Malta needs to trim expenditure in 2026, European Commission warns

Malta’s 2026 budget risks being non-compliant with European Council recommendations to be able to exit the excessive deficit procedure, the European Commission has warned.

Malta’s cumulative expenditure growth is beyond what was agreed with the council, the commission said in its opinion published on Tuesday on Malta’s draft budgetary plan.

European Economy and Productivity Commissioner Valdis Dombrovskis said in Brussels that Malta’s budgetary plan was “at risk of material non-compliance” with council recommendations.

Finance Minister Clyde Caruana (Photo: James Bianchi/MaltaToday)

The Brussels opinion comes a month after Finance Minister Clyde Caruana delivered Budget 2026 in parliament, which included a flagship proposal to cut income tax for parents, which would cost public coffers €160 million over three years, increases in pensions and other social benefits, and the retention of fuel and energy subsidies.

Caruana projected that Malta’s annual deficit next year would decrease to 2.8% of GDP despite the tax cuts and increased expenditure. This is below the EU-recommended 3% threshold.

Eyebrows raised over cumulative expenditure growth

Nonetheless, even though Malta is expected to comply with the annual deficit threshold, it will fall foul of another key marker—cumulative expenditure when compared to 2023. It is the latter marker that has raised eyebrows in Brussels.

“Overall, the commission is of the opinion that the Draft Budgetary Plan of Malta is at risk of material non-compliance with the maximum growth of net expenditure in the council recommendation with a view to bringing an end to the situation of an excessive deficit,” the commission’s opinion reads.

European Commissioner Valdis Dombrovskis (Photo: EU)

The opinion formed part of the European Semester Autumn Package published yesterday that gives an overview of the EU’s fiscal and economic state.

According to the Commission Autumn 2025 Forecast, Malta’s net expenditure is projected to increase by 4.4% in 2025, which is within the maximum growth rate of 6% recommended by the council. For 2026, net expenditure is projected to increase by 4.6%, which is also within the maximum growth rate of 5.8% recommended by the council.

However, Malta falls foul of the second key figure upon which fiscal compliance is measured—expenditure in cumulative terms, which means the expenditure of a year compared to the base year 2023.

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

This corresponds to a cumulative deviation of 1.5% of GDP, which is significantly above the 0.6% GDP threshold set for 2026.

Additionally, the commission notes that Malta has ignored its June 2025 recommendation to wind down the emergency support measures. The net budgetary cost of energy subsidies is projected at 1.1% of GDP this year and 1% of GDP in 2026. “This is not in line with what was recommended by the council,” the commission says.

As a result, Malta will have to take corrective measures within the coming year to get back on track. “The commission invites Malta to take the necessary measures within the national budgetary process to ensure that fiscal policy in 2026 is in line with the council recommendation,” the council’s opinion ends.

Malta risks heightened scrutiny

Economist JP Fabri said the European Commission’s opinion on Malta’s Draft Budgetary Plan carries implications for the country’s economic and fiscal trajectory.

“While the headline numbers may appear manageable, the underlying message is that Malta is drifting off the required fiscal path, and unless corrective action is taken soon, it could face heightened scrutiny, a stricter surveillance regime, and potentially deeper corrective measures,” Fabri told MaltaToday.

Economist JP Fabri (Photo: James Bianchi/MaltaToday)

The main implication is that Malta risks breaching the new EU fiscal framework. While Malta’s annual expenditure growth appears within the limit, Fabri said, its cumulative growth, “the key metric that matters”, is projected to exceed the ceiling by 1.5% of GDP by 2026.

“This places Malta in the category of ‘material non-compliance’, meaning that unless the government introduces corrections in the national budget process, the commission may escalate procedures under the excessive deficit mechanism,” he cautioned.

The EU’s autumn assessment shows that Germany, France, Italy, Ireland, Estonia, Latvia, Luxembourg, Portugal, Slovakia, Cyprus are compliant with the new fiscal rules using the net expenditure growth measure. Croatia, Lithuania, Slovenia, Spain are at risk of non-compliance, while the Netherlands and Malta are at risk of material non-compliance. Denmark, Czechia, Poland, Romania, Sweden, Bulgaria and Hungary at risk of non-compliance, while Finland is being recommended to be placed in excessive deficit procedure.