The Philippines unveiled its budget for 2025 with considerably less drama this year. Last year a showdown over discretionary spending for portfolios overseen by Vice President Sara Duterte became a flashpoint for deeper fissures in the Duterte-Marcos alliance, and eventually led to a major falling out.
No such fireworks accompanied this year’s budget process, which doesn’t deviate all that much from the country’s recent fiscal habits.
Total expenditures for 2025 have been set at PHP 6,352 trillion (about $109 billion). At 10 percent, it is a sizable increase compared to the previous year and confirms the Philippines’ commitment to financing scaled-up public spending by borrowing and running deficits. The 2024 budget, aside from helping fracture the ruling coalition, was constructed around a set of pretty optimistic macroeconomic projections, and planners have continued to hold many of those assumptions in the new budget.
For instance, if we look at the assumptions from last year, the Office of Budget Management projected that in 2024 the economy would grow by a minimum of 6.5 percent, that inflation would not exceed 4 percent, that the exchange rate would not fall below 57 pesos to the dollar, and that the benchmark interest rate would not exceed 5.5 percent. I was skeptical of these assumptions then, and it turns out planners were indeed pushing the limit with many of them.
Throughout 2024, the peso has remained weak against the dollar. Right now, it is around 58 but it’s been close to 57 for much of the year. The benchmark interest rate is 6 percent, higher than the baseline forecast. Economic growth has been strong but is trending closer to 6 than 6.5 percent, while inflation is coming in just under the 4 percent target. This means the 2024 budget has been pushing the limits of most of the major assumptions upon which it was built.
Even with these assumptions accounted for, the 2024 budget planned to run a fiscal deficit equal to 5.1 percent of GDP, while a series of tax reforms were expected to generate increased revenue to help keep the deficit manageable. How did these projections hold up?
Not too bad, but a little bit off the mark. Shortfalls in tax revenue were partially offset by increases in fees, such as from car registrations, and investment income. The need for more revenue from privatizing state assets may be one reason the country’s largest airport was turned over to the San Miguel Corporation so quickly earlier this year. Even so, the deficit is expected to widen to 5.6 percent of GDP by the end of 2024.
Interestingly, budget planners are holding many of their assumptions at about the same level for 2025. GDP is projected to grow by at least 6.5 percent, inflation will remain below 4 percent, and the benchmark interest rate will not exceed 5.5 percent. The only real change they made in their framework was to raise the upper bound for the exchange rate to 58 pesos to the dollar. That means they are giving themselves a little more wiggle room on a weaker peso. Like 2024, next year’s budget will continue borrowing to pay for spending, with a projected deficit equal to 5.3 percent of GDP.
I am not what you call a fiscal hawk. I think it’s perfectly fine for countries to run deficits to pay for public spending (within reason). Some countries have legal limits on deficit spending, such as Indonesia, where annual deficits are capped at 3 percent of GDP, and when the new president said he would push that upper bound markets reacted negatively.
But these caps are for the most part just based on vibes. The Philippines has been running deficits in excess of 5 percent of GDP for the last several fiscal cycles and plans to continue doing so, even under challenging macroeconomic conditions when borrowing costs are elevated.
The more important question is not whether states borrow money to fund government operations, it’s what they are spending the money on. In the Philippines’ 2025 budget, most of the increase is being allocated to personnel expenses, as civil servants and government employees, including the military, will see pay raises and other benefits.
Personnel expenses are set to increase by 13 percent year over year. Capital outlays, including spending on infrastructure, are set to shrink slightly in 2025. Given challenging macroeconomic conditions and higher borrowing costs, is it wise to continue running deficits under optimistic fiscal assumptions in order to pay for public servant pay increases? According to the Philippines’ 2025 budget, the answer is yes.