Issue link: https://maltatoday.uberflip.com/i/1545479
11 maltatoday | SUNDAY • 21 JUNE 2026 OPINION JP Fabri Beyond the deficit is Malta spending enough on the future? Economist MALTA'S successful exit from the European Union's Excessive Deficit Procedure has under- standably attracted considerable attention. In a period marked by geopolitical instability, slowing European growth and height- ened uncertainty across global markets, the achievement de- serves recognition. It reflects a significant improve- ment in public finances and con- firms Malta's position as one of the strongest-performing econ- omies within the European Un- ion. Yet, economics is often most interesting when it looks beyond the headlines. Deficits matter. Debt matters. Fiscal sustainability matters. However, focusing exclusively on these indicators risks over- looking a far more important question. What kind of econ- omy are Malta's public financ- es helping to create? The latest assessment by the Malta Fiscal Advisory Council offers a useful opportunity to shift the conver- sation away from the size of the deficit and towards the quality of public expenditure. Ultimately, the long-term success of public finances is not determined by how quickly deficits fall but by whether today's spending creates the foundations for tomorrow's prosperity. What is driving growth? One of the most striking ob- servations emerging from the Malta Fiscal Advisory Council's assessment is the composition of Malta's projected growth. The economy is expected to expand by 3.7% in 2026, a rate that re- mains significantly stronger than the European average despite a challenging external environ- ment. However, almost all of this growth is expected to come from domestic demand, while net ex- ports are projected to make a slightly negative contribution. This distinction is important because it tells us something about the forces currently sus- taining economic activity. For many years, Malta's growth story was heavily supported by external demand through ex- ports, tourism, financial servic- es and internationally oriented sectors. Today, as global uncer- tainty increases and key trading partners face weaker economic conditions, domestic demand is becoming a far more important driver of growth. Within domestic demand, government expenditure plays a particularly significant role. Government consumption is expected to continue expanding strongly, supported largely by compensation of employees and the ongoing provision of public services. This should not neces- sarily be viewed negatively. Dur- ing periods of economic uncer- tainty, government expenditure can provide stability, support employment and help maintain confidence across the economy. Indeed, one could argue that Malta's relatively strong eco- nomic performance over recent years has been partly facilitated by the willingness of government to intervene when circumstanc- es required it. Whether through energy support measures, social programmes or investment ini- tiatives, public expenditure has helped cushion the economy from shocks that affected many of Malta's European counter- parts. However, there is an important distinction between expenditure that supports current economic activity and expenditure that en- hances future economic capacity. Both may contribute to growth in the short term, but their long- term effects can be very different. This is where the fiscal debate becomes considerably more in- teresting. Consumption or investment? Not all government spending serves the same purpose. Some expenditure is designed to keep the system functioning. It pays salaries, funds operations, main- tains services and supports the day-to-day activities of govern- ment. This expenditure is essen- tial. Other expenditure is designed to increase the economy's pro- ductive capacity. It creates in- frastructure, develops skills, sup- ports innovation, strengthens institutions and improves the foundations upon which future growth depends. Economists often refer to these categories as operational ex- penditure and capital expendi- ture. While both are necessary, the balance between them ulti- mately shapes the long-term tra- jectory of an economy. The Malta Fiscal Advisory Council's report highlights a tension that deserves greater attention. While government consumption continues to grow strongly, public investment pro- jections remain ambitious and, historically, difficult to achieve. The council notes that public investment has repeatedly fall- en short of forecasts over recent years, raising legitimate ques- tions about implementation ca- pacity and project delivery. This observation may appear technical, but it carries signifi- cant implications. A country can announce sub- stantial investment programmes and still fail to realise their eco- nomic benefits if projects are delayed, scaled back or never completed. Economic transfor- mation is not driven by alloca- tions on paper. It is driven by execution. The issue therefore is not whether Malta intends to in- vest. The issue is whether Malta is consistently converting fiscal resources into productive assets capable of improving long-term competitiveness. This question becomes even more important when viewed in terms of productivity. The same report highlights that labour productivity growth remains exceptionally weak, while wages continue to rise faster than pro- ductivity. This dynamic places increasing pressure on compet- itiveness and raises concerns about the sustainability of future growth. If productivity is not improv- ing, then the economy must con- tinue relying on other sources of expansion. Historically, Malta has benefited from strong la- bour market growth, increasing labour force participation and significant population growth. These factors have supported economic performance for many years. However, they cannot re- main the primary drivers of pros- perity indefinitely. This is why the composition of investment matters. Expend- iture directed towards educa- tion, research, innovation, dig- ital transformation, transport efficiency and institutional qual- ity generates returns that extend far beyond a single budget cycle. Such investments help econo- mies produce more value with- out necessarily consuming more land, more infrastructure or more labour. The Malta Fiscal Advisory Council's observation that re- search and development ex- penditure remains extremely low by European standards should therefore concern policymakers. Malta frequently speaks about becoming a knowledge-based and innovation-driven economy. Yet ambitions alone do not gen- erate productivity. Investment does. The gap between what a country says it wants to become and what it actually invests in often explains the gap between aspiration and reality. Investing in tomorrow's growth Perhaps the most important message contained within the council's assessment is that Mal- ta's next phase of development will require a different growth model from the one that brought it this far. The country's economic suc- cess over the past decade has been remarkable. Employment has expanded. Living standards have improved. Public finances have strengthened. Few Europe- an countries can point to a com- parable record. But this success has created new challenges. The model that delivered growth over the past decade re- lied heavily on expansion. More workers entered the labour mar- ket. More businesses were estab- lished. More people participated in economic activity. Population growth contributed significantly to both labour supply and do- mestic demand. For a time, this model worked exceptionally well. Today, however, its limitations are becoming increasingly visi- ble. Infrastructure pressures are intensifying. Housing affordabil- ity remains a concern. Conges- tion continues to affect produc- tivity and quality of life. Public services face growing demands. As a small island state with finite resources, Malta cannot rely in- definitely on growth through ex- pansion alone. The next stage of economic de- velopment must increasingly be driven by productivity. This is where fiscal policy be- comes strategically important. The ultimate objective of sound public finances is to create the conditions for sustainable pros- perity. And that requires asking difficult questions about priori- ties. Are we investing enough in the capabilities that will determine Malta's future competitiveness? Are we directing sufficient re- sources towards innovation, re- search and human capital? Are we building the infrastructure required for a more productive economy? Are we strengthening the institutions that underpin long-term growth? These questions are far more consequential than whether the deficit falls by a few additional decimal points. Malta deserves credit for the progress achieved in restoring fiscal discipline and exiting the Excessive Deficit Procedure. Yet the country's most important economic challenge is no longer fiscal consolidation. It is eco- nomic transformation. Is today's expenditure creating tomorrow's growth? In the long run, prosperous economies are distinguished not by the size of their budgets but by their ability to convert public resources into productive capacity, innovation and opportunity. That is the fiscal conversation Malta should increasingly be having. The Malta Fiscal Advisory Council's observation that research and development expenditure remains extremely low by European standards should therefore concern policymakers