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deeper vulnerabilities. The is- land's infrastructure, housing market, and public services are already showing signs of strain. The more the state leans on imported labour to sustain rev- enue growth, the more it must invest in capacity to support that population. Fiscal inflows rise, but so do costs. What looks like a healthy surplus in the short run can easily turn into a structural burden over time. The tax reform's design is clearly meant to be socially ambitious. By easing the bur- den on parents and families, the government is pursuing a political and demographic goal as much as an economic one. It is attempting to reverse one of Malta's most pressing challenges—a persistently low fertility rate. The argument is that lower taxes, particularly for working parents, can en- courage family formation by reducing the financial pressure of child-rearing. Whether that materialises remains uncertain. Fiscal policy can ease symp- toms but rarely changes social behaviour overnight. Nonethe- less, the direction is consistent with a broader European trend of using tax systems to promote family stability and labour par- ticipation. Strength of consumption Another important factor underpinning the paradox of higher revenue amid lower rates is the strength of con- sumption. Malta's household spending remains robust, sup- ported by steady wage growth and full employment. In this context, lower taxes are likely to reinforce the feedback loop between disposable income and consumption. When families spend more, VAT receipts rise, and the government indirectly recovers part of what it gives up in direct taxation. The budget quietly counts on this multipli- er effect. It assumes that what is lost at one end will return, par- tially, through the other. This kind of circular fiscal reasoning is not uncommon in small, open economies, but it comes with risks. The same openness that amplifies domes- tic demand also leaks a portion of it through imports. As more consumption goes to foreign goods and services, a chunk of the fiscal benefit escapes off- shore. Thus, while the income tax cuts may indeed boost near- term spending, the longer-term question is whether this con- sumption translates into higher domestic value added or simply into larger trade deficits. The government also appears to believe that higher labour force participation will follow from lower tax rates. The log- ic is that reducing the marginal burden on second earners or part-time workers could draw more people, particularly wom- en and young parents, into em- ployment. This assumption is plausible but not guaranteed. Labour supply decisions de- pend on more than after-tax in- come; they hinge on childcare availability, housing affordabil- ity, and overall quality of life. Without addressing these com- plementary constraints, fiscal incentives may have limited traction. There is also the question of sustainability. Malta's fiscal projections rely on growth rates that, while credible, remain ex- posed to global conditions. A small island economy cannot fully shield itself from external shocks. If growth slows or if employment expansion stalls, the delicate balance between lower rates and higher revenue could falter. In such a scenario, the government would face a tougher choice between main- taining social commitments and preserving fiscal discipline. Tax compliance The issue of tax compliance further clarifies the paradox. In previous years, revenue in- creases were partly explained by better enforcement and ad- ministrative reforms. But most experts agree that this channel has now reached its ceiling. Compliance levels are already high, and any further gains are marginal. This means that the expected rise in income tax col- lection cannot come from effi- ciency improvements, it must come from growth itself. The government is betting that re- al output and employment will continue to expand fast enough to compensate for reduced rates. While this bet is not unfound- ed, it highlights a deeper truth about Malta's economic struc- ture. The country's growth model remains anchored in labour volume rather than pro- ductivity. As long as more peo- ple join the workforce, revenue will grow. But once that tap slows, so too will fiscal buoy- ancy. This is why the current model, though working, cannot be viewed as a permanent fix. It delivers short-term stability but defers the harder question of how to create more value per worker rather than simply add- ing more workers. Still, one must give credit where it is due. The govern- ment has managed to design a budget that blends fiscal pru- dence with social empathy. The tax cuts are targeted, progres- sive, and politically resonant. They speak to the anxieties of families facing higher living costs and to a society in need of reassurance after years of glob- al uncertainty. The message is one of comfort—the state can afford to give back without compromising stability. A more permanent equilibrium Yet the comfort rests on a narrow ridge. It depends on the continuation of a very specific economic momentum; steady growth, robust employment, and manageable inflation. Should any of these falter the underlying arithmetic of the budget could quickly unravel. A more productive, innova- tion-driven economy would provide a stronger foundation for future tax reforms. In the end, the paradox of ris- ing income tax revenues despite rate cuts is less mysterious than it first appears. It reflects a de- liberate strategy to trade fiscal margin for social stability, to exchange part of the state's rev- enue cushion for broader eco- nomic participation. It is an ex- ercise in confidence, rooted in the belief that Malta's growth engine will keep turning. The real question is not whether the numbers will add up in 2026, they likely will, but whether the system that pro- duces them can remain viable in the decade ahead. For now, the country enjoys the benefits of a growing workforce and a vi- brant economy. The challenge will be to turn this temporary alignment of growth and gen- erosity into a more permanent equilibrium built on productiv- ity, innovation, and trust. Until then, the paradox stands as a reminder that in public finance, as in life, more is not always about taking more; it is often about creating the condi- tions for plenty to continue to 15 maltatoday | SUNDAY • 2 NOVEMBER 2025 paradox, a fragile model and a message of comfort Foreign workers have become the quiet backbone of Malta's fiscal stability. Their numbers have swelled to a point where they now represent an important share of the tax base BUDGET 2026