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economic transformation. A business employing 20 addi- tional workers may contribute more to GDP and employment without becoming significant- ly more productive. Another business investing in technol- ogy, management capabilities and automation may generate considerably more value with- out expanding its workforce proportionately. Both contrib- ute to economic growth, but their implications for wages, competitiveness and the use of scarce resources are funda- mentally different. Malta's eco- nomic strategy has historically been particularly effective at encouraging the former. The next phase must become con- siderably better at enabling the latter. The tourism industry offers a useful illustration. During the first four months of 2026, tour- ist arrivals increased by 16.5%, yet expenditure per visitor de- clined by 1.8%. This does not establish a long-term deterio- ration in tourism productivity, but it illustrates the limitations of judging economic success primarily through volumes. More visitors generate addi- tional demand for accommo- dation, transport, labour, infra- structure and public services. The more important question is whether the additional ac- tivity produces proportionate- ly greater economic value. In a small island economy fac- ing constraints on land, infra- structure and environmental capacity, productivity must in- creasingly be understood as the value generated from scarce resources rather than simply the amount of activity those re- sources accommodate. The Pre-Budget Document al- so contains an important anal- ysis of capital deepening, the process through which work- ers become more productive by using better equipment, ma- chinery and technology. Its in- dustry-level analysis identifies a strong positive relationship between capital investment per worker and output per work- er. However, it also highlights that investment alone is insuf- ficient. Management quality, organisational efficiency, inno- vation and technological capa- bility determine how effective- ly capital is deployed. This is particularly relevant to Malta, where the relatively small size of many businesses, limited access to capital and the at- tractiveness of labour-inten- sive expansion can discourage more ambitious investment. Businesses respond to the in- centives confronting them. Changing the growth model therefore requires changing the incentives that shape busi- ness decisions. Malta's limited investment in research and development re- inforces the concern. In 2024, expenditure on research and development amounted to just 0.54% of GDP, compared with an EU average of 2.24%. Both public and private investment remain comparatively weak. This matters because innova- tion is not simply about devel- oping new products or attract- ing technology companies. It is also about improving produc- tion processes, management systems, organisational struc- tures and the capacity of ex- isting businesses to adopt new technologies. Weakness in human capital Yet perhaps the most conse- quential weakness lies in hu- man capital. The latest PISA results show that only 52% of Maltese 15-year-olds achieved baseline proficiency in reading, compared with an OECD av- erage of 69%. In mathematics, the corresponding figures were 56% and 65%, while in science Malta recorded 63% against an OECD average of 74%. Perfor- mance also deteriorated be- tween 2022 and 2025 across all three subjects. These rankings provide an uncomfortable in- dication of the capabilities that will shape Malta's future work- force. An economy seeking to become more technologically sophisticated requires people capable of reasoning, solving problems, adapting and learn- ing continuously. Machin- ery, artificial intelligence and digital infrastructure cannot compensate indefinitely for weaknesses in foundational ed- ucation. This is where the relation- ship between education and productivity needs to become much more central to eco- nomic policymaking. Malta has introduced numerous educa- tional initiatives, curriculum reforms, digital programmes and vocational pathways. Some are undoubtedly valuable, but the ultimate measure of suc- cess must be improvements in learning outcomes and the ca- pabilities students carry into adult life. Education is not sim- ply another expenditure cate- gory in the national budget. It is the foundation of long-term productive capacity. The same principle extends to vocational training, lifelong learning and management development. Capital and skills are comple- mentary. Businesses will strug- gle to adopt sophisticated tech- nologies if the workforce lacks the capabilities to use them ef- fectively. Malta needs performance budgeting The implications extend to government itself. General government expenditure in- creased by approximately €487 million in 2025, reaching €9.1 billion. This does not mean the expenditure was unjustified, particularly given increasing demand for public services and existing commitments. How- ever, it reinforces the impor- tance of examining whether public spending is strength- ening the country's produc- tive foundations. Investment in education, infrastructure, digitalisation and business support should increasingly be evaluated according to the outcomes achieved rather than the amounts allocated. Malta needs a stronger culture of per- formance budgeting and im- pact evaluation, ensuring that resources are directed towards interventions capable of gen- erating measurable economic and social returns. Ultimately, the productivi- ty challenge is also a political economy challenge. Employers benefit from access to labour, property owners benefit from expanding demand, govern- ment benefits from additional tax revenues, and consumers benefit from the availability of services. Politicians benefit from strong headline growth and the ability to finance new measures. Each actor responds rationally to the incentives within the system, even when their combined decisions re- inforce a model that becomes increasingly difficult to sus- tain. Moving towards produc- tivity-led growth will therefore require more than encouraging businesses to invest or workers to acquire new skills. It will re- quire a deliberate realignment of economic incentives, sup- ported by better education, ac- cess to capital, institutional ca- pability and public policies that reward value creation rather than expansion alone. None of this diminishes Mal- ta's economic achievements. But economic success should provide the confidence to con- front emerging weaknesses rather than the temptation to overlook them. The warning signs in productivity, labour costs, innovation and educa- tion are not evidence that the economy is failing. They are evidence that the foundations 19 maltatoday | SUNDAY • 18 OCTOBER 2026 OPINION Malta's growth The warning signs in productivity, labour costs, innovation and education are not evidence that the economy is failing. They are evidence that the foundations of future prosperity require greater attention