The cracks beneath Malta’s growth

Malta recorded real GDP growth of 4% in 2025, with the European Commission forecasting further expansion of 3.7% in 2026. Unemployment remains among the lowest in the EU, labour market participation continues to increase, and the public finances have improved considerably. These are genuine achievements that should not be underestimated but the Pre-Budget Consultation Document for 2027 contains another, less reassuring story. 

Beneath the impressive headline numbers, cracks are beginning to emerge in the productive capacity of the Maltese economy. They do not point towards an imminent crisis, but they raise fundamental questions about the sustainability of our growth model and its ability to deliver lasting improvements in living standards. 

The most revealing figures concern productivity. Labour productivity, measured through real value added per employed worker, increased by 2.2% in 2023, slowed dramatically to just 0.2% in 2024 and contracted marginally by 0.1% in 2025. In several sectors, employment expanded faster than real output. This is a significant development because productivity ultimately determines an economy’s capacity to generate higher incomes without continuously increasing the resources it consumes. 

Malta has become exceptionally successful at expanding economic activity by adding workers, businesses, tourists, buildings and consumption. However, an economy cannot indefinitely improve prosperity simply by increasing its inputs. At some point, growth must increasingly come from producing more value with the resources already available. 

An even more revealing comparison emerges when looking beyond GDP growth towards European productivity levels. In 2024, Malta’s GDP per capita, adjusted for purchasing power, stood at approximately 110% of the EU average. Yet output per hour worked on mainland Malta reached only 84% of the European average, falling to around 70% in Gozo and Comino. These indicators measure different aspects of economic performance and should not be interpreted as directly interchangeable.

Nevertheless, the contrast is instructive. Malta has achieved impressive levels of economic activity and income per inhabitant, supported by high employment participation and sustained expansion, without achieving equivalent productivity per hour worked. It is precisely this distinction that should concern policymakers. Economic prosperity built on greater participation is valuable, but its capacity to deliver future improvements in living standards depends increasingly on productivity. 

The wage figures reinforce this concern. According to Eurostat, Malta’s average annual full-time adjusted salary stood at approximately €33,499 in 2024, compared with €39,808 across the EU. Maltese salaries therefore remained around 16% below the EU average in nominal terms. This comparison does not account for differences in purchasing power or household circumstances, but it exposes an important challenge.

Despite years of exceptional economic growth, Malta has not translated its performance into equivalent levels of average remuneration. The objective should certainly be higher wages, but the question is how those increases can be sustained. Higher wages ultimately require an economy capable of generating greater value per worker. Without that improvement, wage increases risk translating into higher prices, reduced profit margins or deteriorating competitiveness rather than durable gains in purchasing power. 

The Pre-Budget Document provides evidence that this tension is already becoming visible. Nominal compensation per employee increased by 7.6% in 2024, while productivity grew by only 0.2%. In 2025, compensation increased by another 4.2% despite a marginal contraction in productivity. Part of this development reflected public-sector collective agreements and related payments, and higher compensation is not inherently undesirable. Indeed, an economy aspiring towards higher-value activities must offer attractive remuneration.

However, when compensation consistently increases faster than productivity, the cost of producing goods and services comes under pressure. This is reflected in Malta’s real unit labour costs, which increased by 2.4% in 2024 and 2.8% in 2025, compared with EU increases of 1.54% and 0.6% respectively. Malta’s recent cost competitiveness has therefore deteriorated relative to the European average, even though its longer-term position remains comparatively stable. 

Uneven productivity challenge 

What makes these figures particularly interesting is that the productivity challenge is not uniform across the economy. Construction provides a striking example. By 2025, its real unit labour cost index stood approximately 35 percentage points above its 2019 level, reflecting successive productivity declines alongside rising labour costs relative to output prices. Real estate and arts and entertainment also experienced increases.

By contrast, information and communication recorded a remarkable improvement, with its real unit labour cost index approximately 23 percentage points below its 2019 level. Strong productivity gains in this sector more than compensated for rising wages. The contrast demonstrates that Malta does not have one homogeneous economic model. Some activities are successfully generating additional value through technology, skills and organisational improvements, while others remain heavily dependent on expanding employment and physical activity. 

This distinction matters because it challenges the assumption that economic growth automatically reflects economic transformation. A business employing 20 additional workers may contribute more to GDP and employment without becoming significantly more productive. Another business investing in technology, management capabilities and automation may generate considerably more value without expanding its workforce proportionately.

Both contribute to economic growth, but their implications for wages, competitiveness and the use of scarce resources are fundamentally different. Malta’s economic strategy has historically been particularly effective at encouraging the former. The next phase must become considerably better at enabling the latter. 

The tourism industry offers a useful illustration. During the first four months of 2026, tourist arrivals increased by 16.5%, yet expenditure per visitor declined by 1.8%. This does not establish a long-term deterioration in tourism productivity, but it illustrates the limitations of judging economic success primarily through volumes.

More visitors generate additional demand for accommodation, transport, labour, infrastructure and public services. The more important question is whether the additional activity produces proportionately greater economic value. In a small island economy facing constraints on land, infrastructure and environmental capacity, productivity must increasingly be understood as the value generated from scarce resources rather than simply the amount of activity those resources accommodate. 

The Pre-Budget Document also contains an important analysis of capital deepening, the process through which workers become more productive by using better equipment, machinery and technology. Its industry-level analysis identifies a strong positive relationship between capital investment per worker and output per worker. However, it also highlights that investment alone is insufficient.

Management quality, organisational efficiency, innovation and technological capability determine how effectively capital is deployed. This is particularly relevant to Malta, where the relatively small size of many businesses, limited access to capital and the attractiveness of labour-intensive expansion can discourage more ambitious investment. Businesses respond to the incentives confronting them. Changing the growth model therefore requires changing the incentives that shape business decisions. 

Malta’s limited investment in research and development reinforces the concern. In 2024, expenditure on research and development amounted to just 0.54% of GDP, compared with an EU average of 2.24%. Both public and private investment remain comparatively weak. This matters because innovation is not simply about developing new products or attracting technology companies. It is also about improving production processes, management systems, organisational structures and the capacity of existing businesses to adopt new technologies. 

Weakness in human capital 

Yet perhaps the most consequential weakness lies in human capital. The latest PISA results show that only 52% of Maltese 15-year-olds achieved baseline proficiency in reading, compared with an OECD average of 69%. In mathematics, the corresponding figures were 56% and 65%, while in science Malta recorded 63% against an OECD average of 74%. Performance also deteriorated between 2022 and 2025 across all three subjects.

These rankings provide an uncomfortable indication of the capabilities that will shape Malta’s future workforce. An economy seeking to become more technologically sophisticated requires people capable of reasoning, solving problems, adapting and learning continuously. Machinery, artificial intelligence and digital infrastructure cannot compensate indefinitely for weaknesses in foundational education. 

This is where the relationship between education and productivity needs to become much more central to economic policymaking. Malta has introduced numerous educational initiatives, curriculum reforms, digital programmes and vocational pathways. Some are undoubtedly valuable, but the ultimate measure of success must be improvements in learning outcomes and the capabilities students carry into adult life.

Education is not simply another expenditure category in the national budget. It is the foundation of long-term productive capacity. The same principle extends to vocational training, lifelong learning and management development. Capital and skills are complementary. Businesses will struggle to adopt sophisticated technologies if the workforce lacks the capabilities to use them effectively. 

Malta needs performance budgeting 

The implications extend to government itself. General government expenditure increased by approximately €487 million in 2025, reaching €9.1 billion. This does not mean the expenditure was unjustified, particularly given increasing demand for public services and existing commitments. However, it reinforces the importance of examining whether public spending is strengthening the country’s productive foundations.

Investment in education, infrastructure, digitalisation and business support should increasingly be evaluated according to the outcomes achieved rather than the amounts allocated. Malta needs a stronger culture of performance budgeting and impact evaluation, ensuring that resources are directed towards interventions capable of generating measurable economic and social returns. 

Ultimately, the productivity challenge is also a political economy challenge. Employers benefit from access to labour, property owners benefit from expanding demand, government benefits from additional tax revenues, and consumers benefit from the availability of services. Politicians benefit from strong headline growth and the ability to finance new measures.

Each actor responds rationally to the incentives within the system, even when their combined decisions reinforce a model that becomes increasingly difficult to sustain. Moving towards productivity-led growth will therefore require more than encouraging businesses to invest or workers to acquire new skills. It will require a deliberate realignment of economic incentives, supported by better education, access to capital, institutional capability and public policies that reward value creation rather than expansion alone. 

None of this diminishes Malta’s economic achievements. But economic success should provide the confidence to confront emerging weaknesses rather than the temptation to overlook them. The warning signs in productivity, labour costs, innovation and education are not evidence that the economy is failing. They are evidence that the foundations of future prosperity require greater attention.