The Malta Fiscal Advisory Council (MFAC) 2025 Annual Report provides a sophisticated and data-driven autopsy of the nation’s economic trajectory as it transitions from a high-octane, post-pandemic recovery into a more mature and tempered business cycle. This transition is analysed through two primary lenses: the institutionalisation of an advanced macroeconomic heatmap to detect systemic vulnerabilities before they crystallise, and a longitudinal COFOG-based study that maps the structural DNA of government spending over a quarter century. Together, these chapters provide an essential toolkit for understanding how Malta can balance robust domestic demand with the looming requirements of the reformed EU economic governance framework.
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.
