The ‘war chest’ and productivity

I hope I can use this week’s article to give my readers a dose of reality while we are all being bombarded by various proposals that makes one truly think that “money is no problem”.

Let us start with the facts. Below please find a quick overview of the trajectory of government finances between 2022 to 2025. One can see that on one hand government revenue increased by 43.7% between 2022 to 2025, while government expenditure increased by 31.8% for the same period.

Going forward one major unknown is how much Malta will need to spend in fuel and energy subsidies. In the height of the Ukraine war, between 2022 and 2023, Malta spent some €300-€400 million annually in such subsidies. Then come all the proposals flying around on a daily basis. A quick preliminary cursory estimate of the proposals put forward by each of the major political parties would cost the public purse something between €300 to €400 million annually in reduced tax revenue or increased government expenditure, if all are implemented at once.

If Malta’s economy is to experience a forecasted real GDP growth of 3.7% and assuming an average 3% inflation rate over the three years, Malta would hit a nominal GDP of €26.2b in 2026, €28b in 2027 and almost €29.9b in 2028. If this economic growth materialises as predicted, to remain within the 3% limit of annual deficit-to-GDP Malta could have annual deficits ranging from €800 to €900 million between 2026 to 2028. Assuming the 2025 baseline deficit of €545 million – achieved when energy and fuel subsidies had fallen to approximately €150 million – our so-called annual “war chest”, provided the projected GDP growth materialises, would amount to roughly €250-350 million per year. Which is why in my humble opinion, considering the instability and the unknown of the impact of the likely increased expenditure in fuel and energy subsidies in 2026, all the proposals flying around make some difficult reading. As I said above, all this is dependant that the forecasted economic growth for 2026 to 2028 will materialise as forecasted. As I write this I am reading the latest Moody’s credit rating report for Malta, which has reduced the 2026 economic growth forecast from 4% to 3.5% due to capacity constraints in tourism, labour shortages and geopolitical risks.

Besides the various eye-catching proposals by both parties, that impact government revenue and expenditure, there are also various proposals being put forward that will impact the labour market. These vary from extended maternity leave, paternity leave and also other rights in relation to flexible and remote working. I am not against such shifts, however, I am afraid that this could easily end up in a situation whereby we are putting the “cart before the horse”.

The below graph depicts the real labour productivity of Ireland, Denmark, Sweden, Malta and the EU average for the past years. You can see that Ireland stands in a league of its own, while Denmark is also on a strong upward trajectory, whereas both Sweden and the EU average have largely flatlined. Malta’s labour productivity trajectory has dipped in 2020 being the pandemic year, recovered a bit in subsequent years (but still not to pre-pandemic levels) and labour productivity is dipping down again in 2024 and 2025.

The challenge is clear. To be able to enjoy the benefits of an evolved labour market, we need first to boost our labour productivity by transforming our economy into growing further new high value-added economic sectors and by investing heavily in having present economic sectors become much more efficient by the use of technology. If we do not revert our present labour productivity trajectory and instead push through costly labour “reforms” we end up creating much more problems than the ones we are trying to address.

The data presented in this article serves as a stark validation of the Malta Chamber’s position in its open letter, issued on 2 May, to the leaders of Malta’s main political parties. By grounding its stance in hard facts and economic reality, the Malta Chamber has proven to be the leading balanced voice of reason in a landscape currently dominated by political posturing. Malta’s so called “war chest” is not infinite and Malta’s real labour productivity is dipping. It is within this context that the Malta Chamber rightly argues that implementing costly electoral proposals and labour reforms before boosting labour productivity does not serve the country’s common good.