I was reading with interest the recently published Central Bank of Malta (CBM) article entitled Decomposing the largest government expenditure items by Laura Bigeni.
Between 2022 and 2025, three core expenditure categories under the European System of Accounts (ESA 2010) framework – compensation of employees, intermediate consumption, and social benefits – formed the backbone of Malta’s public finances. Together, these three items accounted for just over two-thirds of total government expenditure and represented roughly 29% of Malta’s Gross Domestic Product (GDP). The general government accounts compiled by the National Statistics Office (NSO) capture the operations of central government ministries and departments, local councils, and Extra Budgetary Units (EBUs), which are legally distinct non-market units with full account sets that can incur liabilities and generate non-tax revenues. Examining the granular sub-components of these three expenditure pillars reveals distinct structural drivers across the Maltese public sector.
By 2025, total compensation of employees reached €2,408.7 million, marking a cumulative nominal expansion of 31.1% (€571.9 million) over the 2022 baseline. Despite this absolute expansion, public sector wage expenditure, as a share of GDP, contracted slightly from 10.2% in 2022 to 9.8% in 2025, demonstrating that nominal economic growth outpaced employment cost expansion over the full horizon. The growth dynamic was driven by two structural mechanisms: net headcount expansions and shifts in average wage levels.
General government headcount expanded continuously between 2022 and 2025. Recruitment was concentrated in public administration (NACE 84), education, health, and residential care activities. Headcount growth within NACE 84 was propelled by institutional capacity additions within ministries as well as entities under ministerial remits, notably transport and education authorities. EBUs and local councils also accelerated their contribution to total headcount expansion in 2024 and 2025 compared to the preceding two years. Across the entire 2022-2025 period, net employment additions accounted for slightly less than one-third of total wage bill growth.
The primary catalyst for wage bill growth, however, was average wage expansion, which was dictated by multi-year collective agreements. The overall outlay peaked in 2024 with a year-on-year increase of €266.9 million, driven by a 12.1% jump in average compensation. This spike was overwhelmingly caused by the implementation of the 2024 educators’ collective agreement, which entailed significant rate upward revisions and substantial backdated wage arrears for over 16,000 State-employed teaching, administrative, and support staff. This was followed by the broader 2025 civil service collective agreement affecting approximately 33,500 employees, alongside sector-specific agreements for the Police Force and nursing staff.
Intermediate consumption – representing operational purchases of goods and services used to deliver public services – exhibited the steepest rate of expansion among all major categories. Spending rose by 56.8% (€740.4 million) between 2022 and 2025, climbing to €2,043.9 million. Consequently, intermediate consumption expanded as a proportion of GDP from 7.2% in 2022 to 8.3% in 2025.
From an industrial classification (NACE) perspective, public administration (NACE 84) accounted for the single largest share of growth, explaining nearly the entire increase in 2022 and over half of the expansion in 2025. From 2023 onward, health (NACE 86) and residential care activities (NACE 87) generated strong, steady upward pressures on procurement volumes.
Decomposing intermediate consumption by functional spending category highlights the operational predominance of State entities.
Social benefit expenditure grew by 29.2% (€449 million) between 2022 and 2025, totalling €1,988 million. Because nominal economic growth remained robust, social transfers as a ratio to GDP declined from 8.6% in 2022 to 8.1% in 2025.
Cash transfers constituted the bulk of total spending and served as the main engine of expansion. Retirement and entitlement payouts grew consistently, driven by statutory Cost-of-Living Adjustments (COLA), supplementary discretion-based pension increases above baseline COLA, and an expanding pool of retirees. Beneficiaries of the primary entitlement – the two-thirds pension – grew by approximately 2,000 individuals annually, expanding from 58,000 in 2022 to nearly 64,000 in 2025. This demographic growth was partially counteracted by the statutory, phased increase in the minimum retirement age to 64 in 2022 and 65 in 2026.
Other non-pension cash benefits also expanded, including elevated child allowances, in-work benefits, stipends, carers’ grants, disability assistance, and the targeting mechanism introduced in 2022 – the additional COLA targeted at low-income households.
Conversely, unemployment benefit outlays remained negligible due to tight labour market conditions and record-low unemployment. Non-contributory social assistance spending grew by only €6 million over the timeframe, while total beneficiaries fell by approximately 1,700, assisted by structural labour market initiatives like the tapering of the benefits scheme.
Social benefits in kind maintained a small relative share, with growth peaks in 2023 driven by policy expansions in free State-sponsored school transport and generalised childcare provision.
The structural trends detailed in the Central Bank of Malta’s analysis carry important implications for public finance management, structural expenditure rigidity, and long-term fiscal sustainability.
A key insight from the CBM study is the entrenched rigidity of Malta’s primary spending lines. Increases in employee compensation and cash social benefits are structurally inelastic downward. Multi-year collective agreements (such as the civil service and educators’ contracts) lock in higher baseline wage floors and recurring allowance structures for years. Similarly, base pension increases and indexation mechanisms permanently adjust the expenditure baseline upward.
While nominal GDP growth temporarily contained these items as a percentage of GDP between 2022 and 2025, these non-discretionary commitments create an asymmetrical fiscal risk. If nominal GDP growth slows, these rigid outlays will automatically ratchet up the overall spending-to-GDP ratio, squeezing the fiscal space available for public capital investment, that is so much needed to counterbalance the stress of a growing economy.
Because baseline commitments like payroll and social benefits are structurally rigid, any economic slowdown or disruption to corporate and personal income tax inflows would create severe, asymmetrical fiscal risks. Such a revenue shock would rapidly blow out the fiscal deficit, forcing sharp public debt escalation or disruptive expenditure cuts.
Unlike civil service payrolls or statutory social benefits, intermediate consumption is nominally considered a discretionary expenditure item. Yet, it recorded the highest rate of growth (+56.8%), expanding significantly as a share of GDP. A substantial portion of this growth stems from EBUs.
Because EBUs operate with autonomous budgets outside direct departmental line-item treasury control, their rapid expansion introduces operational risks into government finances. While EBUs generate non-tax revenues that offset part of their fiscal burden, the current level of disaggregated reporting makes it challenging to evaluate whether their intermediate operational outlays, such as consultancy, professional services, and operational maintenance, deliver proportional economic value.
To maintain fiscal discipline under the revised EU Framework for Economic Governance (Directive EU 2024/1265), the State will likely need to enforce systematic spending reviews and enhanced reporting standards (for example, within the annual Economic Survey and Half Yearly Report) specifically targeted at EBUs.
The steady addition of roughly 2,000 new two-thirds pension beneficiaries each year underscores ongoing demographic aging. Although recent increases in the legal retirement age (reaching 65 in 2026) provided temporary fiscal relief, statutory retirement age adjustments have reached their current legal ceiling.
Going forward, organic demographic pressures on cash social benefits and public health spending (NACE 86/87) will compound. Without further structural reforms to boost productivity, lengthen labour market participation, or streamline State procurement, health and pension costs could create persistent, structural spending pressures on Malta’s public finances.
During the general election campaign and the period leading up to it, I observed several…
On 17 July the European Commission published its long-awaited review and proposed revisions to the…
The European Commission today endorsed Malta's Social Climate Plan - the fourth national plan adopted…
The Malta Chamber of Commerce used a meeting with Opposition Leader Alex Borg and the…
The government this week will publish revised regulations governing the classification of farmers and livestock…
Construction of the new Organic Processing Plant has officially begun, with site mobilisation, excavation works,…