Malta’s economic landscape

Malta’s economy is currently at a critical juncture, navigating complex challenges. A review of recent Central Bank of Malta (CBM) publications – Energy Subsidies in Malta, The Economic Impact of Malta’s 2025 Personal Income Tax Reform, Business Dialogue 2025 Vol. 5 No. 3 and Expected Impact of Global Tariffs – reveals a series of interconnected policy considerations and economic realities that collectively shape the nation’s path forward.

The Energy Subsidies in Malta discussion paper highlights the government’s fixed energy price policy, introduced in response to global energy crises. This policy successfully shielded households and firms from extreme retail energy cost increases, supporting economic activity and reducing inflation during 2022-2023. However, these benefits have come with significant costs. The subsidy regime is estimated to have increased the public debt-to-GDP ratio by approximately 4 percentage points by 2024. Moreover, it has suppressed market signals, reducing incentives for energy efficiency and investment in renewable energy, thereby slowing progress toward Malta’s climate targets. The paper advocates for a phased, well-communicated exit strategy, combining targeted social support and renewable subsidies, as the most balanced approach for fiscal sustainability, energy efficiency and alignment with EU goals.

The Economic Impact of Malta’s 2025 Personal Income Tax Reform examines the changes to personal income tax (PIT) brackets. The 2025 budget increased the tax-free thresholds and raised the lower limits of the 15% and 25% tax brackets. Simulations suggest that this reform will decrease the average tax liability by €595 per taxpayer and increase disposable income for affected households by €988, primarily benefiting middle-income earners. The reform is also expected to enhance the tax system’s redistributive capacity, reducing income inequality and poverty rates. While the direct cost to government revenue from PIT is estimated at €168 million this year (0.7% of nominal GDP), the paper also indicates a net positive effect on real GDP of up to 0.4% due to increased consumption and hours worked.

The Business Dialogue 2025 Vol. 5 No. 3 provides insights into the sentiment of non-financial corporations in Malta. Between April and June, business activity showed varied performance across sectors, with service-oriented firms performing strongest. While expectations for improved activity slightly diminished, rising input costs, particularly labour costs due to a tight labour market and challenges in attracting skilled workers, remain a widespread concern. Investment plans saw a decrease, driven by Capex, expansions, efficiency improvements and diversification needs. Economic uncertainty and increased competition are also reported as primary challenges.

The Expected Impact of Global Tariffs article, featured in the CBM Business Dialogue, assesses the implications of US government tariffs on Maltese companies. Despite Malta having a negative trade balance with the United States, the direct impact of tariffs on Maltese exports is relatively low due to a significant portion of goods being exempted. Many firms emphasised that their supply chains are well-established within the EU or neighbouring regions, conducting transactions in euro, which provides some insulation from currency volatility. However, uncertainty remains the most prominent theme, with companies acknowledging that broader macroeconomic developments, such as shifts in global demand, could eventually influence their operating environment.

These papers collectively paint a picture of an economy where domestic policy decisions and global economic shifts are deeply intertwined. The energy subsidies, while providing immediate relief and supporting economic activity, are fiscally burdensome and disincentivise crucial green investments. This directly impacts the long-term business outlook, as firms face dampened signals for energy efficiency. The gradual withdrawal of these subsidies, as proposed, needs to be carefully managed to avoid negative impacts on both households and businesses, which are already contending with rising input costs and economic uncertainty.

The personal income tax reform, which aims to boost disposable income and consumption, could have been used as a means to partially offset any reduction in purchasing power from a partial phasing out of energy subsidies. This would have demonstrated a coordinated approach to supporting household finances. However, we now have a fiscal cost of the tax reform plus an ongoing strain on public finances from energy subsidies.

Business sentiment, particularly concerns about rising input costs, mainly due to labour costs, underscores the need for stable and predictable policy environments. The discussions around global tariffs further highlight external vulnerabilities, even if the direct impact is limited. The pervasive uncertainty reported by businesses suggests that any significant policy shifts, such as changes to energy subsidies, need clear communication to allow firms to adapt their investment and operational plans effectively.

The collective intelligence derived from these reports suggests that Malta’s economic resilience hinges on strategic policy synthesis. The current challenges – fiscal sustainability, green transition, maintaining competitiveness and addressing labour market pressures – cannot be tackled in isolation.

Energy subsidies necessitate careful fiscal management. Redirecting fiscal savings from a tapered subsidy exit towards green capital subsidies, as explored in the energy paper, presents a dual benefit: easing fiscal pressure while accelerating the green transition. This aligns with global sustainability goals and can create new economic opportunities. On the other hand, while the income tax changes are intended to boost domestic purchasing power, their full impact will only be realized if external economic factors, such as global trade dynamics, are effectively managed. The fact that Maltese firms are somewhat insulated from direct tariff impacts is a strength, but policymakers must remain vigilant to broader shifts in global demand, especially European countries we trade with and investor sentiment.

The recurring concern about skilled labour shortages and rising wage demands in the Business Dialogue underscores the importance of human capital development. Policies promoting education, training, and labour market flexibility will be crucial to supporting business growth and ensuring that the benefits of tax reforms and potential economic expansion are broadly shared. Efficiency improvements, also a driver for investment mentioned by businesses, tie back to the need for better energy efficiency incentives that the current subsidy regime disincentivises.

In conclusion, Malta faces a nuanced economic landscape where short-term interventions have provided stability but created long-term dependencies. The intelligence derived from these Central Bank of Malta analyses points towards a need for integrated, forward-looking policies that prioritise fiscal sustainability, accelerate the green transition, and foster a resilient business environment capable of adapting to both domestic reforms and evolving global dynamics. A coordinated approach, leveraging insights from economic modelling and direct business feedback, will be vital for charting a course towards sustained prosperity.