As Budget 2027 undergoes its final touches, attention will inevitably turn to what the finance minister will announce tomorrow. Pension increases. Benefits. Tax changes. Investment. New measures. And, inevitably, the size of the deficit.

But on the eve of Budget Day, there is another question worth asking: how resilient are Malta's public finances if the economic conditions underpinning the Budget are overtaken by events?

Economic history has an inconvenient habit of interrupting comfortable forecasts. The global financial crisis of 2008 did it. A pandemic later shut down large parts of the world economy. Russia's invasion of Ukraine subsequently triggered a major energy-price shock, while continuing tensions in the Middle East underscore the vulnerability of energy markets. Malta responded to these crises in different ways, using public resources to support the economy and protect households and businesses.

Such responses require fiscal space: the capacity of public finances to absorb a shock without immediately imposing painful tax increases or spending cuts. But perhaps what matters most is fiscal resilience: the ability of public finances to withstand a shock, recover and still retain fiscal space to respond if another crisis arrives. Fiscal space helps a government to act; resilience determines how much capacity remains afterwards.

While we cannot predict the nature or timing of the next shock, we can identify the vulnerabilities in our public finances that could make its consequences more severe. Building fiscal space is therefore essential to preserving fiscal resilience. For this reason, you don't build fiscal space because you know what the next crisis will be. You build it because you don't.

Malta's fiscal strength - and its vulnerabilities

In a forthcoming analysis, I examine the extent to which Malta's public finances could withstand major economic shocks, individually and in succession. Malta enters Budget 2027 with important strengths. The government deficit fell from more than 5% of GDP in 2022 to 2.2% in 2025, debt remains below half the size of the economy, and tax revenues have grown strongly. But today's favourable figures do not guarantee resilience tomorrow.

Consider a family whose income has risen rapidly. Salaries increase, overtime is plentiful and one parent repeatedly receives substantial bonuses, improving the family's standard of living. But permanent commitments financed by exceptional income become harder to sustain when the bonuses stop.

Government finances face a comparable tension. Personal income tax, VAT and social security contributions have grown strongly, but company income tax stands out. Receipts from this source rose by more than 70% in 2024, accounting for almost half the increase in tax revenue that year. The Central Bank of Malta attributes much of the exceptional performance in 2024 and 2025 to internationally oriented companies registered in Malta, whose fortunes depend partly on conditions abroad. A shock thousands of kilometres away can therefore reach the Malta's public finance.

Government expenditure, on the other hand, is less responsive when circumstances change. Between 2022 and 2025, spending on goods and services increased by almost 57%, the wage bill by around 31%, and social benefits by around 29%. These figures illustrate how difficult recurring commitments can be to adjust: pensions, public wages and essential services do not automatically fall when tax receipts weaken.

Government revenue can slow quickly. Expenditure has a much longer braking distance. A shock can squeeze the public finances from both sides.

The legacy of successive shocks

The costs of previous crises can persist. Energy subsidies over the past five years reached no less than €1.35 billion. Yet the bill is far from closed: energy and food-price support is expected to approach €400 million in 2026, with a similar allocation envisaged for 2027.

Stabilising prices has protected households and businesses. But fiscal arithmetic remains fiscal arithmetic: every euro used to hold down energy prices cannot simultaneously finance another programme, reduce the deficit or rebuild fiscal space for the next shock. The longer such support continues, the more it risks becoming an expected feature of government policy, increasing pressure for similar intervention when the next adverse shock arrives. And with energy markets still exposed to geopolitical instability, renewed price pressures could arrive while existing support remains in place.

Government debt tells part of the same story. It rose from around €9 billion in 2022 to €11.4 billion in 2025, even as strong nominal GDP growth initially lowered the debt ratio. That favourable arithmetic cannot be assumed indefinitely. Borrowing to confront one crisis leaves a higher debt burden when the next arrives. The question is how much capacity remains when crises overlap.

Putting fiscal resilience to the test

To explore that question, my analysis starts from the Ministry for Finance's 2026-2028 budgetary projections, which already incorporate the fiscal legacy of earlier shocks, including planned energy support. It then adds hypothetical future shocks as illustrative stress tests, not forecasts.

Under a hypothetical financial-crisis-type shock beginning in 2027, the simulation shows that the deficit peaks at about 6.4% of GDP in 2028 and debt reaches 56% in 2029. Malta's moderate initial debt provides some capacity to absorb this type of shock, but the fiscal damage persists long after the initial economic shock has passed.

A COVID-type disruption is more abrupt. Replaying a similar pandemic-type economic shock in 2027 alongside emergency measures comparable to those deployed that shock, produces a deficit of about 11.4% of GDP and debt of 59.5% in the same year. The deficit reflects deliberate support for the economy as well as weaker activity, not simply a lower tax intake.

Despite their different trajectories, debt in both individual-shock tests subsequently declines, but by 2030 remains around 12 percentage points of GDP above the baseline. The simulations illustrate an important distinction: government intervention can cushion the economic damage from a crisis, yet its fiscal consequences can persist long after economic activity recovers.

The most revealing test combines a financial-crisis-type shock in 2027 followed by a COVID-type disruption in 2029, before recovery from the former shock is complete. In this scenario, the deficit reaches approximately 13.8% of GDP and debt approaches 69% in 2029. The message is that successive shocks can compound rather than replace one another.

Several revenue sources may weaken together as profits, consumption, employment and investment falter. Meanwhile, recurring spending continues, energy support may still be needed, and debt accumulated during the first shock remains. Fiscal space can diminish precisely when it is needed most. Being below the EU's 3% deficit reference value before a crisis is no guarantee of resilience afterwards.

The Irish warning

Ireland offers a real-world reminder. Before 2008, buoyant tax revenues accompanied a broad boom in which property played a central role. When it reversed, several revenue streams weakened together, and a banking collapse magnified the damage. Malta is not Ireland in 2008. But the episode shows how apparently separate strengths can depend on the same underlying conditions. Ireland's fiscal institutions now also caution against funding permanent government commitments with potentially volatile multinational corporation-tax receipts.

What the Budget must preserve

DBRS's recent decision to maintain Malta's A (high) rating with a stable outlook recognises important strengths. Its concerns about energy subsidies and fiscal pressures remind us that creditworthiness today and resilience to tomorrow's shocks are related, but different, questions.

Budget 2027 should be judged not only by what its measures deliver, but also by the capacity they leave to respond when events take an unexpected turn. The stress tests suggest Malta can absorb an isolated shock, but fiscal resilience weakens when crises arrive in succession.

Fiscal resilience is not simply having enough capacity to survive the next shock. It is having enough left afterwards to face the one that follows. That may be among the most important things Monday's Budget should preserve.

Ivan Ebejer is an economist and independent management consultant specialising in strategic decision-making.

This article draws on an analysis by the author examining the resilience of Malta's public finances to major economic shocks. The full analysis will be available shortly at www.ivanebejer.com.