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15 OPINION maltatoday | SUNDAY • 12 OCTOBER 2025 JP Fabri Economist Malta's rising debt and the narrow path ahead MALTA'S public debt has qui- etly crossed €11 billion, a jump of more than a billion euro in just a single year. Most of it is locked into long-term gov- ernment stocks, with the rest spread across Treasury Bills and savings bonds. As a share of GDP, debt remains below the European average, at just under 50%. On the surface, that leaves breathing room. But debt is not just a ratio. It is a growing stock that must be serviced, managed, and justi- fied in terms of the opportuni- ties it creates or the burdens it imposes. The pre-budget document sets out a story of resilience. The government is committed to bringing the deficit down to- ward 3% by 2026, aligning with Europe's fiscal framework. Debt is projected to stabilise, and growth is expected to keep the ratio below the Maastricht threshold. This is the reassur- ing narrative, one that sug- gests Malta can keep borrow- ing without losing control. Yet the latest assessment by the Malta Fiscal Advisory Council (MFAC) points to vulnerabili- ties beneath the surface. In the first half of 2025 alone, the Consolidated Fund regis- tered a deficit of €457 million, already more than half of the full-year target. Expenditure jumped by 12% compared with last year, driven by high- er outlays on social protec- tion, health, education, and wage agreements. Revenue grew more modestly, lifted by stronger employment and wag- es but dampened by lower VAT receipts. On an accrual basis, the deficit looked smaller, but the pattern was familiar: A nar- row mid-year gap that risks widening in the second half as spending accelerates. This is why MFAC warns that fiscal targets depend heavily on containing recurrent spending while still protecting produc- tive investment. Wages and social payments are rising fast- er than forecast, while invest- ment execution remains slow. If consolidation is achieved by curtailing capital projects, then short-term fiscal discipline comes at the cost of long-term growth. The real dilemma is how to manage debt prudently without choking the very in- vestments that would make it more sustainable. Debt dynamics hinge on three factors: the deficit, interest costs, and growth. Malta is still growing faster than Europe, though the pace is moderat- ing. Domestic demand remains strong, but external trade is softening, and productivity has yet to make a meaningful leap. Interest costs are also creeping up. By mid-2025, debt servic- ing had already absorbed €144 million, up from last year. With debt now at €11.1 billion, even small changes in global financ- ing conditions ripple into sig- nificant costs for the budget. The MFAC points to anoth- er layer of fragility—the new EU fiscal rules. These limit the growth of nationally financed net expenditure, requiring Malta to offset the extraor- dinary 14% spike recorded in 2024. The target for 2025 is close to zero growth in net ex- penditure, a tall order given rising wages, social transfers, and subsidy pressures. Walking a narrow path Compliance is not just a box-ticking exercise. It shapes investor confidence, credit rat- ings, and the space government has to manoeuvre in the event of a downturn. The picture that emerges is of a country walking a narrow path. On one side, Malta en- joys robust growth, record em- ployment, and a debt ratio that looks comfortable on paper. On the other, it faces a rising debt stock, tighter fiscal rules, and mounting pressure from re- current spending. The danger is complacency, assuming that staying below the 60% bench- mark is enough. In reality, the cost of debt matters more than its level, and the way borrow- ing is used matters most of all. If debt is financing subsidies, wages, and current consump- tion, then it becomes a weight on future budgets. If it is fi- nancing infrastructure, tech- nology, and the green transi- tion, then it becomes a lever for productivity. The pre-budget makes the right commitments in principle—to consolidate, to invest, and to align with Eu- rope's rules. But commitments are not outcomes. The execu- tion gap; slow capital project delivery, rising recurrent costs, and dependence on migra- tion-fuelled growth is where risks crystallise. Other small states have shown the difference that fis- cal choices make. Estonia built buffers in good times and kept debt minimal. Ireland invest- ed heavily in a productive, ex- port-led model that turned its high debt into a manageable burden. Malta's challenge is not to mimic these paths, but to ensure its own borrowing aligns with long-term transfor- mation rather than short-term relief. The verdict is that Malta's debt is steady, but fragile. It re- mains under control today, but its trajectory narrows the fiscal space of tomorrow. Unless the balance shifts from borrowing for stability to borrowing for productivity, Malta may find that its comfort zone is smaller than it seems. The verdict is that Malta's debt is steady, but fragile. It remains under control today, but its trajectory narrows the fiscal space of tomorrow File photo