Malta is not yet in the danger zone when it comes to the national debt, but the country could find itself in that situation quickly without medium-term planning, especially if investment in renewables is not expedited to reduce energy price pressures, Dr Moira Catania told The Malta Independent on Sunday.

Catania, a senior lecturer at the University of Malta's Institute for European Studies, was replying in her capacity as chairperson of the Malta Fiscal Advisory Council.

She said that Malta's rising national debt of currently around €10.8 billion is "sustainable for now, but not indefinitely". Whether it becomes alarming depends on the proportion of debt to economic output, or GDP, as well as the cost of borrowing and how the debt is used.

She said that assessing the type of debt is important, and continued that debt which funds recurrent costs, such as salaries, does not equate to long-term investment. She said that Malta's debt-to-GDP ratio currently stands at around 52 to 54%, "below the EU's 60% threshold". However, she said that the margin is narrowing and that the government should explore ways to optimise resources and cut costs.

"I believe Malta can afford three to four more years of moderate, deficit-driven borrowing, but if the GDP growth slows, global interest rates rise, or borrowing is misallocated to unproductive areas, the debt could become unsustainable by 2029 or 2030," Dr Catania stated. "Alarm bells would pound if the debt-to-GDP ratio exceeds 65 to 70% without a sound fiscal plan, interest payments significantly exceed government revenue, and Malta's credit rating is downgraded. This would raise borrowing costs and trigger stricter EU scrutiny under the Stability and Growth Pact," she added.

Another alarm would be if interest payments begin to crowd out productive public investments in areas such as infrastructure, education and healthcare. This could damage market sentiment and increase borrowing costs.

Catania stated that these concerns are why she was sceptical in the way ReArm Europe was presented, "especially exempting member states from deficit rules if they spend on military and defence the amount of 1.5% of GDP". She remarked that she is not against investing, "but if the investments go to cover military equipment for just Ukraine, that's not productive investment".

Sustainability of debt

Asked about the sustainability of debt, Silvan Mifsud, the vice-president of the Malta Chamber of Commerce, replied that the national debt can keep rising "just as long as it rises at a lower rate than GDP growth".

To the same question, Clint Azzopardi Flores, an economist and former Labour Party MEP candidate, responded that assessing the sustainability of national debt is a "complex issue". He said that the International Monetary Fund defines government debt as sustainable "if the country is able to finance its policy objectives and service the resulting debt, without resorting to unduly large adjustments which could otherwise compromise its stability".

He continued that in the EU, the new economic governance framework adopted in 2024 aims to ensure debt sustainability, which he said is defined as the government debt being "on a plausibly downward trajectory" or staying at "prudent levels, even under adverse scenarios" by the end of a multi-year fiscal adjustment period.

Azzopardi Flores stated that, according to the debt sustainability analysis carried out by the European Commission in 2024, Malta's fiscal sustainability risk is low in the short-term and "generally low" in the medium-term. He added that, however, it has a high-term fiscal sustainability risk, "reflecting projected increases in ageing-related public expenditures, namely pensions, health-care and long-term care costs".

National debt rises to nearly €11 billion

According to data published by the National Statistics Office, the national debt as at the end of March stands at around €10.8 billion, which is an increase of €844 million from the corresponding month in 2024.

The Malta Independent on Sunday asked Dr Catania, Mifsud and Azzopardi Flores what they believe are the main contributors to the increase in the national debt, as well as whether they think the reasons are valid and ultimately beneficial for the country.

Catania said that the €844 million year-on-year increase in Malta's national debt reflects a combination of structural fiscal decisions and strategic economic stabilisers.

She said that she thinks the main drivers of this increase are primarily the energy subsidies and cost-of-living support given in the past three years. She continued that Malta has maintained broad subsidies on energy and fuel since the Russian invasion of Ukraine. "This is the tricky and critical point," she commented. "Government intervention signalled market stability. Once such stability is assured, private investors and consumers alike do not halt their planned investments or spending. Without this intervention, unprecedented exogenous shocks would have severely hindered economic growth, as aggregate demand would have declined."

She remarked that debt-to-GDP and deficit-to-GDP are ultimately just ratios, with GDP as the denominator. "The larger the GDP, the lower these ratios if growth is sustained."

Catania said that she believes that counter-cyclical measures, which preserve economic stability are necessary, but they come at a fiscal cost. The central challenge, she noted, is how long Malta can maintain such subsidies without reforming its energy pricing structure or reducing fossil fuel dependency and shifting to renewables for substantial cost reductions on subsidies. She added that new collective agreements, including increased public salaries and enhancements in the health and education sectors, also contribute to the debt, but remarked that this is strategic debt if it leads to higher future productivity.

"So, on one hand, we are tackling the aggregate demand to stabilise shocks, while in tandem investing in productive sectors on our aggregate supply, including our future workforce. Personally, I view debt and deficits over a cycle rather than year to year. In times of force majeure, this should be the strategy," she stated.

Mifsud said that if one were to analyse the figures between 2019 and 2024, then one would see that the government annual revenue increased by 54% while the government expenditure increased by 73%. He said that the increase in government expenditure was mainly coming from intermediate consumption, compensation of government employees, social benefits, capital transfers payable and subsidies payable, "with four out of five of these categories being directly related to recurrent expenditure".

Azzopardi Flores said that the level of government debt will increase as long as the government continues to register a budget deficit, "which is financed by government borrowing". He continued that the budget deficits which the government has registered since 2020 have resulted in an increasing level of government debt. "However, it is relevant to consider the level of government debt in the context of the performance of the Maltese economy," he commented. The general government debt as a share of the GDP has not increased over the past few years, but rather it has decreased from 49.8% in 2021 to 47.4% by the end of 2024. "Thus, although in absolute terms the debt level has increased, the economy has experienced very strong growth, which resulted in a decreasing government debt ratio."

He added that the reasons for government borrowing are also relevant. He said that in its recommendations to the government, the Malta Fiscal Advisory Council has emphasised the importance of prioritising expenditure policies which ensure the quality and sustainability of public finances. He said that the MFAC has particularly recommended that public spending efficiency should be improved and that resources be allocated towards productive capital investment.

Scaling back costs?

The Malta Independent on Sunday asked whether the government should attempt to scale back some costs and whether doing so would have a larger detrimental impact on the economy or quality of life.

Catania responded that the government should assess how to scale back costs in a "thoughtful, surgical, and prescriptive manner". She said that "abruptly or poorly-timed cuts could damage growth" and provided an example by saying that inefficient public sector spending should be streamlined by reducing duplication and investing in digitisation. She continued that "subsidies should remain, but must be coupled with accelerated investment in renewables to shift the burden". She added that unproductive capital projects should be scrapped in favour of more productive investments with a focus on environmental sustainability.

She said that cutting spending on healthcare or education would harm long-term productivity and social wellbeing, and that reducing social safety nets would increase inequality and create political challenges. Additionally, she said that scaling down public investment in the green and digital transitions would damage Malta's competitiveness and alignment with EU priorities. Such concerns are why any cost-cutting must be carefully targeted, she stated.

"Instead of austerity, Malta should consider a spending review, implement efficiency reforms, and pursue targeted fiscal consolidation through strict KPIs. This would ensure sustainability while safeguarding quality of life, preserving our investment-grade credibility, and preparing the economy for future shocks, such as pandemics or the fallout from war... The current Minister for Finance seems to be quite on the alert and applying such a strategy, while the Minister for the Economy is currently in the public consultation stage on Malta Vision 2050, which is certainly required to properly plan our future."

Mifsud said that the question of whether the government should attempt to scale back costs is "ultimately a matter of efficiency, as much of the increase in government expenditure comes from recurrent expenditure". He added that the more the government gains in efficiency to reduce the increase in compensation to employees and intermediate consumption, the better to reduce government expenditure while not having any particular effects on Malta's economy.

Azzopardi Flores said that the new EU economic governance framework involves a commitment to adhere to an expenditure trajectory over the medium-term, and continued that the government has committed to a ceiling of an average growth of 5.9% in the net nationally financed primary expenditure. He added that this ceiling was subsequently endorsed by the European Commission.

Given historical trends in public expenditure growth, "this target poses a challenge for the Maltese government, particularly in the context of a growing economy and expanding population", he said. The MFAC has emphasised the importance of restraining expenditure growth in accordance with the set trajectory and highlighted that continuous monitoring of public expenditure developments is essential. "Furthermore, in this context, it is crucial to ensure efficiency of public spending and that productive capital investment is not curtailed," he remarked.