An Interview with Finance Minister Clyde Caruana

What has been the feedback to last Monday’s Budget?
The feedback has been positive. I believe the Government has supported different sectors with targeted and sustainable measures. When you consider last year’s tax cut together with this year’s new parental tax brackets, every taxpayer has seen an increase in disposable income.

You described the parental tax cut as a generational measure. What do you mean by that?
We’re supporting all families in different ways, but this year’s Budget offers unprecedented help for families with children. It’s a generational measure because it provides lasting support for parents. In the 1990s and early 2000s, the Government removed the children’s allowance for working parents. We’ve reversed that direction completely and we’re saying clearly that the Government stands with parents. For example, two parents earning €42,000 each will see their annual tax bill drop from around €14,900 to just €3,600 under this new system. Over the years, until their children turn 23, that’s a tax saving of around a quarter of a million euros.

What about parents who earn less? Will their tax cuts be as significant?
Yes. Take two middle-income workers earning €30,000 each. Last year, they paid almost €9,000 in tax. Under the new system, they will pay absolutely nothing.

For how long will this apply?
It depends on the children’s ages. For instance, if the children are two and five years old and continue their education, the parents’ income will remain tax-free for the next 21 years, until the youngest child reaches the age of 23. 

Can the country afford such measures?
Yes, it can. The key factor behind any social or tax measure is the strength of the economy. Malta’s economy is performing very well. Despite a major income tax cut last year and no new taxes introduced this year, Government revenue continues to grow. That clearly reflects a healthy and resilient economy.

What about low-income workers who do not pay tax?
If you already do not pay tax, this measure won’t directly affect you by definition. However, we have introduced other measures that put more money in your pocket. The children’s allowance has increased for those earning up to €30,000, which coincides with the new tax-free threshold. We also strengthened the in-work benefit and increased the bonus by €500 for every additional child in a family, regardless of whether the parents are employed. So, even for those not paying tax, there are meaningful improvements in income support.

And what about single-rate taxpayers?
This Budget reflects the cumulative impact of two major tax measures. Last year’s €140 million tax cut was retained and expanded with this year’s measure, bringing the total value of tax reductions to around €300 million. A worker on the single tax rate will have saved between €870 and €1,350 in tax across this year and the next. So yes, single-rate taxpayers are also benefiting from a significant tax cut.

These are substantial reductions, especially given Europe’s economic slowdown. How do you explain the difference between Malta and the rest of Europe?
We are seeing the results of our economic decisions. After the pandemic and the start of the war in Ukraine, many European governments shifted the burden of energy and inflation onto their working populations. I believe that was a mistake. Malta took a different path. We absorbed most of the impact, protected families and businesses from higher energy costs, increased pensions, and introduced a second cost-of-living adjustment for low-income earners. Because of these measures and many others, our economy remains strong. Many European countries that did not follow this approach are now experiencing little to no growth.

Why did other European countries choose a different approach?
Their fiscal space is limited. Many of them already had very high debt-to-GDP ratios. In Malta, thanks to years of fiscal discipline, our debt-to-GDP ratio stands at around 47%, and our deficit continues to fall each year. 

You also described this as a socialist budget. Are the social measures as strong as in previous years?
Absolutely. The tax cuts have understandably dominated the headlines, but the budget also includes very strong social measures. Pensions, low-income support, increases in the in-work benefit and children’s allowance and many others, amount to around €120 million in total. That represents a large portion of the overall package. The feedback from people, especially pensioners, has been very positive because these are meaningful and tangible increases.

Unions and employers have reacted positively to the Budget. This Government has built a reputation for supporting businesses. How does this year’s Budget continue that approach?
In this Budget, we took a strategic approach to business support. Digitalisation is key to competitiveness and productivity, and we are investing €100 million to help businesses become more efficient through technology and artificial intelligence. This reduces their dependency on additional labour while increasing output. In other countries, artificial intelligence is often viewed with fear because of high unemployment. In Malta, it’s the opposite. Since we have almost full employment, embracing AI and digital tools helps us address labour shortages and maintain economic growth.