The analysis presented in the Central Bank of Malta (CBM) Staff Insights report, Fiscal Developments in 2025 by Jessica Pace, provides a comprehensive assessment of Malta’s budgetary performance, long-term fiscal stance, and evolving structural balances.
Over the past decade, Malta’s fiscal trajectory has transitioned through several distinct phases. In the pre-pandemic period between 2016 and 2019, the general government maintained fiscal surpluses, reducing the debt-to-GDP ratio to 43.1% and creating sufficient fiscal space. This shifted abruptly in 2020 when the onset of Covid-19 necessitated massive expansionary support packages and created large primary deficits. The subsequent recovery between 2021 and 2023 saw fluctuating fiscal stances as pandemic aid was replaced by extensive energy subsidies to shield the economy from international price shocks. By 2024 and 2025, the government re-embarked on discretionary fiscal consolidation, unwinding major one-off support measures and steering the headline balance toward sustainable benchmarks.
On the positive side, Malta achieved a milestone in 2025 as the general government deficit narrowed to 2.2% of GDP from 3.4% in 2024, falling below the EU’s 3% Maastricht threshold for the first time since the pandemic. This consolidation prompted the European Council to formally close the Excessive Deficit Procedure against Malta in June. Overall revenue expanded by 9.4% in level terms to reach 34.8% of GDP, bolstered by strong corporate tax collection, sustained wage and employment growth that lifted household income taxes to 7.6% of GDP, and a tourism-driven rebound in value-added tax receipts. Furthermore, Malta’s debt-to-GDP ratio closed at 46.4%, standing substantially below the euro area average of 87.4%.
Despite these positive headline figures, this CBM report highlights several significant structural and medium-term fiscal risks that demand closer scrutiny. A primary vulnerability lies in the composition of government revenue, which has become increasingly dependent on direct corporate taxation. Corporate tax receipts reached an all-time high of 7.1% of GDP in 2025, driven largely by foreign-owned firms operating under specialised refund and group consolidation frameworks, alongside incentives connected to the EU Pillar 2 minimum effective tax rate. This leaves public finances exposed to shifts in international tax environments, multinational restructuring, or cross-border regulatory changes. This concentration risk is compounded by the permanent loss of revenues from the citizenship-by-investment scheme, which was terminated following an adverse European Court of Justice ruling in April 2025. Meanwhile, indirect taxes and social contributions remain structurally subdued relative to their historical pre-pandemic shares in output.
A deeper risk stems from the rigidity and momentum of public expenditure, which reached 37% of GDP in 2025. Recurrent spending remains elevated due to the 2025 civil service collective agreement, higher outlays on contractual services and residential care that pushed intermediate consumption to 8.1% of GDP, and accelerating pension commitments driven by an aging demographic. In addition, permanent energy subsidies continue to consume 2.2% of GDP – double their pre-pandemic baseline – creating a recurring fiscal burden. The report also points out that while annual expenditure growth in 2025 aligned with national targets, cumulative net expenditure growth continues to exceed the benchmark path set under the EU’s revised fiscal framework.
Finally, the favourable snowball effect, which historically offset borrowing costs through rapid nominal GDP growth, has started to weaken as economic expansion normalises and effective sovereign financing rates edge higher, leaving the fiscal balance vulnerable to future macroeconomic shocks.
The macroeconomic projections detailed in the Central Bank of Malta’s Outlook for the Maltese Economy (2026:3) establish direct structural and cyclical links with the previously mentioned fiscal review, Fiscal Developments in 2025. Together, the two documents provide an interconnected narrative of Malta’s transition from post-pandemic recovery to mapping out the shared drivers of growth and persistent downside risks.
On the positive side, the macroeconomic outlook reinforces the ongoing consolidation trajectory outlined in the 2025 outturn. Real GDP growth is projected to remain robust at 3.8% in 2026, 3.6% in 2027, and 3.8% in 2028, largely anchored by resilient domestic demand and private consumption, which accelerates to 4.3% in 2026. This underlying economic strength continues to feed directly into public revenue. The widening of income tax brackets and continued employment growth, which increased direct household taxes in 2025, are expected to support household disposable income and consumer spending through 2028. Consequently, the general government deficit is projected to narrow progressively from 2.2% of GDP in 2025 to 1.9% in 2026, 1.7% in 2027, and 1.6% by 2028, ensuring Malta remains safely below the 3% EU threshold. In parallel, the structural deficit is forecast to improve to 1.9% of GDP, while the debt-to-GDP ratio extends its downward trajectory to 44.2% by 2028, well beneath the euro area benchmark.
However, both of the mentioned CBM reports bring into sharp focus the common structural vulnerabilities and heightened risks facing the economy. A prominent link is the fiscal burden of energy policy. While the 2025 review noted that energy subsidies had locked in an expenditure floor at 2.2% of GDP – double pre-pandemic levels – the 2026 outlook reveals that these outlays will likely rise during the year due to renewed commodity price shocks following geopolitical conflict in the Middle East and the war in Iran. Because the government maintains fixed retail energy tariffs, any escalation in global fuel import prices passes straight through to public expenditure rather than consumer prices, presenting a direct downside risk of budget overruns.
Both reports also mention the downside in public expenditure rigidities and the public investment cycle. The 2025 outturn identified persistent upward momentum in intermediate consumption and public sector wages following the new civil service collective agreement. The 2026 outlook confirms that real government consumption will continue expanding by over 3% annually across the forecast horizon due to these same binding wage agreements and operational costs. On the capital side, the planned deficit reduction depends largely on a decline in government investment after 2026, following the completion of major Recovery and Resilience Facility (RRF) projects and the second electricity interconnector. This creates a sharp drop in capital expenditure from a 17% surge in 2026 to near stagnation by 2028, leaving fiscal targets exposed should project timelines slip or capital transfers re-emerge. Forecasting capital expenditure stagnation creates a severe disconnect between fiscal modelling and physical reality, as suppressing public investment directly clashes with the urgent need to address Malta’s mounting infrastructure bottlenecks. Relying on capital cutbacks as the primary mechanism for deficit reduction risks forcing sudden, unbudgeted emergency spending later to prevent infrastructure failures, which could ultimately derail the government’s medium-term consolidation targets.
Finally, revenue sustainability and macroeconomic imbalances intersect across both reports. As the 2025 review cautioned against an over-reliance on volatile corporate direct taxes, the 2026 outlook expects tax growth to track just at or below nominal GDP expansion. At the same time, employment growth is projected to moderate toward 2.3% as foreign worker inflows decelerate due to new migration policies, which may dampen future social contribution growth and compound demographic pressures on pension outlays. Coupled with upside risks to headline inflation from global supply disruptions and persistent services costs, these fiscal and macroeconomic interlinkages underline that Malta’s fiscal consolidation path remains highly sensitive to external shocks and rigid domestic spending commitments.
