By: PKF Malta Advisory team

On the 26th of October, the minister of Finance, Hon. Clyde Caruana, presented the Budget 2027 documents to the President of Malta, H.E. Myriam Spiteri Debono, prior to delivering the Budget Speech in Parliament under the theme “Malta Miegħek”. The Budget outlines the government's priorities for 2027, focusing on sustaining economic growth, supporting households and strengthening fiscal sustainability. At the same time, it introduces measures that may have wider implications for businesses, the labour market and the employment of third-country nationals (TCNs).

Economic Growth: Continued Expansion at a Moderating Pace

Malta's economy is projected to maintain a positive growth trajectory in 2027. Real Gross Domestic Product (GDP) is expected to grow by 3.8%, compared to the forecasted figure of 4.1% in 2026. This suggests a slight slowdown in the pace of economic growth; however, it is still expected to significantly outperform the EU average of 1.4%, according to the latest European commission published forecast. In nominal terms, GDP is expected to increase from €24.7bn in 2025 to €26.3bn in 2026 and €28.1bn in 2027.

Government Revenue and Expenditure Outlook

Regarding fiscal policy, government revenue is expected to increase from €9.1bn in 2026 to €10.1bn in 2027, which represents an 11% increase. Moreover, an increase of 7.8% in recurrent expenditure is projected. At the same time, capital expenditure is projected to increase from €1.2bn in 2026 to €1.5bn in 2027, which represents an increase of 24.2%. Interest payments on government debt are also expected to increase slightly from €326m in 2026 to €382m in 2027, representing 1.36% of GDP. The projected increase in capital expenditure suggests the government’s goal of supporting economic growth and infrastructure development.

Fiscal consolidation and sustainability

The government's fiscal outlook indicates a gradual consolidation of public finances, with the deficit expected to decline to 1.8% of GDP by 2029 from the current 5.5% of GDP. Meanwhile, the debt-to-GDP ratio of 46.8% is projected to remain below the EU's 60% reference value. These projected figures might suggest a relatively stable fiscal position. However, the continued presence of budget deficits highlights the importance of ensuring that public expenditure generates sufficient economic returns.

Household purchasing power versus business costs

With inflation projected at 2.7% for 2027 , up from 2.5% this year, a €6.41 weekly Cost of Living Adjustment (COLA) will help protect household purchasing power. For employers, this would mean a higher wage bill as from January 2027, pushing up the costs for businesses.

Government revenue versus tourism competitiveness

Tourism remains a key contributor to Malta's economy, with tourist arrivals expected to exceed 4.5 million in 2026, generating approximately 28 million overnight stays. As part of Budget 2027, the government announced an increase in the eco-contribution from €1.50 to €8 per person per night for hotels and collective accommodation, capped at €64 per stay, while short-let accommodation will be subject to a €10 nightly charge, capped at €80. These revisions are expected to generate approximately €182 million in additional government revenue. While the additional revenue could support investment in tourism infrastructure and public services, the higher charges may affect Malta's price competitiveness and businesses operating within the tourism sector. It remains an open question whether, and how quickly, the additional revenue will translate the additional revenue translates into improvements in service quality and the overall tourism experience.

Moving from labour-driven growth towards productivity-driven growth

Budget 2027 introduces several measures affecting third-country nationals (TCNs), including an increase in new work permit application fees from €600 to €800, alongside a new annual infrastructure contribution of €400, applicable to both new applications and permit renewals. These measures are expected to generate approximately €80 million in additional government revenue.

The measures may reflect a broader shift towards a higher-value-added economic model. However, the additional employment-related financial burden could indirectly impact the profit margin of employers. Businesses may need to absorb these costs to attract and retain foreign workers, particularly highly skilled professionals. This could affect Malta's competitiveness in attracting international talent, especially in sectors where demand for specialised skills remains high. Meanwhile, labour-intensive sectors such as hospitality, construction and retail may face additional operating costs, potentially placing pressure on profit margins and business competitiveness.

On the other hand, Budget 2027 introduces a reduction in the corporate tax rate from 35% to 25% for companies with an annual turnover below €1 million, applicable to retained or reinvested profits. This could encourage SMEs to reinvest their earnings into technology and productivity improvements. While the reduction may provide financial relief to eligible businesses, its effectiveness in offsetting higher employment-related costs will depend on their profitability.

Another notable measure is the withdrawal of free public transport for TCNs without long-term residency, who will instead face a monthly charge of approximately €33 for public transport usage for those TCNs who have lived in Malta for less than 5 years. Free public transport was originally introduced in October 2022 to encourage greater use of public transport, reduce traffic congestion and limit environmental impacts. The revised policy therefore raises questions about the consistency of Malta's long-term transport objectives. This additional cost for bus usage is counteracted by a monthly administrative fee of €83 tied to a driving licence by TCNs. Therefore, having to pay approximately €33 for public transport usage is still considered to be cost-effective than the monthly administrative charge of €83 for the upkeep of a driving licence.

While the measures could encourage businesses to invest in productivity and reduce reliance on relatively low-cost labour, higher employment costs alone do not guarantee a transition towards more productive economic activities. Investment in technology, workforce skills and innovation should be the main drivers for productivity growth.