Issue link: https://maltatoday.uberflip.com/i/1540988
14 maltatoday | SUNDAY • 2 NOVEMBER 2025 JP Fabri Economist The tax paradox, IT may appear paradoxical that Malta's government is forecasting higher income tax revenues in 2026 despite introducing tax cuts, particu- larly through the new par- ent rate. On the surface, this seems inconsistent with arith- metic logic: If rates go down, shouldn't revenues follow? Yet, in economics, the sto- ry is rarely linear. The fiscal picture painted in the latest Budget reveals a deeper dy- namic; one in which expan- sion, not efficiency, is now the dominant driver of the state's revenue engine. The government's optimism rests on the conviction that Malta's economy has matured into a self-sustaining growth model powered by an expand- ing workforce and resilient consumption. The assumption is simple but powerful: As long as the number of taxpayers and the value of their incomes rise faster than the rate cut, total revenue will still climb. In other words, it is not about taxing more, but about taxing more people who are earning more. This is the crux of the para- dox. The government expects income tax receipts to increase even as it gives away part of its yield through lower rates. The mathematics work because the tax base is widening. Employ- ment remains strong, and eco- nomic participation continues to grow, particularly through foreign labour inflows that have significantly expanded Malta's productive capacity. The past decade's growth has been labour-intensive rather than capital-deep, meaning the economy creates many jobs even if productivity per worker grows slowly. Each of those jobs contributes to the public purse, and the result is a revenue system that feeds off scale rather than innovation. Foreign workers have be- come the quiet backbone of Malta's fiscal stability. Their numbers have swelled to a point where they now repre- sent an important share of the tax base. Though they typical- ly earn less than local work- ers, their collective contribu- tion is substantial. They rent homes, spend locally, and pay income tax through automatic deductions. The expansion of this group has compensated for both the fertility decline among Maltese nationals and the plateau in domestic la- bour participation. As a re- sult, the state finds itself with a constantly replenishing pool of taxpayers, each adding a steady trickle of revenue. A fragile model This demographic elasticity has become a defining feature of Malta's growth story. It ex- plains how the economy can continue to register strong fiscal inflows despite relative- ly modest productivity gains. It also underpins the govern- ment's confidence that the 2026 tax cuts will not jeopard- ise fiscal stability. With more people working, earning, and spending, the aggregate flow of revenue will keep rising, even if the average tax burden per individual falls. However, while the numbers add up, the structure behind them deserves closer scrutiny. Relying on population growth as the main engine of fiscal strength is a fragile model. It can sustain the short-term arithmetic but may conceal Budget shorts We take a look at some of the key social and wage measures in Budget 2026 Income tax cut: Taxpayers with children will experience a substantial tax cut over the next three years, worth €160 million. The tax brackets will be progressively adjusted to increase the non-taxable portion of income with sub- sequent tax brackets being widened as well. The tax cuts will provide significant savings for families with chil- dren. COLA: €4.66 per week. Pensioners: €10 per week increase including COLA. Children's Allowance: €250 increase per child for families earning less than €30,000. In-work benefit: €75 in- crease per child. Carers' Grant: €179 in- crease to reach €5,369 per year. Disability therapy re- fund: €250 yearly increase to reach €1,000 per year. Eli- gibility to be extended to 23 years of age. Baby bonus: €500 increase to birth and adoption bo- nus. First child bonus will be €1,000, second child €1,500 and third child or more €2,000. Adoption grant: In- crease to a maximum of €12,000 for adoptions from abroad and €2,000 for local adoptions. Elderly carer grant: €500 increase to €9,000 per year for those who employ a car- er for elderly relatives. Wage increase support: Government to finance up to 65% of the wage increase (up to a maximum of €780 per year) for two years in the private sector for workers who have been employed for more than 4 years. In Gozo, support will be higher at 80% (up to a maximum of €960 per year). Stipends: 15% increase equivalent to between an increase of between €17 and €58 every four weeks ex- cluding COLA. Fish Fridays: Government schools will be serving local fish on Fridays to promote healthy eating habits. BUDGET 2026