Tomorrow’s prosperity needs a new growth model

Over the past decade, Malta has emerged as one of Europe’s economic success stories. Labour market participation has reached record levels and now ranks among the highest in the European Union. Tourism continues to break records, with visitor numbers growing so rapidly that targets originally envisaged for 2035 could be reached within the next year or two.

Economic growth remains among the strongest in Europe, employment is at historic highs and public finances have consistently outperformed expectations, with budget deficits falling faster than planned. Looking at these figures, the natural reaction is simple: What’s not to like? More economic activity means more jobs, higher incomes and stronger government revenues.

Yet, impressive outcomes do not necessarily reveal what lies behind them. The more important question is whether the forces that powered Malta’s growth over the past decade can continue to do so in the decade ahead. Research recently published in the Malta Fiscal Advisory Council’s latest assessment report sought to answer precisely that question.

Using a productivity accounting framework widely employed by institutions such as the OECD and the European Central Bank, the analysis decomposed Malta’s growth into its two fundamental drivers: labour and productivity.

The distinction is simple. Economies grow either because more people are working or because workers become more productive. The most resilient economies are those that increasingly rely on the latter. Malta’s recent experience, however, has been driven predominantly by the former.

Rising labour market participation, particularly among women, and strong inward migration significantly expanded the workforce. Today, Malta records the third-highest labour force participation rate in the European Union while its population increased by almost 130,000 persons between 2016 and 2025, equivalent to around 14,000 additional residents every year.

This economic model delivered impressive results. Malta’s economy has grown at an average annual rate of 6.5%, compared with just 1.5% across the European Union. But success does not come without trade-offs. Malta was already the most densely populated country in Europe a decade ago. Since then, its population density has increased by almost 400 persons per square kilometre, nearly equivalent to the entire population density of the Netherlands, Europe’s second most densely populated country.

Today, Malta records around 1,800 persons per square kilometre, more than three times the Dutch figure. As the population continues to expand, so too do the pressures on housing, transport, infrastructure, public services and quality of life.

The critical question is therefore whether Malta can continue growing in the same way.

The findings are striking. The analysis shows that if Malta wishes to sustain real economic growth of around four per cent per year, roughly the rate recorded in 2025, while productivity continues to improve at its average pace of the past decade, the labour force would need to continue expanding by around 14,000 people every year.

With labour market participation already at record highs and among the highest in the European Union, the scope for further gains from this source has become increasingly limited. Consequently, maintaining this growth model would require continued reliance on inward migration as the principal driver of labour force growth.

The challenge is no longer simply how to grow faster. It is how to grow more productively- Gilmour Camilleri

Put differently, maintaining the current growth model would require Malta to continue adding the equivalent of a small town to its workforce every year.

Why is this the case? Because the other side of the growth equation, productivity, has been comparatively weak. Between 2013 and 2019, labour productivity grew by an average of 2.1% annually. Since the pandemic, however, average productivity growth has slowed dramatically to just 0.3% per year.

Indeed, the decomposition finds that only one-fourth of the average growth (6.5%) registered in the last decade has been driven by productivity increases. Increases in the labour force participation rate were accountable for about two percentage points while 2.8 percentage points are attributed to population increases. This raises a fundamental question.

Can a small island with finite land, growing infrastructure demands and increasing concerns about quality of life continue relying on labour force expansion as its principal engine of growth?

Fortunately, there is an alternative. The same analysis shows that if productivity growth were to accelerate to three per cent annually, while economic growth remained at four per cent, the required increase in the labour force would fall from around 14,000 persons per year to approximately 6,000.

This is the difference between growth driven by adding more people and growth driven by creating more value.

Hence, the debate should not be framed as growth versus no growth. Rather, it is about the type of growth Malta wishes to pursue. One model relies primarily on continued labour force expansion, inward migration and domestic demand. The other relies increasingly on productivity, innovation and higher value-added economic activity.

Fiscal policy has a central role to play in enabling this transition. Public finances should not merely support economic growth; they should help shape its composition. This means prioritising investments that enhance productivity, strengthen competitiveness and remove barriers to innovation.

Complementary measures should focus on addressing skills mismatches through targeted education and training initiatives, fostering innovation and research activity and accelerating the twin transition towards digitalisation and environmental sustainability.

Malta’s economic success over the past decade deserves recognition. But the model that delivered yesterday’s growth may not be the model that delivers tomorrow’s prosperity. The challenge is no longer simply how to grow faster. It is how to grow more productively.

Gilmour Camilleri is chief economist at the Malta Fiscal Advisory Council.