Philippines’ fiscal deficit-to-GDP ratio to further narrow until 2027

By Katherine K. Chan, Reporter

THE PHILIPPINES’ fiscal deficit-to-gross domestic product (GDP) ratio will likely narrow until 2027 as the government’s tax reforms are expected to boost revenue mobilization, the ASEAN+3 Macroeconomic Research Office (AMRO) said.

In its latest Quarterly Fiscal Bulletin released on Thursday, AMRO said the country’s budget gap may shrink to 5.3% of GDP this year, before further narrowing to 5.2% in 2027.

“The fiscal deficit is projected to remain broadly unchanged at 5.2% of GDP in FY (fiscal year) 2027, compared with 5.3% in FY 2026,” AMRO said.

If this holds true, the fiscal deficit-to-GDP ratio will be narrower than the above-target 5.6% seen last year, when the gap ballooned by 4.7% year on year to P1.577 trillion.

The National Government (NG) expects its fiscal deficit to settle at P1.659 trillion or 5.4% of GDP by yearend, before potentially narrowing to P1.695 trillion or 5.1% of GDP by 2027.

In July, the NG’s budget deficit swelled to P106.3 billion, more than fivefold (461.73%) the P18.9-billion gap logged in the same month last year. It was, however, narrower than the P264.3-billion deficit in June.

The country’s seven-month shortfall widened by 13.85% to P893.1 billion from the P784.4-billion deficit a year earlier.

“On the revenue side, revenue mobilization is expected to strengthen gradually through the full implementation of recent tax policy reforms — including the VAT (value-added tax) on Digital Services Act, CREATE MORE (Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy) law, Capital Markets Efficiency Promotion Act, and the new Mining Fiscal Regime — alongside continued improvements in tax administration,” AMRO said.

The government’s tax revenues rose by an annual 5.66% to P2.595 trillion in the January-to-July period, thanks to the 5.31% increase in the Bureau of Internal Revenue’s collections to P1.99 trillion and the 7.25% rise in the Bureau of Customs’ collections to P583.4 billion.

The government’s total expenditures jumped by 7.02% to P3.764 trillion in the seven months to July from P3.517 trillion a year ago.

AMRO noted the disruptions tied to the controversial flood control projects continued to dampen the country’s capital spending.

Infrastructure spending also slumped by 40.8% year on year to P367.4 billion in the first half of the year from P620.2 billion.

Despite this, AMRO lauded the administration’s proposed national budget for 2027, along with those of Indonesia and Thailand, noting that it prioritizes “growth-enhancing spending, expenditure efficiency, and stronger revenue mobilization.”

“Amid limited fiscal space and rising mandatory spending pressures, the budget also emphasizes expenditure efficiency through the Government Optimization Program, stronger performance-based management, and tighter controls on operating expenditure and redundant programs,” AMRO said.

The government proposed a P7.2-trillion national budget for 2027, placing social services and infrastructure programs as the administration’s priorities. This is 6% higher than this year’s P6.793-trillion budget.

“Looking ahead, fiscal policy will need to balance support for growth and vulnerable groups with efforts to rebuild fiscal space,” AMRO Group Head for Fiscal Surveillance Seung Hyun Hong said in a statement.

“Continued efforts to strengthen revenue mobilization, improve spending efficiency, and reinforce public financial management frameworks will be important for maintaining fiscal sustainability and resilience,” he added.

CHALLENGES
Meanwhile, Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, said hitting AMRO’s deficit-to-GDP ratio forecasts are “achievable but not guaranteed” as structural and governance issues derail the country’s fiscal consolidation.

“The 5.3% target for 2026 looks realistic because it is very close to the government’s own fiscal program,” he told BusinessWorld via Facebook chat. “The 5.2% projection for 2027 is also feasible, but the margin for error will depend heavily on whether economic growth recovers, and whether revenue reforms produce the expected gains.”

Meeting the forecasts may be possible if the government sustains its revenue collection and controls its spending, he said, noting the “encouraging signs” from Customs exceeding its half-year collections target.

However, tepid economic growth and elevated inflation would make reducing the deficit-to-GDP ratio a harder feat, Mr. Peña-Reyes noted.

“2026 is also a difficult year for fiscal consolidation because economic growth has weakened… Slower growth makes it harder to generate buoyant tax revenues, while higher inflation can put pressure on government spending,” he said.

In the first half of the year, the economy expanded by 2.6% after growth slumped for a fourth straight quarter to a new post-pandemic low of 2.3% in the April-to-June period.

AMRO has trimmed its Philippine growth forecast to 3.4% from 4.1% for this year, and to 4.8% from 5.5% in 2027. This would put the country’s growth below the government’s 3.5%-4.5% for this year and 5%-6% target next year.

The administration’s fiscal consolidation program also faces risks from slow revenue mobilization, the pressure to maintain public investment and social spending, as well as rising interest rates and debt service pressures, Mr. Peña-Reyes added.

With this, he noted that the government must place equal weight on improving the quality of fiscal consolidation and accelerating its pace.

“The government should avoid achieving lower deficit ratios primarily by cutting productive investment or by accumulating arrears,” Mr. Peña-Reyes said. “A more durable strategy would be to combine stronger tax administration and revenue mobilization with tighter procurement, better project selection, reduced leakage and protection of high-return public investment.”

“That would allow the Philippines to narrow the deficit while preserving the growth needed to bring down the debt-to-GDP ratio over time,” he added.

On the other hand, Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said AMRO’s forecasts are “realistic and attainable,” especially with revenue-strengthening reforms underway.

“The good news is that improvements in tax administration, digitalization, and compliance are already helping strengthen revenues,” he said in a Viber message.

“Going forward, the government should stay focused on broadening the tax base, curbing leakages and smuggling, and ensuring that public spending is efficient and directed toward high-impact infrastructure and social programs,” Mr. Ravelas added.

However, global uncertainties and weather shocks could also weigh on the government’s efforts to lower its deficit-to-GDP ratios, Mr. Ravelas said.

“Overall, the key is not just reducing the deficit but doing so in a way that preserves growth and strengthens the country’s long-term economic fundamentals,” he added.

By 2030, the Philippine government wants to narrow its fiscal deficit-to-GDP ratio to 3.5% with a P1.458-trillion shortfall as it commits to its fiscal consolidation plan.