IMF, childcare and housing affordability

The beauty of an economy is that it is all interlinked. I will try to illustrate these interconnections by examining recent topics highlighted in the IMF report on Malta, as well as free childcare services and housing affordability.

The International Monetary Fund (IMF) recently concluded its 2025 Article IV consultation with Malta, highlighting the microstate’s “robust momentum” with growth averaging nearly 7% over the last decade. This economic surge has been primarily led by tourism, online gaming, and professional services, heavily supported by significant inflows of foreign workers. However, the IMF warned that Malta’s labour-intensive growth model is approaching its limits. As the most densely-populated country in the EU, Malta faces mounting pressure on its infrastructure and public services. The IMF emphasised that future growth must shift toward productivity, specifically addressing persistent labour shortages and skills mismatches.

This point of the persistent labour shortages reminded me of the recent “firestorm” following comments by Gozo Bishop Anton Teuma. In a recent homily, the Bishop expressed concerns regarding the use of childcare centres for very young children, suggesting that parents who utilise them may be prioritising work over the personal care of their infants. This stance triggered an immediate debate among policymakers, who argue that childcare is an essential economic tool. Without it, the labour market would face even more severe shortages, as many families rely on dual incomes to navigate the rising costs of living and housing.

Incidentally, recently, a comprehensive working paper released by the Central Bank of Malta (CBM) provides the evidence needed to navigate this debate. The study, the first causal evaluation of the 2014 reform, reveals that the Free Childcare Scheme (FCS) has significantly boosted female employment probability.

The key findings from this CBM report include that the reform increased the probability of female employment by approximately 1.3 to 2.4 percentage points, with effects growing over time and peaking in 2016 and that such employment gains were disproportionately concentrated among single mothers and mothers with multiple children, subgroups that historically faced the greatest structural barriers to work. The CBM report also concluded that the FCS reform likely reduced Social Assistance for Single Unmarried Parents (SUP) claims by 1.2 percentage points and that the aggregate effect was mainly driven by new entrants into employment rather than the retention of those already working. The report also concluded that the FCS reform helped reduce pre-existing employment gaps by up to 26% for single mothers and 39.3% for mothers of two.

Derived from these CBM findings, several strategic inferences emerge regarding the future of the labour market. Since the FCS is highly effective at bringing mothers into the workforce, further mandates for extreme work flexibility should remain at the employer’s discretion. Moreover, the FCS should be strengthened because as outlined in the same CBM report, positive employment effects do not persist once a child turns three and eligibility ends and hence there is a clear need for state-funded “bridge” support, such as expanded Breakfast Clubs, to protect staff retention and investment in staff training done by private businesses. Moreover, to assist employers in a tight market, policy should pivot toward retention-based incentives, such as tax credits for employers that manage to offer the needed flexibility for parents who remain in full-time work throughout the early years of their children. Finally, in industries like manufacturing where remote work is impossible, robust and flexible childcare, with hours mirroring working shifts, remains the primary barrier to maintaining a stable workforce.

From a fiscal perspective, the free childcare service is a logical investment for the state. According to recent media reports, the government has signed a landmark agreement for the next four years (2026-2029) valued at €276.7 million. This results in an average annual expenditure of approximately €69.18 million.

With roughly 13,000 children in Malta under the age of two, the average annual amount the government would pay to families if this spending was diverted as a direct cash grant would be approximately €5,321 per year (or roughly €443 per month). This amount is far too low to induce one of the parents to stop working and stay at home, especially given current wage levels and the cost of living.

The economic returns are even more striking. Since the introduction of the scheme, the female employment rate has surged from under 50% before 2013 to nearly 75% by 2026. The CBM report on FCS concluded that the scheme has contributed to add approximately 6,200 women to the workforce who would otherwise have been inactive. Assuming these women earn the national average salary, the income tax and social security contributions they generate contribute significantly to the economy, meaning that a substantial part of the government subsidy for the free childcare is recovered by the income tax and social security payments made by such women added to the labour force.

In addition to these fiscal and demographic shifts, other social realities are fundamentally reshaping Malta’s landscape. A significant trend is the increasing dominance of women in higher education; in the 2023-2024 academic year, females comprised 55.3% of all tertiary students in Malta. This educational shift is even more pronounced at specific levels, with women outnumbering men by 10.6 percentage points in tertiary education. Furthermore, for every 100 male graduates in 2024, there were 134 female graduates, showing that women are becoming the most qualified cohort in the national talent pool. This progress indicates that for the modern Maltese woman, participation in the labour force is no longer driven solely by the need for extra household income to combat the rising cost of living. Instead, work has become a vital vehicle for self-realisation, personal growth, and professional identity. As women increasingly invest in their own human capital, the labour market has evolved from a financial necessity into a space where they seek to apply their high-level skills and fulfil their individual potential.

In addition to the above, the role of quality childcare in the early socialisation of pre-school children cannot be overlooked. As Maltese families continue to have fewer children – a trend reflected in the declining fertility rates – the traditional environment of large nuclear and extended families is becoming less common. In this shifting social landscape, childcare centres have become the primary arena for early socialisation, providing children with the necessary opportunity to interact with same-age peers. This early exposure to a collective environment is essential for developing social wellbeing and emotional intelligence. By learning to navigate peer dynamics, share resources and follow structured routines outside the home, children build the foundational skills required for school readiness, ensuring a smoother transition into the formal education system.

The free childcare CBM analysis study also mentions that the added 6,200 women to the labour force likely generated some €180 million in additional wage income for their families. This point made me think on the recent talk on housing affordability.

Recent reports and statements from the CBM, including the 2025/2026 Quarterly Reviews and Financial Stability Reports, suggest a complex “dual reality”: while the CBM maintains that the property market is technically not in a crisis or significantly overvalued, it acknowledges that affordability is deteriorating for new entrants and low-income earners.

In late 2025, the CBM stated that property prices have actually been undervalued by approximately 5% over the last three-and-a-half years relative to economic fundamentals. They argue that prices are broadly aligned with the country’s strong GDP growth and disposable income. A point of recent contention (January 2026) involved the CBM clarifying that 91% of households in the 18-34 age group are homeowners. However, they noted this refers to households – it does not account for the significant number of young adults still living with parents who have not yet formed their own households. Despite the “no crisis” stance, the CBM admits that low-income earners (earning below €25,000) and single first-time buyers are being increasingly priced out of the average-priced unit.

While the CBM uses the Residential Property Price Index (RPPI) based on actual deeds, other local reports (like the KPMG/MDA study often cited in CBM dialogues) provide a starker view of the price-to-wage gap.

On average various data points indicate that between 2017 to 2025, property prices have increased by 59% and wages have increase by 25% to 30% (differences by economic sector). This has led to a worsening of the price to income ratio. According to the CBM historical data and research bulletins, the price-to-income ratio for a first-time buyer couple in 2017 was approximately 5.4, while for single individuals, it was roughly 9.9. By 2024/5 this price to income ratio has increased to 8.1 for a first-time buyer couple to 14 for a single first-time buyer. Furthermore, recent studies also note that over one-third of first-time buyers now require direct financial assistance from parents to enter the market, indicating that wages alone are no longer sufficient for many.

Taken together, these points present a compelling picture when the connections between them are considered. A central argument in recent economic assessments like the IMF is that Malta’s current labour-intensive growth model is reaching its limits, warning that wage growth cannot continue to outpace productivity growth indefinitely as this makes Malta’s economy less competitive on the global stage.

This means that future growth must come from productivity gains and automation, meaning firms will not be able to simply “hand out” high wage increases to cover rising living costs without a corresponding increase in output. CBM projections in the latest Business Dialogue for 2026 show wage growth slowing to approximately 3.7% (down from peaks of nearly 6-7% in 2024). This mandatory “wage cooling” creates a dangerous pincer movement for the average resident. While wages are expected to moderate to the 3%-4% range by 2026 to protect national competitiveness, property prices in many segments (specifically apartments) have continued to grow at 5%-7%. Property prices are unlikely to drop because construction costs remain high due to labour shortages If wages slow down but property prices do not, the Price-to-Income Ratio will naturally worsen.

The current debate surrounding Malta’s economic growth model and social infrastructure represents a defining crossroad for the nation. As the IMF has pointed out, the era of labour-intensive growth, driven by sheer numbers, is reaching its natural limits. Turning back the clock to a model of maternal inactivity is not only a regressive social step but a fiscal impossibility in an economy where dual incomes are now a prerequisite for housing affordability and basic economic survival. The “no-brainer” success of the Free Childcare Scheme, which activates thousands of our most educated citizens and generates tens of millions in annual tax revenue, proves that the way forward is to deepen participation, not retreat from it.

However, for this model to remain sustainable, Malta must pivot from volume to value. The primary solution to the “pincer movement” of cooling wages and rising property prices is a massive, nationwide investment in productivity through digital solutions and automation. By increasing the value of every hour worked, employees can command higher salaries that outpace the cost of living without eroding national competitiveness. This surge in productivity will, in turn, provide the state with the enhanced fiscal revenue needed to fund the next generation of social support: expanded “bridge” services, flexible work incentives, and robust infrastructure for working parents. The path forward is not to discourage parents from working, but to empower them through an economy that is smarter, more efficient, and relentlessly focused on productivity growth. Malta’s future lies in creating a high-value ecosystem that rewards self-realisation and provides every family with a genuine pathway to prosperity.