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THERE was something refresh- ing about Finance Minister Clyde Caruana's candour during the pre-budget discussion. At a time when political communication too often reduces economic poli- cy to announcements, slogans and lists of measures, Caruana was un- usually willing to expose some of the tensions beneath Malta's eco- nomic model. Employers have relied too heav- ily on relatively cheap labour rather than capital. Government departments have accumulated "fat" that now needs trimming. Energy subsidies inevitably con- tain some waste. Tax evasion re- mains sufficiently significant to justify using artificial intelligence to identify unexplained discrep- ancies between declared income and accumulated wealth. Perhaps most strikingly, the finance minis- ter acknowledged that he has yet to see the studies underpinning a €2.8 billion light rail proposal an- nounced before the election and will only pronounce himself once he has seen the numbers. What- ever one's politics, such candour deserves recognition. Malta needs more of it. Importing labour Caruana is also right about the central economic challenge. Mal- ta cannot continue indefinitely meeting every increase in demand by importing more labour. He estimates that the native labour supply is around 3,000 people an- nually while demand is north of 10,000. The gap has to come from some- where, and for much of the past decade migration has filled it. That model allowed businesses to expand, supported public financ- es, increased consumption and helped Malta achieve extraordi- nary rates of economic growth. But its limitations are becoming increasingly visible in congestion, housing, infrastructure, public services and, most importantly, productivity. The pre-budget document itself shows productivity growth slow- ing from 2.2% in 2023 to 0.2% in 2024 and turning marginally neg- ative in 2025. Caruana is therefore right when he says that Malta needs less reliance on labour and more on capital, technology and machinery. The disagreement is not with the diagnosis. It is with where responsibility for that out- come should primarily lie. It's the incentives, stupid Employers certainly make pro- duction decisions, but businesses respond to incentives. If an ad- ditional worker is cheaper, easier and less risky than investing in machinery, technology, automa- tion or organisational transforma- tion, many firms will choose the worker. That is not necessarily a failure of entrepreneurship. It is rational behaviour within the eco- nomic architecture they face. For years Malta has made labour expansion relatively easy while capital deepening has remained more difficult. Investment re- quires finance, confidence, man- agement capability, skills and a willingness to accept risk. Tech- nology requires people capable of using it. Automation requires sufficient scale to justify it. Mean- while, an economic model capable of supplying additional workers allows firms to postpone some of those harder decisions. If we want businesses to behave differently, exhortation will not be enough. We have to change the incentives that shape their choices. This is where the political econ- omy becomes uncomfortable be- cause the incentives extend far be- yond employers. Businesses want access to labour because it allows them to grow. Property owners benefit from additional demand. Government benefits from addi- tional tax revenue and social se- curity contributions. Consumers benefit from businesses remaining open and services remaining rela- tively affordable. Politicians ben- efit from an economy producing strong headline GDP growth and from avoiding reforms that im- pose visible costs today in return for less visible benefits tomorrow. Ministries naturally defend their budgets. Beneficiaries defend subsidies. Industries defend incentives. Vot- ers understandably prefer benefits that can be felt immediately to reforms whose returns may ma- terialise years later. No individual actor needs to be behaving irra- tionally for the collective outcome to become unsustainable. That is precisely what political economy teaches us: individually rational choices can produce a collectively suboptimal equilibrium. Government 'fat' Government itself cannot stand outside this analysis. General gov- ernment expenditure increased by almost €490 million in 2025 to around €9.1 billion. Employee compensation rose by more than 8%, intermediate consumption by 16% and social benefits and transfers in kind also increased strongly. The deficit nevertheless improved because revenues grew even faster. Malta is not facing an immediate fiscal crisis. But buoy- ant revenues can hide inefficiency. When an expanding economy continuously generates addition- al income for government, dif- ficult choices can be postponed. New programmes can be added without old ones disappearing. Departments can expand without being forced to demonstrate pro- portionately better outcomes. It is therefore encouraging that the fi- nance minister is willing to identi- fy "fat" in ministerial budgets. But trimming expenditure through the personal intervention of a de- termined finance minister is not a system. Malta needs an institu- tional mechanism that continu- ously asks whether public money is achieving what it was intended to achieve. Caruana himself said he has upset colleagues by cut- ting into their budgets while try- ing to keep the deficit below 3%. That tells us something important about the incentives operating within government itself. This is why performance budg- eting and impact evaluation should become central to the next phase of Malta's fiscal framework. Ministries should increasingly be required to explain not simply how much they spent, but what changed because they spent it. Major programmes should begin with measurable objectives and baselines, carry predetermined evaluation dates and, where ap- propriate, contain sunset pro- visions. Programmes that work should be expanded. Those that underperform should be rede- signed. Those that repeatedly fail should eventually disappear. 18 maltatoday | SUNDAY • 11 OCTOBER 2026 OPINION JP Fabri Clyde is right. But the Economist Finance Minister Clyde Caruana For years Malta has made labour expansion relatively easy while capital deepening has remained more difficult