This column has already referred to the importance of reigning in public expenditure in the recent article entitled “The silly season”. In that article, I referred to the Malta Fiscal Advisory Council’s (MFAC) Half-Yearly Report 2025 assessment, which highlighted the need to control spending growth. The MFAC’s half-yearly assessment provided a clear warning regarding the trajectory of public expenditure, highlighting that to comply with the new EU fiscal framework, the government should aim to limit net expenditure growth to “nearly zero” in 2025 to offset the sharp rise in 2024. However, the 8.8%expenditure growth observed in the first half of 2025 indicated the significant challenge and reinforced the Council’s call for continued vigilance in expenditure management for the remainder of the year to ensure compliance.
Right on cue, the European Commission has highlighted significant concerns over Malta’s expenditure path in its Opinion on the Draft Budgetary Plan (DBP) of Malta for 2026, published on November 25, 2025. The core issue highlighted by the Commission is the risk of material non-compliance with the maximum growth of net expenditure, which is key to concluding Malta’s Excessive Deficit Procedure (EDP). The fiscal path for Malta is set by the nominal growth rate of net expenditure. To exit the EDP, the Council had recommended specific maximum annual and cumulative growth rates. The issue at hand, is stemming from the cumulative growth rate. The EU commission’s recommended maximum cumulative growth rate (calculated from the base year 2023) is 20.4%, while Malta’s net expenditure is projected to increase by 27% in 2026. This means that the excess in cumulative expenditure translates into a significant deviation. In money terms this means that in 2023 the total public expenditure totalled €7.5 billion. By 2026 the maximum this could have increased as per EU commission guidelines was €9 billion. Now Government is projecting to have a total public expenditure of €9.3 billion in 2026, meaning it needs to shave of at least some € 300 million in public expenditure.
The Malta Fiscal Advisory Council (MFAC), in its November 17, 2025, Assessment of the Macroeconomic Forecasts within the Draft Budgetary Plan DBP 2026, formally concludes with the endorsement of the macroeconomic projections for 2025 and 2026 prepared by the Ministry for Finance (MFIN) as part of Malta’s Draft Budgetary Plan (DBP) 2026. Despite the endorsement, the MFAC identifies specific risks and holds differing views from the MFIN regarding the composition of the underlying growth drivers.
The Council assesses the balance of risks to real GDP growth in 2025 as tilted to the downside. This assessment is driven by the fact that the MFIN expects real GDP growth to accelerate significantly in the second half of 2025 (to 5.0%), up from 3.1% in the first half of the year, a rebound the Council believes may be difficult to sustain.
This downside risk for 2025 is rooted in several components. The projected acceleration in private consumption by MFIN relies on a strong projection for nominal compensation per employee (6.9% increase in 2025). The Council deems this wage growth projection to be optimistic, especially given the high base effects from one-off payments related to the education sector collective agreement paid late in 2024. If compensation growth is weaker, household purchasing power may be dampened, imposing downside risks on domestic demand and overall growth. Moreover, the sharp recovery in gross fixed capital formation anticipated in the second half of 2025 is heavily dependent on the realisation of public capital expenditure. Based on historical implementation patterns, achieving such a pronounced acceleration in public investment presents challenges. Furthermore, the combination of strong wage growth and stagnant productivity is projected to cause real unit labour costs (RULC) to rise markedly by 4.1% in 2025. Compared to the anticipated RULC trends in the EU, this dynamic poses risks to Malta’s cost competitiveness and capacity to expand export market shares.
The potential overall negative impact stemming from these identified downside risks across demand components is expected to be partially offset by a projected moderation in import growth. For 2026, the Council assesses the risks to GDP growth as broadly neutral. While the Council identifies potential upside risks in public consumption and gross fixed capital formation, particularly if projects are deferred from 2025, these increases are not expected to exert a material impact on real GDP growth. This is because the potential increase in these import-intensive activities is likely to be offset by a subsequent higher import growth.
Following its assessment, the MFAC issued two primary recommendations focused on long-term economic strategy. The Council notes that since the pandemic, economic growth has been predominantly driven by domestic demand, specifically private and government consumption, a pattern the forecasts suggest will persist in the short term. The Council emphasises that this reliance on consumption-led growth risks creating pressures on infrastructure and fiscal sustainability, while offering only limited productivity gains. Consequently, the Council reiterates that transitioning from relying on domestic demand to export-led growth remains a pressing priority. Achieving this requires greater effort to support innovation, diversify exports, and upgrade existing competitive sectors to ensure Malta retains its capacity to expand market shares across various economic sectors.
The Council also encourages the swift and coordinated implementation of measures aimed at addressing Malta’s structural economic challenges within a comprehensive strategic framework. To enhance productivity and long-term competitiveness, critical focus areas include addressing skill mismatches through education and training, fostering innovation and research, and advancing the twin transition towards digitalisation and environmental sustainability. The Council advises that fiscal policy should continue to act as a strategic enabler, facilitating productive investment and reforms that strengthen the economy’s capacity to generate sustained, innovation-driven, and environmentally responsible growth.
In conclusion, the government faces a critical, two-front challenge: It must execute a reigning in of public expenditure, to comply with EU rules, while simultaneously undertaking deep structural reforms to secure a sustainable, innovation-driven economic future. A tall order as we are not too far off from a general election, even if held in 2027.
