Malta Fiscal Advisory Council recommends shift towards productivity-led growth

The Malta Fiscal Advisory Council (MFAC) has recommended a shift towards productivity-led growth as a more sustainable basis for long-term economic performance.

The Council made its recommendation while endorsing the Finance Ministry’s macroeconomic forecasts for 2026 as presented in the Annual Progress Report 2026.

“This endorsement signifies that the MFAC assessed the forecasts to fall within its endorsable range and to be consistent with the assumptions outlined in the official document.”

Subsequently, on 9th June 2026, the MFAC published its complete assessment and formal endorsement of the macroeconomic projections.

It noted that the forecasts contained in the Annual Progress Report 2026 update the previous forecasts which were part of the Draft Budgetary Plan 2026, due to the changed global economic outlook following the outbreak of war in the Middle East at the end of February 2026.

The council said that the Ministry for Finance expects the Maltese economy to grow by 3.7 per cent in 2026, with domestic demand continuing to serve as the main growth engine.

This marks a slight downward revision from earlier forecasts but still places Malta among the fastest-growing economies in the euro area, it said.

The council noted that private consumption is set to remain the key contributor, supported by a strong labour market and higher incomes, “particularly following recently concluded collective agreements in segments of the public sector.”

“Government consumption expenditure is expected to remain robust in 2026, albeit with a slight moderation. Gross fixed capital formation is projected to increase significantly, marking a substantial upward revision from the previous forecast, primarily driven by a stronger public investment profile.”

Meanwhile, net exports are projected to exert a small negative contribution to GDP growth, as imports are expected to outweigh exports, the council said.

The council noted certain differences in the composition of growth, particularly with respect to projections for gross fixed capital formation and government consumption. “Downside risks to public investment are expected to be largely offset by upside risks to government consumption, driven by continued expenditure pressures in key areas such as health and infrastructure.”

It said that private investment risks are considered broadly neutral, and that overall, these offsetting factors result in a broadly neutral growth risk assessment. “Furthermore, the widening negative output gap appears to reflect a cyclical slowdown, though its magnitude seems difficult to reconcile with resilient labour market conditions and persistent domestic demand pressures.”

The council made two recommendations. On the aforementioned shift recommendation, the council noted that Malta’s strong economic growth in recent years has been driven largely by domestic demand and an expanding labour force, supported by significant inward migration.

“While this has boosted economic activity, it has also intensified pressures on infrastructure and public services, with productivity growth remaining relatively subdued.”

Its second recommendation is to strengthen productive investment, particularly in human capital, digitalisation, research and innovation, and advanced infrastructure, “rather than relying on short-term expenditure.”

The council highlights that Malta’s relatively low capital intensity is constraining productivity growth and limiting long-term economic potential.

“While recent initiatives to support digital uptake are positive, stronger efforts are needed to boost research and development and address skills mismatches. Overall, a coordinated strategy focused on productive investment is essential to support a more sustainable, resilient, and productivity-driven growth model.”