Malta borrows more as economy expands, defying fiscal norms

Malta’s public finances are moving increasingly out of step with basic economic logic, as government debt and spending continue to surge despite years of strong economic growth.

Under Finance Minister Clyde Caruana, the driving force behind Malta’s cheap labour-driven growth model, the country’s national debt has more than doubled in nominal terms, rising from €5.4 billion in 2020 to €11.3 billion by 2025.

This sharp increase has unfolded during a period of robust economic expansion, fuelled by rapid population growth, a booming labour market, and post-pandemic recovery.

But instead of using the boom to strengthen public finances, the government has continued to spend heavily on unproductive sectors and political gimmicks and sweeteners.

Economists who spoke to The Shift said that under normal economic principles, governments are expected to reduce deficits and rebuild fiscal buffers during periods of growth. In Malta’s case, the opposite is happening. The government continues to run deficits of around 3% of GDP, adding to the debt pile year after year, even as revenues are boosted by a growing economy.

The problem is not just the scale of spending, but its nature.

A significant share of increased expenditure is going towards recurrent costs, including public sector wages, subsidies, and day-to-day operations, rather than long-term investment. Such spending does little to improve productivity or strengthen the economy’s fundamentals, raising concerns that rising debt is not translating into sustainable growth.

Economists point out that fiscal policy is meant to be counter-cyclical: governments should spend during downturns but consolidate during economic expansions. Malta’s approach runs directly against this principle.

While the debt-to-GDP ratio remains relatively stable, this is largely due to continued economic growth masking the underlying increase in borrowing.

“Growth is doing the heavy lifting,” one veteran economist told The Shift, warning that the current trajectory is being sustained artificially.

Independent economists told The Shift that Prime Minister Robert Abela and Caruana are prioritising short-term political gains, pumping money into the economy to maintain a sense of prosperity and a “feel-good” factor, rather than addressing long-term risks.

At the same time, Malta’s economic model is showing signs of strain.

Heavy reliance on labour expansion and a constant influx of low-cost workers is putting pressure on infrastructure while delivering limited productivity gains.

Economists warn that if growth slows, even slightly, the fragile balance underpinning Malta’s debt dynamics could quickly unravel.

The composition of spending remains central to the concern.

Borrowing to finance productive, long-term investment can be justified. However, persistent deficits driven by consumption and recurrent expenditure, as is the case in Malta, raise serious questions about fiscal discipline.

For now, Malta is not facing an immediate fiscal crisis and is pretty in line with EU rules. However, continuing to accumulate debt during an economic boom point to a deeper structural problem.

At best, it is a missed opportunity to put public finances on a stronger footing. At worst, it is storing up risks that could become difficult to manage when economic conditions inevitably change.