Finance Minister Clyde Caruana told parliament that the rock-bottom fertility rate of the Mediterranean island's native population was the "biggest challenge" facing the country.

"We need to encourage more families to have at least two children," Caruana said in a speech on Malta's 2026 budget.

A report by EU statistical agency Eurostat this year showed Malta had the bloc's lowest fertility rate in 2023, at 1.06.

Maltese Catholic Archbishop Charles Scicluna in September said that Malta faced "ethnic extinction".

Although densely populated, with around 1,704 people per square kilometre, almost a third of Malta's population is made up of foreign workers and their families.

Caruana said on Monday that parents of two or more children will, from 2026, each not pay income tax on the first 18,500 euros ($21,575) of their income.

That will rise to 30,000 euros each by 2028. The tax cuts will be retained until the children are 23 years old.

The scheme is similar to another announced in Poland in September which will remove tax on families with at least two children having an income of up to 32,973 euros.

Caruana said in February that Malta's native population is currently 406,000, of whom 24% are aged over 65.

In his budget speech, Caruana said Malta is forecast to have GDP growth of 4.1% in real terms in 2026, broadly similar to 2025. National debt was projected to be stable at 47.1% of GDP.

The deficit was projected to fall to 3.3% of GDP this year and 2.8% next year, he added. ($1 = 0.8575 euros)