The Prime Minister Robert Abela was recently quoted as saying that the ongoing fuel & energy subsidies are key to maintaining Malta’s economic competitiveness when stating. “If the economy isn’t growing, this is the kind of help you’d have to cut first,” This remark fits neatly within the practical and theoretical limitations of Keynesian economics, particularly in a small, open economy like Malta’s.
Keynesian economics, rooted in the theories of John Maynard Keynes, advocates for active government intervention during economic downturns. This usually takes the form of fiscal stimulus—government spending or tax cuts intended to boost demand. Subsidies, particularly for essential goods like fuel & energy, are typical tools in the Keynesian playbook, intended to keep consumption high and businesses operational during periods of uncertainty.
The underlying logic is cyclical: during economic slumps, governments should run deficits to stimulate demand, while during economic booms, they should run surpluses to rebuild fiscal space and reduce public debt. However, this is one of the model’s most frequently ignored assumptions—and a major source of long-term risk.
In practice, the political will to tighten fiscal policy during times of growth—by cutting spending or raising taxes—is often absent. Governments rarely run budget surpluses in good times, preferring to maintain or expand popular spending programs. As a result, public debt accumulates across cycles rather than being managed countercyclically.
The PM’s statement underscores this challenge. He argues that Malta’s strong economic performance allows the government to maintain fuel & energy subsidies, but there’s little indication that a phase-out or fiscal consolidation will follow during continued growth. This reveals a key limitation of Keynesianism: it assumes ideal behaviour from policymakers that rarely materialises in democratic settings. Add to that the logical counter argument that this also means that should economic growth falter, such fuel & energy subsidies would become even more unsustainable, thus creating the typical situation of “when it rains, its pours” as higher fuel and energy costs would be passed onto the final customer in a period of slower economic growth.
Subsidies also come with long-term costs. They distort market prices and disincentivise investments in energy efficiency and renewable alternatives. Over time, this weakens Malta’s transition to a greener and more sustainable economy. Moreover, once subsidies are in place, they create political dependencies that make them difficult to withdraw, even when they are no longer economically justifiable.
Rather than rely indefinitely on subsidies, Malta would benefit from a shift toward structural reforms that enhance long-term competitiveness. This theme of structural reforms was also a general theme in the recently published EU Commission Country report. This report outlined that while the Maltese economy is maintaining strong growth momentum driven by domestic demand and export performance, it faces several key policy challenges that require significant structural reforms. These reforms are needed to tackle challenges related to significant labour and skills shortages that are hindering competitiveness and future growth, low investment in research and innovation which is among the lowest in the EU, businesses facing considerable administrative & regulatory burden and lengthy judicial proceedings, slow progress on the green transition with low renewables uptake, transport congestion and social challenges like housing affordability, to mention a few.
Whilst the Prime Minister’s comment was intended to justify a short-term economic policy, it highlights a broader problem: Keynesian economics assumes political discipline that rarely exists. Without the will to run surpluses and reduce debt during growth periods, fiscal policy becomes pro-cyclical and vulnerable. For Malta to ensure long-term economic and fiscal resilience, it must look beyond subsidies and embrace forward-looking, structural reforms.
