After the budget hubris, reality knocks on the door

Clyde Caruana told us there was “more to come” when delivering the budget last month as his colleagues around him banged on their desks in approval. In his usual self-confident style, the finance minister spoke triumphantly on the budget measures he was presenting. 

There was reason to be upbeat. Caruana delivered a massive €160 million tax cut for parents that will be spread over three years, pension increases over and above the cost-of-living adjustment, a social benefits expenditure that will reach €2.6 billion next year, the retention of energy subsidies and €100 million in incentives for businesses, among other measures—and all this while forecasting a deficit in 2026 that will go below the 3% EU threshold. 

Malta’s fiscal trajectory, economic growth and debt ratio will continue to defy the odds in 2026. The headline figures suggest Malta will be among the best performing in the EU. 

Indeed, in the post-budget press conference, we were told that fiscal prudence meant that Malta could exit the excessive deficit procedure (EDP) earlier than expected. 

But after the hubris came reality knocking on the door. Indeed, there was ‘more to come’ and it was delivered a month later by the European Commission. 

In its opinion published last week as part of the European Semester Autumn Package, the commission said Malta’s budget for 2026 risks being non-compliant with European Council recommendations to exit the EDP. 

Malta is not expected to meet the agreed expenditure threshold on one of two metrics used to assess fiscal compliance with EU rules. 

While Malta’s net annual expenditure in 2026 is projected to increase by 4.6%, well within the maximum growth rate of 5.8% recommended by the council, it is expected to fall foul of expenditure levels determined in cumulative terms. 

Malta’s net cumulative expenditure is projected by the commission to increase by 27% in 2026 when compared to 2023. This is above the maximum cumulative growth rate of 20.4% recommended by the council. 

The commission said this slippage corresponds to a cumulative deviation of 1.5% of GDP, which is significantly above the 0.6% GDP threshold set for 2026. 

As a result, the commission warned that Malta’s budgetary plan was “at risk of material non-compliance” and urged the government to take corrective measures within the coming year. 

In other words, Caruana needs to revisit his budget and identify expenditure cuts to get the country back on track of fiscal compliance. Failure to do so could lead to heightened scrutiny by the commission on Malta’s finances and as a consequence leave less room for autonomy. 

The last time the country faced a similar predicament was in 2012, when the Nationalist government had to find €40 million in spending cuts after it passed that year’s budget. Admittedly, the circumstances back then were markedly different since Malta was experiencing sluggish economic growth, higher unemployment levels and had a debt-to-GDP ratio of more than 70% (it currently stands at 47.1% of GDP). Fiscal compliance rules required the Nationalist government to take heed of the European Commission’s warning, resulting in budget cuts to several public authorities and government programmes. 

Fiscal prudence requires an approach that ensures every euro that is due is collected and expenditure to be judicious. The commission’s cautionary autumn note raises questions about the long-term sustainability of expenditure levels. 

We need to ask ourselves the uncomfortable questions. Are we sure that every euro budgeted for government entities is being spent wisely? Do we have too many entities with overlapping functions and administrative costs that are unnecessarily multiplied? Is money being wasted on persons of trust, studies and reports the country does not need? Does it make sense to have universal fuel subsidies? Is enough being done to curb abuse of social benefits? Is expenditure being directed to encourage a shift to a value-based economy that pays better but is less labour intensive? 

Caruana does not have the same problems of his predecessor in 2012. The economy is growing, unemployment is non-existent and Malta has a significant fiscal buffer as a result of the low debt-to-GDP ratio. The annual deficit is also under control but a course correction is required nonetheless. 

If Malta ignores the commission’s warning it will only be doing so at its own peril. Taking timely action now will avoid having to take more drastic measures in the future. Maybe it’s time for some sobriety after the desk-banging.