ANALYSIS | How Labour squared the budget circle

Before the 2013 election, I often asked myself: How could Labour deliver on its pledge to improve living standards without raising taxes, at a time when governments worldwide were struggling with the choice between austerity or taxing the rich to sustain public spending?

Labour had campaigned on reducing utility bills, maintaining the previous government’s tax cuts, and promising no new taxation—a “no pain, all gain” commitment that some thought impossible to achieve.

Twelve years on, Malta under Labour seems to have defied the laws of fiscal gravity. By largely adhering to EU fiscal rules and avoiding major tax hikes, government revenue has risen from €2.8 billion in 2012 to €4.5 billion in 2017, €5.9 billion in 2022, €8 billion in 2025, and a projected €8.4 billion in 2026.

This expansion of the “budget cake” has enabled government spending to nearly double, from €4.43 billion in 2012 to almost €9 billion next year. All this has been achieved despite two successive tax cuts, retention of energy subsidies including petrol, and the pressures of two global crises—the pandemic and the subsequent surge in inflation. 

Where is the money coming from?

So far, despite these challenges, Labour’s budgetary manoeuvres have not relied on unsustainable borrowing. Malta’s 2023 deficit stood at 4.9% of GDP, above the EU’s 3% limit, leading to an excessive deficit procedure in 2024. Yet the country’s debt-to-GDP ratio remained comfortably below the EU’s 60% threshold.

Looking ahead, the 2026 budget projects a deficit below 3% of GDP, even as recurrent spending rises from €7.5 billion in 2025 to nearly €8.9 billion by 2027. This fiscal room has allowed for major tax cuts, including a 2025 measure that made 18,000 workers tax-exempt, and a 2026 adjustment raising the tax-free income thresholds people with children.

Growth: The engine behind revenue

But Malta’s “miracle” depends heavily on economic growth. Between 2025 and 2026, total tax revenue is projected to increase by €870 million, from €7.3 billion to €7.8 billion. Income tax is expected to contribute over €200 million, social security over €110 million, alongside higher VAT collections.

This growth is fuelled by an expanding workforce, population growth, and increased tourism. In this way the government has increased tax revenue without introducing new taxes. This has even spared the super-rich from new taxes on windfall profits and polluters from taxes for environmentally damaging activities. This has effectively turned taxation into a political taboo.

The lone exception is the eco-contribution on tourist accommodation, rising from 50c to €1.50 per tourist per night, which is expected to increase revenue from €7.4 million in 2025 to €21 million in 2026. This measure illustrates how even a modest, targeted tax—designed to offset the environmental impact of tourism—can generate tangible benefits for the wider community. Finance Minister Clyde Caruana has himself recently admitted that a mass transport system is unfeasible without punitive fiscal measures discouraging car use.

For there is nothing socialist about removing taxation from the political vocabulary. By avoiding new taxes—even when needed—the government leaves itself increasingly dependent on economic growth to fund its welfare state. If growth slows or the economy contracts, only tax revenue can prevent savage cuts to pensions, social benefits, and other essential services.

In this sense, Malta’s current model hinges less on deliberate fiscal planning and more on the continual expansion of the economy, creating both a political and economic vulnerability that cannot be ignored.

Addiction to growth

Reliance on growth creates constraints. Politically, the government struggles to tackle overdevelopment, over-tourism, overcrowded buses and traffic congestion—side effects of its economic strategy.  Some of these problems are also the direct result of the increase in population which also widened the government’s revenue base.

Moreover, while the government largely remains outside the fiscal danger zone, its choices on where—and how—to spend come with an opportunity cost. Increased tax revenues have allowed it to raise pensions, expand social benefits, and shield households from soaring energy prices, but this has come at a price.

Capital expenditure has barely moved, rising only marginally from €1.1 billion in 2024 to €1.2 billion in 2025, and is projected to fall back to €1.1 billion in 2026. This stagnation stands in stark contrast to the government’s electoral pledge to invest €700 million over seven years in new open spaces within urban areas.

This dependency on growth also strengthens elites—particularly property developers—who can dictate agendas to governments reliant on megaprojects as economic stimuli. In short, such projects increasingly resemble quick fixes for a nation hooked on the heroin of accelerated growth.

The huge turnout for the NGO protest on budget day against the proposed planning bills captures this contradiction—while most non-partisan people acknowledge Labour’s economic success, they are also angry at its subordination to the country’s new barons.

Fear of a leap in the dark

Still, despite widespread concern over population growth and overdevelopment, voters remain wary of any shift that might threaten their living standards—particularly in a country where 17% still live in relative poverty. One of the greatest failures of the past decade of plenty has been the persistence of poverty and the number of people living on the margins.

In short, the average worker remains dependent on the government’s budgetary generosity for any real improvement in living standards. This dovetails with a culture of political patronage, where governments keep voters content by turning the budget into a candy shop of giveaways.

Moreover, in recognition that economic growth has not translated into meaningful wage gains, the government has now pledged to cover 65% of private-sector wage increases for two years.

While this dependency on the state’s redistribution of wealth generated by an open, growth-driven economy is far from ideal, it is understandable that many people pragmatically prefer this familiar arrangement to a leap into the unknown. It also explains why the budget remains a major event in the lives of many Maltese—unlike in wealthier countries, where citizens can afford to be indifferent to it. Moreover, those fortunate enough to have inherited property may even find themselves with a vested interest in the very planning policies that are ruining Malta’s townscapes.

In this context, the Nationalist opposition faces a dilemma: it cannot simply criticise the side effects of the growth model without offering credible alternatives. Understandably, it must reassure workers who fear that any change could leave them less protected. Less understandably, however, the PN remains reluctant to challenge vested interests that continue to reap windfall gains from the current system.

Civil society, which has already shown it can challenge the status quo—most recently by mobilising massive protests against the proposed planning bills—can also become a protagonist in shaping the economic debate.

For meaningful change, protest must be coupled with policy deliberation. Only then can civil society begin to redefine growth—not merely in economic terms, but in ways that prioritise wellbeing, quality of life, and the reduction of inequality. Environmental and social advocacy groups have the potential to become laboratories for radical yet practical ideas capable of reshaping Malta’s economic model.

For now, Labour has pulled off a balancing act—delivering growth, tax cuts, and higher spending without resorting to austerity or heavy taxation. But the side effects of this success story—from overdevelopment to weak infrastructure investment—are catching up fast. The real test lies in how long Malta can sustain this growth-driven model without eroding long-term wellbeing. And with no coherent alternative in sight, the fear of going cold turkey may well keep voters firmly in Labour’s fold.