Editorial: Making the welfare state affordable

Former German chancellor Angela Merkel frequently commented that the EU accounts for just seven per cent of the world’s population and a quarter of its gross domestic product, but as much as half of its welfare spending.

Eurostat data confirms that, in 2023, Malta’s social expenditure, measured as a percentage of GDP, was slightly more than half the EU average. There are signs, however, that social spending is accelerating fast, raising questions about its sustainability.

The National Statistics Office released figures indicating that, in 2024, government spending on social benefits increased by 12.7% compared to the previous year. Retirement pensions and non-contributory spending recorded the most significant increase.

The NSO also confirms that two-thirds of pensioners form a larger cohort within the population than families in receipt of children’s allowance. This reality calls for a soul-searching exercise by social security and economic policymakers if the country’s future socio-economic prosperity is to be safeguarded.

It would be incorrect to view the welfare state primarily as a burden, and it is undeniable that welfare states embody values that people across the EU hold dear.

Of course, sustainable economic growth is the key to providing the kind of social benefits that the community needs to look to the future with optimism. Socio-economic reform inertia in the sector is the main obstacle to making the welfare state affordable.

It is worrying that Malta’s population is ageing rapidly while birth rates continue to decline. While life expectancy is getting longer, the pressures on the public health system are becoming more pronounced. At the same time, a low birth rate is resulting in a falling local working population.

The government is aware of these concerning trends but is taking little action to mitigate their risks. For instance, for over a decade, the mass importation of third-country nationals has spurred economic growth, often employing low-paid workers with low-added value in economic activities.

Realistically, in the short and medium term, the country will continue to rely on imported labour to support public infrastructure, especially the healthcare system. If the economic model is restructured, we must also promote the immigration of highly skilled young people to kick-start new, capital-intensive economic activities that generate more value. Of course, this is by no means an easy reform. Like other EU member states, Malta faces significant challenges in addressing the security, trade, and demographic threats that have intensified over the past few years.

The social support systems must be strengthened, not necessarily by spending more, but by managing them better. Abuse of the social welfare systems must no longer be tolerated. Cutting welfare abuse does not mean that the risks disappear; it simply creates new kinds of challenges.

We must also ensure that work ethics are strengthened significantly among younger generations. Our dependence on low-paid foreign workers must be curbed. The government can start this reform by reducing the size of the unproductive parts of the public sector. And there are many of them! Policymakers must also discourage wasteful consumption by targeting subsidies to those who need them most.

However, the most significant change to keep our welfare system affordable and sustainable in the longer term must be better social investment in families, especially in the welfare of children. Today’s children are the workers of tomorrow, and economic reform will never be successful unless we invest more in training and technology to enhance productivity.

The future of our social security system will ultimately depend on how we deliver sustainable economic growth through improved productivity and tax revenues.