Beyond the deficit is Malta spending enough on the future?

Malta’s successful exit from the European Union’s Excessive Deficit Procedure has understandably attracted considerable attention. In a period marked by geopolitical instability, slowing European growth and heightened uncertainty across global markets, the achievement deserves recognition.

It reflects a significant improvement in public finances and confirms Malta’s position as one of the strongest-performing economies within the European Union. Yet, economics is often most interesting when it looks beyond the headlines.

Deficits matter. Debt matters. Fiscal sustainability matters. However, focusing exclusively on these indicators risks overlooking a far more important question. What kind of economy are Malta’s public finances helping to create? The latest assessment by the Malta Fiscal Advisory Council offers a useful opportunity to shift the conversation away from the size of the deficit and towards the quality of public expenditure. Ultimately, the long-term success of public finances is not determined by how quickly deficits fall but by whether today’s spending creates the foundations for tomorrow’s prosperity.

What is driving growth?

One of the most striking observations emerging from the Malta Fiscal Advisory Council’s assessment is the composition of Malta’s projected growth. The economy is expected to expand by 3.7% in 2026, a rate that remains significantly stronger than the European average despite a challenging external environment. However, almost all of this growth is expected to come from domestic demand, while net exports are projected to make a slightly negative contribution.

This distinction is important because it tells us something about the forces currently sustaining economic activity. For many years, Malta’s growth story was heavily supported by external demand through exports, tourism, financial services and internationally oriented sectors. Today, as global uncertainty increases and key trading partners face weaker economic conditions, domestic demand is becoming a far more important driver of growth.

Within domestic demand, government expenditure plays a particularly significant role. Government consumption is expected to continue expanding strongly, supported largely by compensation of employees and the ongoing provision of public services. This should not necessarily be viewed negatively. During periods of economic uncertainty, government expenditure can provide stability, support employment and help maintain confidence across the economy.

Indeed, one could argue that Malta’s relatively strong economic performance over recent years has been partly facilitated by the willingness of government to intervene when circumstances required it. Whether through energy support measures, social programmes or investment initiatives, public expenditure has helped cushion the economy from shocks that affected many of Malta’s European counterparts.

However, there is an important distinction between expenditure that supports current economic activity and expenditure that enhances future economic capacity. Both may contribute to growth in the short term, but their long-term effects can be very different.

This is where the fiscal debate becomes considerably more interesting.

Consumption or investment?

Not all government spending serves the same purpose. Some expenditure is designed to keep the system functioning. It pays salaries, funds operations, maintains services and supports the day-to-day activities of government. This expenditure is essential.

Other expenditure is designed to increase the economy’s productive capacity. It creates infrastructure, develops skills, supports innovation, strengthens institutions and improves the foundations upon which future growth depends.

Economists often refer to these categories as operational expenditure and capital expenditure. While both are necessary, the balance between them ultimately shapes the long-term trajectory of an economy.

The Malta Fiscal Advisory Council’s report highlights a tension that deserves greater attention. While government consumption continues to grow strongly, public investment projections remain ambitious and, historically, difficult to achieve. The council notes that public investment has repeatedly fallen short of forecasts over recent years, raising legitimate questions about implementation capacity and project delivery.

This observation may appear technical, but it carries significant implications.

A country can announce substantial investment programmes and still fail to realise their economic benefits if projects are delayed, scaled back or never completed. Economic transformation is not driven by allocations on paper. It is driven by execution.

The issue therefore is not whether Malta intends to invest. The issue is whether Malta is consistently converting fiscal resources into productive assets capable of improving long-term competitiveness.

This question becomes even more important when viewed in terms of productivity. The same report highlights that labour productivity growth remains exceptionally weak, while wages continue to rise faster than productivity. This dynamic places increasing pressure on competitiveness and raises concerns about the sustainability of future growth.

If productivity is not improving, then the economy must continue relying on other sources of expansion. Historically, Malta has benefited from strong labour market growth, increasing labour force participation and significant population growth. These factors have supported economic performance for many years. However, they cannot remain the primary drivers of prosperity indefinitely.

This is why the composition of investment matters. Expenditure directed towards education, research, innovation, digital transformation, transport efficiency and institutional quality generates returns that extend far beyond a single budget cycle. Such investments help economies produce more value without necessarily consuming more land, more infrastructure or more labour.

The Malta Fiscal Advisory Council’s observation that research and development expenditure remains extremely low by European standards should therefore concern policymakers. Malta frequently speaks about becoming a knowledge-based and innovation-driven economy. Yet ambitions alone do not generate productivity. Investment does. The gap between what a country says it wants to become and what it actually invests in often explains the gap between aspiration and reality.

Investing in tomorrow’s growth

Perhaps the most important message contained within the council’s assessment is that Malta’s next phase of development will require a different growth model from the one that brought it this far.

The country’s economic success over the past decade has been remarkable. Employment has expanded. Living standards have improved. Public finances have strengthened. Few European countries can point to a comparable record. But this success has created new challenges.

The model that delivered growth over the past decade relied heavily on expansion. More workers entered the labour market. More businesses were established. More people participated in economic activity. Population growth contributed significantly to both labour supply and domestic demand.

For a time, this model worked exceptionally well.

Today, however, its limitations are becoming increasingly visible. Infrastructure pressures are intensifying. Housing affordability remains a concern. Congestion continues to affect productivity and quality of life. Public services face growing demands. As a small island state with finite resources, Malta cannot rely indefinitely on growth through expansion alone.

The next stage of economic development must increasingly be driven by productivity.

This is where fiscal policy becomes strategically important. The ultimate objective of sound public finances is to create the conditions for sustainable prosperity. And that requires asking difficult questions about priorities.

Are we investing enough in the capabilities that will determine Malta’s future competitiveness? Are we directing sufficient resources towards innovation, research and human capital? Are we building the infrastructure required for a more productive economy? Are we strengthening the institutions that underpin long-term growth?

These questions are far more consequential than whether the deficit falls by a few additional decimal points.

Malta deserves credit for the progress achieved in restoring fiscal discipline and exiting the Excessive Deficit Procedure. Yet the country’s most important economic challenge is no longer fiscal consolidation. It is economic transformation.

Is today’s expenditure creating tomorrow’s growth? In the long run, prosperous economies are distinguished not by the size of their budgets but by their ability to convert public resources into productive capacity, innovation and opportunity.

That is the fiscal conversation Malta should increasingly be having.