Malta missing investment targets by €200m a year, watchdog warns

The government has consistently fallen short on its public investment targets, according to the Malta Fiscal Advisory Council, which warned that projected €900 million investment expenditure for the year is “relatively ambitious”.

In its assessment report for 2026, the council said actual public investment consistently fell short of projected levels over the past three years by an average of around €200 million annually.

“The recurring nature of these shortfalls points to persistent implementation challenges, particularly capacity constraints, which continue to weigh on the timely execution of the projected public investment targets,” the council said.

As a result, the council warned that the investment targets are subject to downside risks.

Meanwhile, private investment is expected to remain broadly balanced in the year ahead. While geopolitical uncertainty may cause businesses to postpone certain investment decisions, the council said this should be partly offset by Budget measures promoting digitalisation and business investment.

The council also warned of upside risks to government consumption. While the government is projecting 4.1% growth in intermediate consumption, the council pointed out that the average growth in this area over the past three years stood at 16.2%.

While the downside risks to public investment could dampen expenditure growth, the council said this would not happen to a sufficient enough level to contain the growth to the level projected.

It also flagged persistent demand pressures, especially in health and infrastructure, together with continued cost increases associated with general government service contracts, as factors that could push government consumption above target.

Economy operating below potential

Domestic demand is strong, the unemployment rate will remain close to historical lows, and nominal wage growth has remained solid.

But almost paradoxically, Malta’s output gap is projected to widen and turn further negative in 2026, suggesting the economy is operating below its maximum potential, possibly due to weak demand.

The output gap stood at -0.1 per cent in 2025, but in 2026 it is expected to reach -1.1 per cent, as per government forecasts. The council said this reflects a cyclical slowdown rather than a deterioration in underlying economic fundamentals, but the size of the widening is noteworthy.

The council clarified with Times of Malta that the widening negative output gap is likely the result of two factors.

First, the model used to estimate the gap assumes that Malta’s underlying productivity is stronger than what the data shows, making the economy’s theoretical ceiling look higher.

The second factor is the government’s optimistic investment projects. Higher assumed investment feeds into a higher estimated capacity, which again widens the gap.

The council also warned of upside risks to government consumption. While the government is projecting 4.1% growth in intermediate consumption, the council pointed out that the average growth in this area over the past three years stood at 16.2%

Fiscal rules, both at the EU and national level, use the output gap to separate the government deficit into two buckets: the part caused by a weak economy and the part caused by deliberate spending choices. A larger negative output gap means the deficit is more likely to be labelled as the economy’s fault rather than the government’s.

Productivity remains a concern for the council, which recommends productivity-led growth to sustain economic performance while alleviating pressures on infrastructure and public resources.

The council also recommended directing policy efforts towards enhancing labour productivity, including through investments in human capital, digital technology, research and innovation and advanced infrastructure.

It also pointed out that investment in research and development is exceptionally low. The investment-to-GDP ratio in this area stands at just 0.3%.

Little direct exposure to Middle East conflict

In a separate research box, the council analysed the extent of Malta’s exposure to the conflict in the Middle East.

Overall, there is limited direct impact for Malta, but the economy is still exposed to second-round effects.

Goods exports are concentrated in the UAE and Saudi Arabia, consisting largely of food and live animals. However, the region represents 13.6 per cent of total food exports from Malta, indicating slightly high sector-specific exposure.

Meanwhile, services accounted for 85 per cent of Malta’s total real exports to the region. The council pointed out that services exports are generally less sensitive to geopolitical tensions and physical trade flow disruptions. Malta’s main European trading partners also appear to have relatively limi­ted direct trade exposure to the region. Nonetheless, higher energy costs and increased uncertainty, coupled with weaker economic sentiment, are expected to weigh on Malta’s main export markets.

The council also flagged downside risks to tourism, as lower real income in tourist markets may affect spending on non-essential goods, including travel.

Higher energy costs are also expected to pass through the global economy. While the government is currently subsidising energy costs for households and businesses, imported inflation remains a concern, as 60% of Malta’s goods imports are from EU countries.