On November 6, 2026, the Malta Fiscal Advisory Council (MFAC) published Assessment Report No. 04/2026, evaluating the macroeconomic forecasts prepared by the Ministry for Finance for Malta’s Draft Budgetary Plan 2027.
The Council endorsed the Ministry’s headline real GDP growth forecasts of 4.1% for 2026 and 3.8% for 2027, finding them within its acceptable range. However, beneath these encouraging figures lies a more complicated economic picture, characterised by rising public expenditure, ambitious investment targets, mounting labour costs and persistently weak productivity.
While the headline forecasts appear credible, the Council raises significant concerns about the composition and sustainability of Malta’s economic growth. In particular, it questions the extent to which the economy can continue relying on fiscal stimulus and an expanding workforce without generating corresponding improvements in productivity.
The Council considers the overall balance of risks broadly balanced for 2026 and tilted towards the upside for 2027. However, this assessment reflects opposing pressures rather than an absence of underlying weaknesses.
One major concern relates to the Government’s ambitious public investment programme. The Ministry projects total real investment to increase by 10.2% in 2026 and 7% in 2027, supported by nominal public investment growth of 40.4% in 2026, exceeding €1 billion, followed by a further 27.7% increase in 2027 to €1.35 billion.
Delivering these targets will require public investment to increase by 54% in the second half of 2026 alone. The Council considers this timetable overly optimistic, pointing to bureaucratic bottlenecks, limited contractor capacity and the historical tendency to overestimate the execution of public capital projects.
At the same time, official forecasts assume a significant slowdown in government consumption. Real government consumption growth is expected to fall from 12.8% in the first half of 2026 to 3.5% in the second half, before contracting by 0.7% in 2027.
The Council questions whether such restraint is realistic. Government intermediate consumption, covering operational expenditure, was budgeted to increase by 12.2%, or €239.8 million, in 2026. Yet Consolidated Fund data showed that €223.8 million of this increase had already materialised during the first eight months of the year.
This suggests that operational spending could exceed forecasts, potentially offsetting delays in capital investment and pushing economic growth above official projections.
The productivity challenge
Perhaps the most significant structural concern identified by the Council is the widening gap between employment growth and productivity.
Employment is projected to increase by 4.2% in 2026 and 3.9% in 2027, while unemployment is expected to remain exceptionally low at 3.3% and 3.2%, respectively.
However, real labour productivity per person employed is forecast to contract by 0.1% in each of the two years.
At the same time, compensation per employee is projected to rise by 4.9% in 2026 and 4.6% in 2027, partly reflecting tight labour market conditions and cost-of-living adjustments. Consequently, real unit labour costs are expected to increase by 2.3% and 1.9%, respectively. This contrasts with the euro area, where real unit labour costs are projected to decline by 0.1% by 2027.
The implications for businesses are considerable. Malta is increasing its workforce without generating more real output per employee. This creates pressure on operating margins, profitability and international cost competitiveness.
The distribution of national income is also changing. Employee compensation is projected to increase from 46.6% of gross value added in 2025 to 48.9% by 2027, while the share represented by gross operating surplus is expected to fall from 53.9% to 51.2%.
For an economy increasingly dependent on labour-intensive activity, this trend raises questions about the long-term viability of its growth model.
Questionable assumptions about economic capacity
The Council also challenges the Ministry’s output gap projections.
Using the EU’s commonly agreed methodology, the Ministry forecasts that Malta’s negative output gap will widen from 0.7% of potential GDP in 2025 to 1.2% in 2026 and 2% in 2027.
The Council questions whether an economy experiencing historically tight labour market conditions, job vacancy rates averaging 3.3% and expanding domestic consumption can realistically be characterised as having increasing spare capacity.
These projections are largely influenced by assumptions that continued inward migration and capital investment will expand the economy’s potential productive capacity.
However, if public investment fails to materialise as planned, the actual capital stock and potential output will be lower, narrowing the projected negative output gap.
Misinterpreting this statistical measure as evidence of genuine economic weakness could encourage unnecessary fiscal expansion when the economy may already be operating under considerable capacity constraints.
From subsidies to structural reform
The MFAC acknowledges that Government support, including fixed retail energy prices, personal income tax adjustments and increased public consumption, helped protect household purchasing power during inflationary pressures.
Indeed, government consumption accounted for approximately half of the economic growth recorded in early 2026.
Nevertheless, the Council warns that prolonged reliance on fiscal support reduces available fiscal space and creates long-term structural liabilities.
A more sustainable approach would involve moving away from universal subsidies towards targeted assistance for lower-income households. Energy and fuel pricing policies should also encourage efficiency rather than remove incentives to reduce consumption.
A progressive tariff structure could ensure that excessive domestic and commercial energy consumption is charged closer to market rates, while protecting vulnerable households. This would also encourage businesses to invest in energy efficiency and private microgeneration.
Government must also address the continued expansion of operational expenditure. Strict spending ceilings on procurement, services and administrative supplies would help contain costs. Public sector recruitment should be reviewed to ensure that scarce labour resources are not absorbed into non-essential administrative roles at the expense of private-sector activity.
Fiscal incentives should similarly move away from untargeted consumer stimulus and towards investment that generates measurable productivity improvements.
Accelerated capital allowances for digital adoption, tax incentives for businesses achieving productivity gains and restructuring support for family businesses facing succession or operational challenges could help strengthen enterprise competitiveness.
Making public investment count
Another important finding concerns the effectiveness of public investment.
Despite substantial headline spending, real public infrastructure investment per capita increased by an average of just 0.3% annually between 2019 and 2025. Physical infrastructure has therefore struggled to keep pace with population growth, contributing to pressure on electricity distribution, transport networks and urban systems.
The challenge is not simply to spend more, but to ensure that investment is properly prioritised, implemented and delivers measurable economic returns.
Rather than launching numerous fragmented construction projects that exceed available contractor and engineering capacity, public investment should concentrate on critical infrastructure bottlenecks. Electricity distribution networks, the second electricity interconnector and other strategic projects should take precedence over less essential enhancements.
Procurement procedures should also be strengthened, with greater accountability for delays and appropriate consequences for contractors who repeatedly fail to deliver.
A transition towards higher-value activity
For private businesses, the existing model of relying on continuously increasing foreign labour to sustain expansion is reaching operational and infrastructural limits.
Government support through Malta Enterprise and other funding schemes should increasingly favour businesses investing in automation, artificial intelligence, advanced robotics and enterprise resource planning systems rather than models dependent on large numbers of relatively low-skilled employees.
However, investment in technology must be accompanied by investment in people. Vocational education and industry-led training programmes need to equip workers with the digital, technical and management skills required to operate increasingly sophisticated systems.
Upskilling the existing workforce would allow businesses to generate greater domestic value added per hour worked, improving competitiveness without relying exclusively on further population growth.
Importantly, reducing dependence on labour-volume expansion should not translate into blunt restrictions that disrupt essential services. Policy must distinguish between consumption-driven business models and indispensable sectors, particularly health-related services, that depend on third-country nationals.
Employers should also be encouraged to retain and develop their foreign workforce through training and improved career opportunities, reducing costly employee turnover and building institutional knowledge.
Ultimately, Malta needs a coordinated transition towards a more capital-intensive and knowledge-based economy. Such a shift would also help ease pressure on transport, healthcare, education, water and waste management systems, as well as the natural environment.
The MFAC’s assessment delivers an important warning: headline GDP growth of around 4% should not obscure the structural weaknesses developing beneath the surface.
Continued fiscal expansion and the constant addition of workers cannot remain the principal drivers of economic growth indefinitely. A sustainable model must instead prioritise productivity, infrastructure, skills development and higher-value enterprise.
The transition will require carefully calibrated fiscal incentives and coordinated reforms across education, infrastructure and planning. The very difficult balance will be to maintain the needed pace of economic expansion whilst undergoing this economic transformation using finely calibrated disincentives rather than blunt administrative shocks to prevent severe operational disruptions,whilst still ensuring that future growth delivers greater value, stronger competitiveness and improved long-term sustainability.
