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18 maltatoday | SUNDAY • 4 OCTOBER 2026 OPINION JP Fabri The subsidy trap: Afraid Economist THERE is a temptation when discussing Malta's energy and fuel subsidies to reduce the de- bate to a simple question: Can we afford them? That is in- creasingly the wrong question. The more important question is what we are buying with them; what we are giving up in re- turn; and whether a policy that has successfully protected the Maltese economy from an ex- traordinary external shock can remain sustainable if that shock becomes part of the new nor- mal. The starting point should be an acknowledgement that is sometimes missing from this debate. Malta's energy subsi- dies have worked. They have protected households from a dramatic increase in electricity and fuel costs, insulated busi- nesses from part of the increase in their operating costs, con- tained inflationary pressures and helped prevent an interna- tional energy crisis from trans- mitting fully into the domestic economy. The stability Maltese consumers have experienced while energy markets elsewhere have been extraordinarily vola- tile did not happen by accident. Government effectively trans- ferred a substantial part of the external shock from household and corporate balance sheets onto its own. The scale of that protection is becoming clearer. The Eco- nomic Policy Department has estimated that without the en- ergy subsidies Malta's GDP would be almost €630 million lower over the coming three years. Consumption would fall by €312 million, investment would suffer, more than 3,000 jobs could be lost by 2028 and household disposable income would decline by around 6%. The same estimates suggest that a household with two cars is ef- fectively saving around €2,000 a year through the policy. These are not marginal effects. They suggest that abruptly removing the protection would consti- tute a significant contractionary shock to an economy that has become accustomed to stable energy prices. This matters because it chang- es the nature of the argument. It is too easy to describe subsidies simply as wasteful public ex- penditure. In Malta's case they have effectively operated as a macroeconomic shock absorb- er. An external increase in ener- gy prices would normally work its way through the economy. Fuel and electricity rise, busi- nesses face higher costs, trans- port becomes more expensive, workers seek compensation for declining purchasing power, wage pressures increase and some of those costs feed back into prices. For a small, high- ly open and energy-dependent economy, that transmission mechanism can be particularly powerful. Government interrupted part of that process. It bought sta- bility. The issue now is what happens when we have to keep buying it. The bill is becoming substan- tial. Energy subsidies are ex- pected to cost €392 million in 2026, the highest amount yet, taking cumulative expendi- ture over the past five years to around €1.3 billion. This is oc- curring as international energy conditions have again deterio- rated and previous expectations that the subsidy burden would gradually decline have been overtaken by events. The fiscal deficit, previously expected to continue falling, is now project- ed by the finance minister to rise from 2.2% of GDP in 2025 to 2.8% this year. Malta is not facing an imme- diate debt crisis and that is an important point to remem- ber. Public debt remains rela- tively contained by European standards, at just under 46% of GDP. The argument, therefore, should not be that the country suddenly cannot afford to pro- tect its population. It is about something more subtle and ul- timately more important—fis- cal space. Every government faces choices about how it deploys finite resources. Hundreds of millions spent insulating the economy from energy prices cannot simultaneously finance infrastructure, education, healthcare, public transport, re- newable energy generation and storage, digitalisation or climate adaptation. This does not mean that the €392 million being spent on subsidies could sim- ply be transferred euro for eu- ro into investment. Removing the subsidies would itself affect consumption, employment, tax revenues and economic growth. The finance minister has made precisely this argument, sug- gesting that apparently saving €20 million on subsidies could ultimately result in a €50 mil- lion loss of income. But opportunity cost does not disappear simply because an in- tervention is economically jus- tified. Shock absorber and engine change Indeed, this is where the warnings coming from the Malta Fiscal Advisory Council become particularly relevant. Strong expenditure growth is gradually reducing the room available for additional spend- ing. When governments face increasingly rigid expenditure commitments, new priorities either require additional reve- nue, savings elsewhere or more borrowing. Fiscal sustainability is therefore not simply about re- maining below a particular defi- cit or debt threshold. It is also about retaining sufficient room to respond when the next shock arrives. This is where the debate should move beyond wheth- er subsidies are good or bad. The real distinction is between spending public money to ab- sorb vulnerability and investing public money to reduce vulner- ability. For the past several years, ab- sorbing vulnerability was under- standable. Malta did not create the war in Ukraine, instability in international energy markets or the geopolitical shocks affecting oil and gas supplies. Allowing the entire adjustment to pass immediately to households and businesses would have imposed significant economic and social costs. Governments exist partly to absorb shocks that individ- ual citizens cannot reasonably manage themselves. But a shock absorber is not the same thing as an engine of transformation. This distinction also lies be- hind the IMF's repeated calls for Malta to rebuild fiscal buff- ers while creating greater space for productive investment. Its assessment has acknowledged Malta's strong economic per- formance and relatively sus- tainable public debt position, while simultaneously arguing for the gradual withdrawal of broad energy support as con- ditions permit, coupled with continued protection for vul- nerable households. The logic is not difficult to understand. Temporary intervention can be entirely justified during an ex- ceptional shock. The difficulty begins when temporary inter- vention becomes embedded within the normal functioning of the economy. The events of recent years also demonstrate why timing matters enormously. Removing support in the middle of anoth- er international energy shock would be very different from gradually reforming it during a