line with economic scale), the government size effect (changes in the overall fiscal footprint relative to GDP), and the structural allocation effect (deliberate shifts in spending priorities across different functions). Additionally, the chapter categorises expenditure by its economic nature – rigid (salaries and pensions), operational (intermediate consumption), and discretionary (capital investment) – to assess the government’s flexibility in responding to future fiscal pressures.

The critical insights derived include that social protection, health, and education collectively accounted for 52.1% of total expenditure in 2024. Within social protection, old-age spending (pensions) is the dominant component, totalling €1,366.4 million in 2024 – a reflection of Malta’s demographic shift and a 49% increase in pension beneficiaries since 2010. Moreover, the economic affairs category recorded the fastest growth over the period, reaching 20.3% of total expenditure by 2024. This surge was primarily driven by transport infrastructure investment and energy price subsidies introduced from 2022 onwards.

A three-effect decomposition analysis revealed that the vast majority of spending increases were simply proportional to the expansion of the economy. Interestingly, the overall “size of government”, relative to the economy, actually declined over the period, with the expenditure-to-GDP ratio standing at 37.4% in 2024 compared to earlier years where it fluctuated between 40% and 42%. One has to see if this trend will continue in 2024, as 2025 has seen a steep acceleration of government spending.

Another insight is that intermediate consumption (the cost of running the day-to-day business of government) surged from 12.2% of the budget in 2000 to 19.8% in 2024. This suggests a growing portion of the budget is becoming “locked-in” to operational demands and outsourced contracts.

Finally, unfortunately government R&D expenditure remains a systemic weakness, hovering at less than 0.2% of GDP, drastically trailing the EU average of 0.7%.

In conclusion the MFAC warns that Malta’s current fiscal health relies heavily on strong revenue growth fuelled by domestic demand. As the new EU economic governance framework introduces stricter limits on net expenditure growth, the Council emphasises two strategic imperatives. First, the need to rebalance the growth model by transitioning away from population-driven growth toward a high-value, export-led, and productivity-driven model. Secondly, by enhancing the quality and efficiency of government spending, fiscal space can be preserved by ensuring that expenditure-based consolidations prioritise productive capital investment rather than non-productive recurrent expenditure.

The post Macroeconomic surveillance and fiscal evolution in Malta first appeared on The Malta Business Weekly.

I believe it is useful to understand how Malta’s public finance progressed in the last six years, from the last year before Covid in which we had a surplus, that is 2019, all the way to 2025.

The government’s revenue grew by roughly €3.18 billion over these six years. The engine of this growth has shifted from corporate tax in the early years to Social Security and VAT in the later years.

Year-on-Year Government Revenue (Millions of €)

As can be seen above, Government Revenue plummeted in 2020 due to the pandemic. The 2021 surge was not just recovery, but the start of a massive increase in Income Tax receipts from the financial and gaming sectors. Then in the 2023-2024 period VAT and Income Tax jumped significantly. As wages rose and prices for goods increased, the government’s “cut” grew proportionally.

Now in 2025, for the first time, Income Tax actually dipped (-€51m) while Social Security (+€148m) became the primary growth government revenue driver, likely indicating that while corporate profits may have stabilised (or possibly dipped), the labour market (employment volume) remained strong.

On the other hand, Government Expenditure has scaled more aggressively, rising from €4.88 billion to €8.90 billion. The primary culprit is Programmes and Initiatives, which now consumes nearly half of the entire budget. The Programme & Initiatives expenditure category acts as a “catch-all” for the government’s direct spending on social services, subsidies, and national obligations that are not related to civil service wages or the day-to-day running of a specific department.

Year-on-Year Government Expenditure Shifts (Millions of €)

As can be seen above between 2022 to 2025, the Programmes and Initiatives category exploded. This includes the energy and fuel subsidies and social benefit increases. Personal Emoluments (civil service wages) grew by 62% since 2019. In 2025 alone, this rose by €149m due to new collective agreements across health and education. While Interest payments stayed flat or fell until 2022, but as debt crossed the €10 billion mark in a higher-interest environment, the cost to simply service that debt (interest) has jumped 70% in just three years (2022 to 2025). In 2019, the government spent roughly €13.4 million per day. By 2025, that figure rose to €24.4 million per day.

The government finance 2025 data released on 27 March shows a worrying trend as total overall government revenue growth is slowing (+2.7%) while Expenditure growth is accelerating (+7.3%), as Income tax revenue has not grown in 2025. In 2025 government revenue has grown almost entirely dependent on Social Security contributions from a growing workforce and VAT.

Now some analysis of the sustainability of Malta’s public finances, in 2025 and in the near future, considering the present geopolitical scenario.

Malta’s economic reporting is characterised by significant GDP upward revisions as initial quarterly estimates are replaced by more comprehensive annual data. For 2023, the nominal GDP was initially reported at approximately €19.37 billion, only to be revised upward by 6.6% to a final figure of €20.65 billion. A similar pattern emerged for 2024, where the first provisional estimate of roughly €21.5 billion was eventually adjusted to €23.10 billion, representing a 7.4% increase.

As of the March data release, the provisional GDP for 2025 is estimated at €24.53 billion. If we apply the average revision rate from the previous two years (approximately 7%), the final GDP for 2025 is likely to be revised toward €26.25 billion by the time the final accounts are settled. Based on the NSO’s reported Consolidated Fund deficit of €823.9 million, this adjusted economic denominator would result in an annual deficit of 3.14% of GDP. This figure is particularly significant as it brings Malta remarkably close to the 3% threshold mandated by the EU’s Stability and Growth Pact, suggesting that while the absolute deficit increased in 2025, the sheer scale of economic expansion continues to provide a crucial buffer for national fiscal sustainability.

Looking forward, one has to consider that it is very likely that government expenditure would have to increase further in 2026, as it will have to pay higher fuel and energy subsidies as international oil and gas prices have soared due to the Iran war. In the meantime, if Malta has the predicted real economic growth rate of 3.8% in 2026 plus an inflation of 3.5% the nominal GDP for 2026 would be approximately €28 billion. If we were to assume that Malta would hit a higher deficit level of around €1 billion in 2026 (mainly due to increased fuel and energy subsidies), we would hit a deficit to GDP ratio of 3.5%-3.6%, which would delay our trajectory from hitting the 3% level.

Malta’s fiscal narrative between 2019 and 2025 reveals a sophisticated paradox: a government whose daily spending has nearly doubled – from €13.4 million to €24.4 million – yet remains anchored by an economy that consistently outpaces its own preliminary growth estimates. The transition from 2019 to 2025 highlights a shift toward a high-spending, subsidy-heavy model. However, the 2025 data signals a structural pivot that warrants caution. For the first time in this period, Income Tax revenue has dipped, leaving the state increasingly dependent on VAT and Social Security contributions from an expanding workforce to fund its obligations.

With Programmes and Initiatives now consuming nearly half the budget and debt-servicing costs jumping 70% in three years, the margin for error has narrowed. Looking ahead to 2026, rising geopolitical energy costs are expected to strain Malta’s fiscal sustainability, making it increasingly dependent on maintaining strong real growth (projected at 3.8%) to keep pace with mounting expenditure.

The 2026 fiscal outlook suggests that Malta is entering a high-stakes race between economic expansion and exogenous shocks. While a projected €28 billion nominal GDP provides a formidable defence, any further escalation in geopolitical energy costs could push the deficit toward €1 billion, potentially stalling the nation’s trajectory toward fiscal consolidation.

The post Malta’s fiscal tightrope first appeared on The Malta Business Weekly.

In economic theory, subsidies are primarily viewed as shock absorbers. When a sudden, exogenous shock (like a war or a pandemic) hits, the “Temporary vs. Permanent Shock” framework suggests that governments should intervene to prevent a “price cliff”. By absorbing the initial blow, the state prevents a downward spiral of reduced consumer spending and business insolvency.

However, subsidies are not intended to remain in perpetuity. According to the Principle of Market Signals, prices serve as essential information. When the state permanently masks the true cost of a resource:

• Incentives vanish: Consumers have no reason to conserve energy;
• Innovation stalls: Businesses feel no pressure to pivot to more efficient technologies; and
• Fiscal drag: What was meant to be a temporary bridge becomes a permanent weight on the national debt, reducing the country’s ability to respond to the next crisis.

Malta’s commitment to price stability has come at a significant fiscal cost. Below is the breakdown of the estimated expenditure on energy and fuel subsidies alongside the average spot price of Brent crude oil for those years.

This means that over four years we have spent €1.17 billion in energy and fuel subsidies.

Which brings about the important point of resilience. We are living in an era of “polycrisis”, where the world appears to hop from one geopolitical or environmental catastrophe to another. In this reality, a country’s greatest asset is resilience. Resilience is not just the ability to spend; it is the ability to have a deep and large enough “war chest” available exactly when the peak of a crisis hits.

To maintain this fiscal firepower, a strategic shift based on sound economic principles is needed. Both the IMF and the Central Bank of Malta have advocated for an “exit strategy” – moving away from universal, untargeted subsidies toward a more flexible model. This involves limiting or reducing subsidies during “peace” periods – times when energy prices are lower or the crisis is not at its peak.

Reducing the subsidy during milder periods serves two critical purposes:

1. Fiscal replenishment: It allows the government to reduce the deficit and build reserves, ensuring that when a massive shock (like the 2026 Iran war) occurs, the state has the financial strength to protect the most vulnerable while still managing to keep fiscal sustainability.
2. The inducement for change: Removing the “artificial safety net” during stable times acts as a powerful economic inducement. When businesses and households face even a gradual return to market-reflective pricing, the Return on Investment (ROI) for renewable energy and energy-efficient retrofitting becomes far more attractive.

The economic sense of subsidies lies in their timing. Using them to blunt the sharpest edge of a war-induced spike is sound social policy; using them to hide the reality of a changing energy landscape during periods of relative calm is a missed opportunity. By tapering support when the pressure is lower, Malta can build a more resilient economy – one that is both financially prepared for the next storm and equipped to outrun it.

The post The economic sense of subsidies first appeared on The Malta Business Weekly.