Issue link: https://maltatoday.uberflip.com/i/1540988
12 maltatoday | SUNDAY • 2 NOVEMBER 2025 BUDGET 2026 How Labour squared Despite tax cuts, higher spending, and global crises, Malta's economy keeps defying the fiscal laws of gravity, but at what cost? James Debono tries to find some answers. BEFORE the 2013 election, I often asked myself: How could Labour de- liver on its pledge to improve living standards without raising taxes, at a time when governments worldwide were struggling with the choice be- tween 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 im- possible to achieve. Twelve years on, Malta under La- bour 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 bil- lion 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 ener- gy 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, La- bour's budgetary manoeuvres have not relied on unsustainable borrow- ing. Malta's 2023 deficit stood at 4.9% of GDP, above the EU's 3% limit, leading to an excessive deficit proce- dure in 2024. Yet the country's debt- to-GDP ratio remained comfortably below the EU's 60% threshold. Looking ahead, the 2026 budget pro- jects 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 thresh- olds people with children. Growth: The engine behind revenue But Malta's "miracle" depends heav- ily 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. In- come tax is expected to contribute over €200 million, social security over €110 million, alongside higher VAT collections. This growth is fuelled by an expand- ing workforce, population growth, and increased tourism. In this way the government has increased tax revenue without introducing new taxes. This has even spared the su- per-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-con- tribution on tourist accommodation, rising from 50c to €1.50 per tourist per night, which is expected to in- crease revenue from €7.4 million in 2025 to €21 million in 2026. This measure illustrates how even a mod- est, targeted tax—designed to offset the environmental impact of tour- ism—can generate tangible benefits for the wider community. Finance Minister Clyde Caruana has himself recently admitted that a mass trans- port system is unfeasible without pu- nitive 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 depend- ent 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 plan- ning and more on the continual ex- pansion of the economy, creating both a political and economic vulner- ability that cannot be ignored. Addiction to growth Reliance on growth creates con- straints. 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 dan- ger zone, its choices on where—and how—to spend come with an oppor- tunity cost. Increased tax revenues have allowed it to raise pensions, expand social benefits, and shield households from soaring energy pric- es, 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 gov- ernment's electoral pledge to invest 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