The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy

National product statistics have been used widely in recent years as a reflection of the total product of society and even to indicate the state of “economic welfare.” These statistics cannot be used to frame or test economic theory, for one thing because they are an inchoate mixture of grossness and netness and because no objectively measurable “price level” exists that can be used as an accurate “deflator” to obtain statistics of some form of aggregate physical output. National product statistics, however, may be useful to the economic historian in describing or analyzing an historical period. Even so, they are highly misleading as currently used—Murray N. Rothbard 

 

In this issue: A brief but blistering breakdown of the 5.5% GDP mirage. 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy

I. Q2 GDP: A Mirage of Momentum

II. The Secondary Trendline: Pandemic’s Lingering Scar; GDP: A Flawed Lens, Still Worshipped

III. Economic Wet Dreams, Statistical Kabuki and Confirmation Bias

IV. The GDP Illusion, Poverty Amid Growth: Cui Bono?

V. Policy Theater, the Real Economy and The Credit–Consumption Black Hole

VI. Jobs Boom, GDP Drag

VII. Policy Vaudeville: July .9% Inflation, MSRP and the Php 20 Rice Rollout

VIII. Core vs Headline CPI: A Divergence Worth Watching

IX. Deflator Manipulation, GDP Inflation

X. Inflation-GDP Forecasting as Folklore

XI. The Official Narrative: A Celebration of Minor Gains

XII. The Real Driver: Government Spending, Not Households

XIII. The Consumer Illusion: Retail as a Misleading Proxy

XIV. Expenditure Breakdown: Only Government Spending Beat the Headline

XV. Inconvenient Truth: The Rise of Big Government—Crowding Out in Action, The Establishment’s Blind Spots and Tunnel Vision

XVI. More Inconvenient Truths: Debt-Fueled GDP—A Statistical Shell Game

XVII. The Debt-Deficit Trap: No Way Out Without Pain—Sugarcoating Future Pain

XVIII. Tail-End Sectors Surge: Agriculture and Real Estate Rebound

XIX. The Policy Sweet Spot—and Its Expiry Date: Diminishing Returns of Stimulus

XX. Conclusion: Narrative Engineering and the Keynesian Free Lunch Trap

XXI. Post Script: The Market’s Quiet Rebuttal: Flattening Curve Exposes GDP Mirage 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy 

Beneath the headline print lies a fragile economy propped up by CPI suppression, statistical distortion, and unsustainable public outlays.

I. Q2 GDP: A Mirage of Momentum 

The Philippines clocked in a Q2 GDP of 5.5% — higher than Q1 2025’s 5.4% but lower than Q2 2024’s 6.5%. 

For the first half, GDP posted a 5.4% expansion, above the 5.2% of the second half of 2024 but still below the 6.2% seen in the first half of 2024.

Figure 1

While this was largely in line with consensus expectations, what is rarely mentioned is that both nominal and real GDP remain locked to a weaker post-2020 secondary trendline — a legacy of the pandemic recession. (Figure 1, topmost graph) 

II. The Secondary Trendline: Pandemic’s Lingering Scar; GDP: A Flawed Lens, Still Worshipped 

Contra the establishment narrative, this lower secondary trend illustrates a slowing pace of increases—a theme we’ve repeatedly flagged. 

GDP now appears to be testing its own support level, underscoring the fragility of this fledgling trendline and the risk of a downside break. 

Though we’re not fans of GDP as a concept, we analyze it within the dominant lens—because everyone else treats it as gospel. 

But let’s be clear: GDP is a base effect—a percentage change from comparative output or expenditure figures from the same period a year ago. 

III. Economic Wet Dreams, Statistical Kabuki and Confirmation Bias 

When pundits claim GDP will breach 6% or that the Philippines is nearing “upper middle class” status, they’re implying that aside from seasonal Q4 strength, the rest of the year will recapture the original trendline and stay there. What a wet dream! 

These forecasts come from either practitioners afflicted by the Dunning-Kruger syndrome or sheer propagandists. 

The PSA’s national accounts data offer contradictory insights. But this isn’t just about statistics—it’s about confirmation bias. The public is told what it wants to hear. 

IV. The GDP Illusion, Poverty Amid Growth: Cui Bono? 

GDP is a quantitative estimate—built on assumptions, inputs, and econometric calculations. It hopes to objectively capture facts on the ground, but in aggregate, it overlooks individual preferences, distributional effects, financing mechanisms, and policy responses. 

Worse, its components (from rice to cars to Netflix) are averaged in ways that can distort reality. Aside, input or computational errors, or even manipulation, are always possible. 

Yes, GDP may be 5.5%, but SWS’s June self-rated poverty survey still shows 49% of Filipino families identifying as poor, with 10% on the borderline. While this is sharply down from December 2024’s 63%, the numbers remain considerable. (Figure 1, middle image) 

So, who benefits from the recent inflation decline that distilled into a 5.5% GDP? 

At a glance, the 41%—but even within this group, gains are uneven. Or, even within the 41% who are “non-poor,” gains are concentrated among larger winners while most see only modest improvements (see conclusion) 

V. Policy Theater, the Real Economy and The Credit–Consumption Black Hole 

The real economy doesn’t operate in a vacuum. It is a product of interactions shaped by both incumbent and anticipated socio-political and economic policies. 

The BSP began its easing cycle in 2H 2024, delivering four rate cuts (the fifth in June), two reserve requirement ratio cuts, doubled deposit insurance, a soft peg defense of the peso, and a new property benchmark that eviscerated real estate deflation. 

Theoretically, the economy ought to be functioning within a policy ‘sweet spot’. 

Despite blistering nominal growth and record-high universal-commercial bank credit—driven by consumer lending—real GDP barely budged. (Figure 1, lowest pane) 

Interest rates were hardly a constraint. Bank lending surged even during the 2022–23 rate hikes. Yet the policy transmission mechanism seems blunted: credit expansion hasn’t translated into consumer spending, rising prices or real GDP growth. 

Banking sector balance sheets suggest a black hole between credit and the economy—likely a repercussion of overleveraging or mounting balance sheet imbalances. 

More financial easing won’t fix this bottleneck. It’ll worsen it. 

VI. Jobs Boom, GDP Drag

Figure 2

We’re also treated to the spectacle of near-record employment. In June, the employed population reached its second-highest level since December 2023, driving the employment rate to 96.3% and lifting Q2’s average to 96.11%. 

That should be good news. But is it? If so, why has headline GDP moved in the opposite direction? (Figure 2, topmost chart) 

This labor boom coincided with over 25% credit card growth—normally a recipe for inflation (too much money chasing too few goods). (Figure 2, middle visual)

Instead, CPI fell, averaging just 1.4% in Q2. Near-record employment met falling prices, with barely a whisper from the consensus about softening demand. (Figure 2, lowest diagram)

VII. Policy Vaudeville: July .9% Inflation, MSRP and the Php 20 Rice Rollout

Authorities reported July inflation at 0.9%—approaching 2019 lows. But this is statistical kabuki, driven by price controls and weak demand.

Figure 3

Rice prices, partly due to imports, were already falling before January’s MSRP. The Php 20 rice rollout only deepened the deflation. (Figure 3, topmost diagram)

July saw rice prices drop 15.9%. Despite earlier MSRP, meat prices remained elevated—9.1% in June, 8.8% in July.

Because rice carries an 8.87% weight in the CPI basket, its deflation dragged down Food CPI (34.78% weight), driving July’s headline CPI to 2019 lows.

This divergence reveals the optics. MSRP failed on pork, so it was quietly lifted. But for rice, it was spun as policy success—piggybacking on slowing demand, punctuated by the Php 20 rollout even though it simply reinforced a downtrend already in motion.

VIII. Core vs Headline CPI: A Divergence Worth Watching

The growing gap between core and headline CPI is telling. The negative spread is now the widest since June 2022. Historically, persistent negative spreads have signaled inflection points—2015–16, 2019–2020, 2023. (Figure 3, middle window)

Moreover, MoM changes in the non-food and energy core CPI suggest consolidation and its potential terminal phase. An impending breakout looms—implying rising prices across a broader range of goods. (Figure 3, lowest graph)

IX. Deflator Manipulation, GDP Inflation 

Here’s the kicker: statistical histrionics are inflating GDP by repressing the deflator.

Real GDP is not a raw measure of economic output—it’s a ratio: nominal GDP divided by the GDP deflator. That deflator reflects price levels across the economy. Push the deflator down, and—voilà—real GDP pops up, even if nominal growth hasn’t changed. 

Q2’s 5.5% real GDP print looks better partly because the deflator was suppressed by statistical and policy factors: rice imports, price controls, Php 20 rice rollouts or targeted subsidies, and peso defense all helped drag reported inflation to multi-year lows. Rice alone, with an 8.87% CPI weight, deflated nearly 16% in July, pulling down the broader food CPI and, by extension, the GDP deflator. 

If the deflator had stayed closer to its Q1 level, Q2 real GDP would likely have landed closer to the 4.5–4.8% range—well below the official figure. This isn’t economic magic; it’s arithmetic. The “growth” came not from a sudden burst in output, but from lowering the measuring stick. 

Q2 GDP is another "benchmark-ism" in action. 

X. Inflation-GDP Forecasting as Folklore 

Amused by media’s enthrallment with government inflation forecasts, we noted at X.com: "Inflation forecasting is the game of ‘pin the tail on the donkey’ — a guess on a statistical guess, dressed up as science. The mainstream reinforces an Overton-window narrative that serves more as diversion than insight" 

The real economy—fragile, bifurcated, and policy-distorted—remains unseen.

XI. The Official Narrative: A Celebration of Minor Gains 

The establishment line, echoed by Reuters and Philstar, goes something like this: 

"Slowing inflation also helped support household consumption, which rose 5.5% year-on-year in the second quarter, the fastest pace since the first quarter of 2023" … 

"Faster farm output and strong consumer spending helped the Philippine economy expand by 5.5 percent in the second quarter"

Figure 4

But beneath the headlines lies a more sobering truth: a one-basis-point rise in household spending growth has been heralded as a “critical factor” behind the GDP expansion. 

While the statement is factually correct, it masks the reality: household spending as a share of GDP has been rangebound since 2023, showing no real breakout in momentum. 

XII. The Real Driver: Government Spending, Not Households 

The true engine of Q2 GDP was government spending, which rose 8.7%, down from 18.7% in Q1 but still dominant. (Figure 4, topmost window) 

Over the past five quarters, government spending has averaged 10.7%, dwarfing household consumption’s 5.1%.  

This imbalance exposes the fragility of the consumer-led growth narrative. When per capita metrics are used, the illusion fades further: Real household per capita GDP was just 4.5% in Q2, barely above Q1’s 4.4%, and well below Q1 2023’s 5.5%.

This per capita trend has been flatlining at secondary trendline support, locked in an L-shaped pattern—inertia, not resurgence—and still drifting beneath its pre-pandemic exponential trend.  The per capita household consumption “L-shape” shows spending per person collapsing during the pandemic and never meaningfully recovering — a flatline that belies the GDP growth narrative. (Figure 4, middle graph)

XIII. The Consumer Illusion: Retail as a Misleading Proxy

Despite the BSP’s promotion of property prices as a proxy for consumer health—and the Overton Window’s deafening hallelujahs—SM Prime’s Q2 results reveal persistent consumer strain: (Figure 4, lowest chart) 

• Rent revenues rose only 6.3%, the weakest since the pandemic recession in Q1 2021.
• Property sales stagnated, up just 0.2% despite new malls in 2024 and 2025 

So much for the “strong consumer” thesis. 

XIV. Expenditure Breakdown: Only Government Spending Beat the Headline 

In the PSA’s real GDP expenditure table, only government spending exceeded the headline:

• Household: 5.5%
• Gross capital formation: 0.6%
• Exports: 4.4%
• Imports: 2.9%
• Government: 8.7% 

Notably, government spending excludes public construction and private allocations to public projects (e.g., PPPs). Due to the May mid-term elections, real public construction GDP collapsed by 8.2%. 

XV. Inconvenient Truth: The Rise of Big Government—Crowding Out in Action, The Establishment’s Blind Spots and Tunnel Vision

Figure 5

The first half of 2025 exposes a structural shift the mainstream won’t touch:  Government spending’s share of GDP has surged to an all-time high! 

Meanwhile, consumer driven GDP continues its long descent—down since 2001. (Figure 5, topmost diagram) 

As the public sector’s footprint swells, the private sector’s relative role contracts. This isn’t theoretical crowding out. It’s empirical. It’s unfolding in real time. (Figure 5, middle image) 

Importantly, this is not a conspiracy theory—these are government’s own data. Yet the establishment’s analysts and bank economists appear blind to it. 

Proof? 

Banks are shifting focus toward consumer lending, even as the consumer share of GDP trends lower. 

The “build-and-they-will-come” crowd remains locked in a form of tunnel vision, steadfastly clinging to a decaying trend. 

XVI. More Inconvenient Truths: Debt-Fueled GDP—A Statistical Shell Game 

Government has no wealth of its own. It extracts from the productive sector—through taxes, borrowing (future taxes), and inflation. 

As Big Government expands, so does public debt — now at Php 17.3 trillion as of June! 

The June debt increase annualizes to Php 1.784 trillion — eerily close to the Php 1.954 trillion NGDP gain over the past four quarters (Q3 2024–Q2 2025). (Figure 5, lowest visual)

Figure 6 

That’s a mere Php 170 billion gap. Translation: debt accounts for 91.3% of NGDP’s statistical value-added. 

The 91.3% “debt as share of NGDP increase” means almost all of the year-on-year nominal GDP expansion came from government borrowing, not private sector growth — in other words, strip out the deficit spending, and the economy’s headline size barely moved. 

Yet this spread has collapsed to its lowest level since the pandemic recession. (Figure 6, upper pane) 

This isn’t growth. It’s leverage masquerading as output — GDP propped up almost entirely by deficit spending! 

This also reinforces the government’s drift toward centralization—where state expansion becomes the default engine of the economy. 

XVII. The Debt-Deficit Trap: No Way Out Without Pain—Sugarcoating Future Pain 

It’s unrealistic for the administration to claim it can “slowly bring down” debt while GDP remains tethered to deficit spending. 

Debt-to-GDP ratios are used to soothe public concern—but the same debt is inflating GDP through government outlays. It’s a circular metric: the numerator props up the denominator. 

According to the Bureau of Treasury, Debt-to-GDP hit 63.1% in Q2 2025—highest since 2005! 

Ironically, authorities quietly raised the debt-to-GDP threshold from 60% to 70% in August—an implicit admission that the old ceiling is no longer defensible. 

This is a borrow-now, pay-later model. Short-term optics are prioritized, while future GDP is sacrificed. 

Even the PSA’s long-term trendline reflects this drag—confirming the trajectory of diminishing returns. 

And we haven’t even touched banking debt expansion, which should have supported both government and elite private sector financing. Instead, it’s compounding systemic fragility. 

We’re no fans of government statistics—but even their own numbers tell the story. Cherry-picking to sugarcoat the truth isn’t analysis. It’s deception. And it won’t hide the pain of massive malinvestments. 

XVIII. Tail-End Sectors Surge: Agriculture and Real Estate Rebound 

From the industry side, Q2 saw surprising strength from GDP’s tailenders: 

Agriculture GDP spiked 7%, the highest since Q2 2011’s 8.3%. Volatile by nature, such spikes often precede plunges. 

Real estate GDP nearly doubled from Q1’s 3.7% to 6.1%, though still below Q2 2024’s 7.7%. (Figure 6, lower graph) 

Yet initial reports of listed property developers tell a different story: 

-Aggregate real estate sales: +4.1% (Megaworld +10.5%, Filinvest -4.96%, SMPH +0.02%) 

-Total revenues: +5.23% (Megaworld +9.6%, Filinvest -1.2%, SMPH +3.83%)

These figures lag behind nominal GDP’s 7.9%, suggesting statistical embellishment aligned with BSP’s agenda. 

Benchmark-ism strikes again!  

XIX. The Policy Sweet Spot—and Its Expiry Date: Diminishing Returns of Stimulus 

Technically, Q2 and 1H mark the ‘sweet spot’ of policy stimulus—BSP’s easy money paired with fiscal expansion. But artificial boosts yield diminishing returns. 

A 5.5% print reveals fragility more than resilience. 

Once again, the entrenched reliance on debt-financed deficit spending inflates GDP at the expense of future stability—while compounding systemic risk.  

XX. Conclusion: Narrative Engineering and the Keynesian Free Lunch Trap 

GDP has been sculpted to serve the establishment’s preferred storyline: 

• CPI suppression to inflate real GDP
• Overstated gains in agriculture and real estate
• Escalating reliance on deficit spending 

Repressing CPI to pad GDP isn’t stewardship—it’s pantomine. A calculated communication strategy designed to preserve public confidence through statistical theater. 

Within this top-down, social-democratic Keynesian spending framework, the objective is unmistakable: Cheap access to household savings to bankroll political vanity projects. These are the hallmarks of free lunch politics. 

The illusion of growth props up the illusion of competence. And both are running on borrowed time. 

Yet, who benefits from this GDP? 

Not the average household. Not the productive base. As The Inquirer.net reports: "The combined wealth of the country’s 50 richest rose by more than 6 percent to $86 billion this year from $80.8 billion in 2024, as the economy got some lift from robust domestic demand and higher infrastructure investments, according to Forbes magazine." 

GDP growth has become a redistribution mechanism—upward. A scoreboard for elite extraction, not shared prosperity. 

Without restraint on free lunch politics, the Philippines is barreling toward a debt crisis. 

XXI. Post Script: The Market’s Quiet Rebuttal: Flattening Curve Exposes GDP Mirage 

Despite headline growth figures and establishment commentary echoing official optimism, institutional traders—both local and foreign—remain unconvinced by the Overton Window of managed optimism rhetoric. 

The market’s posture suggests skepticism toward the government’s narrative of resilience.

Figure 7 

Following a Q2 steepening (end-June Q2 vs. end-March Q1), the Philippine Treasury curve has flattened in August (mid-Q3), though it remains steep in absolute terms. While the curve remains steep overall, the recent shift reveals important nuances: 

Short end (T-bills): August T-bill yields are marginally lower than June Q2 but still above March Q1 levels. 

Belly (3–5 years): Rates have been largely static or inert, showing no strong conviction on medium-term growth or market indecision 

Long end (10 years): Yields have fallen sharply since March and June, suggesting softer growth expectations or rising demand for duration. 

Ultra-long (20–25 years): Rates remain elevated and sticky, reflecting structural fiscal and inflation concerns. 

After July’s 0.9% CPI print, the peso staged a brief rally, yet the USDPHP remains above its March lows. Meanwhile, 3-month T-bill rates softened slightly post-CPI, hinting at the BSP’s intent to maintain its easing stance. 

Q3’s bearish flattening underscores rising risks of economic slowdown amid stubborn inflation or stagflation. 

The divergence between market pricing and statistical growth exposes the mirage of Q2 GDP—more optical than operational, more narrative than organic.

  

June 2025 Deficit: A Countdown to Fiscal Shock

In the final analysis, it’s just central banks printing money, reducing its value and causing inflation as they support dishonest governments that refuse to be fiscally responsible and continually run massive deficits. Such policies flow from the “elite’s” greed and their insatiable thirst for power, benefiting themselves at the expense of the middle class and working poor… When a society loses its moral foundation, it’s only a matter of time before the economy and currency deteriorate and the wealth gaps between the rich and poor increase dramatically—Jonathan Wellum  

In this issue

June 2025 Deficit: A Countdown to Fiscal Shock 

I. A Delayed Reckoning: Anatomy of a Fiscal Shock

1. Easy Money–Financed Free Lunch Politics

2. The Political Cult of Spending-Led Ideology: Trickle-Down by Government Fiat

3. Chronic Policy Diagnostic Blindness

4. Econometric Myopia: Forecasting the Past

5. Behavioral Fragility: The Psychology of Denial

II. Countdown to Fiscal Shock: The Hidden Story of June’s Blowout

III. Q2 Slowdown, Q1 Surge: Anatomy of the Half-Year Blowout—From Past Binge to Present Reckoning

IV. Technocratic Overreach, Authorized Expenditures, Congressional Irrelevance

V. Deficit Forecasting: Averaging Toward a Crisis

VI. Financing Strain and the Debt-Debt Servicing Spiral

VII. Tax Dragnet, CMEPA’s Forced Financial Rotation: The Economic Asphyxiation Tightens

VIII. Bank’s Fiscal Complicity, Liquidity Strains, Treasury Market’s Mutiny

IX. Mounting USDPHP Exchange Rate Tension

X. Conclusion: The Structural Fragility of Deficit Philosophy 

June 2025 Deficit: A Countdown to Fiscal Shock 

When deficits become destiny: the fiscal countdown accelerates—a convergence of easy money and political overreach

I. A Delayed Reckoning: Anatomy of a Fiscal Shock 

A fiscal shock rarely emerges from a single misstep. It crystallizes from compound misalignments across policy, ideology, and behavior. It’s the law of unintended consequences—unfolding in real time. Where economic orthodoxy meets political convenience, stability is hollowed out. And just as critically, it’s a delayed consequence of systemic denial. 

Here are the five pillars of this reckoning: 

1. Easy Money–Financed Free Lunch Politics 

A regime of entitlement—fueled by populist spending and post-pandemic ultra-low rates—fostered a seductive illusion: 

Deficits don’t matter. Debt is painless. 

Years of stimulus, subsidies, and politically popular transfers hardened into fiscal habit— habits that now resist restraint, and are rooted in beliefs that are difficult to dismantle. 

2. The Political Cult of Spending-Led Ideology: Trickle-Down by Government Fiat 

At the heart of the Philippine development model lies a flawed political-economic ideology: that elite consumption and state expenditure will "trickle down" to the broader economy. 

Massive infrastructure programs, defense outlays, and subsidy-heavy welfare budgets may deliver short-term optics—but they also crowd out private investment, misallocate capital, and accelerate savings erosion. 

The result: an economy that becomes top-heavy, brittle, and structurally vulnerable. 

This heavy-handed, statist-interventionist, anti-market bias is what Ludwig von Mises called "statolatry"—the worship of the state. 

3. Chronic Policy Diagnostic Blindness 

In the social democratic playbook, populist tools dominate. And with them comes a dangerous neglect of structural realities:

• Crowding out is ignored
• Balance sheet mismatches are waved off
• Price distortions go unexamined
• Resource misallocations are dismissed
• Economic trade-offs are neglected 

Intervention becomes the default—not the diagnosis. The result? Mispriced assets, distorted capital structures, and risk narratives untethered from fundamentals. 

The same statolatry—elevating state action above market signals—undergirds this blindness. It promotes interventionist reflexes at the expense of incentive clarity and institutional coherence. 

Fragility escalates—masked by the optics of populist-driven fiscal theatrics. 

4. Econometric Myopia: Forecasting the Past 

The establishment clings to econometric models built on frangible assumptions—historical baselines, linear extrapolation, and trend mimicry. These tools overlook what matters most: 

• Nonlinear disruption
• Inflection points
• Complex feedback loops
• Tail risks and structural breaks 

With ZERO margin for error, fragility festers beneath the surface. 

That fragility was laid bare by a maelstrom of paradigm shifts: 

• The pandemic rupture
• Deglobalization and trade fragmentation
• Raging asset bubbles
• Debt overload
• Mountains of malinvestments
• Hot wars and geopolitical shockwaves
• Inflation surges
• Financial weaponization 

This isn’t noise—it’s a new architecture of global and domestic uncertainties. And econometric orthodoxy isn’t equipped to model it. 

5. Behavioral Fragility: The Psychology of Denial 

Heuristics shape policy—and not in ways that reward foresight. Beyond populist signaling and econometric hindsight, cognitive distortions rule: 

• Recency bias
• Rear-view heuristics
• Political denialism masked as institutional confidence 

Years of perceived “resilience” dulled vigilance: 

• Every deficit was shrugged off
• Every peso slide deemed temporary
• Every fiscal blowout “absorbed” by the system 

This cultivated an expectation: past stability ensures future resilience. It doesn’t. That assumption—embedded deep within policy reflexes—has left institutions blind to volatility and ill-equipped for disruptions and rupture. 

II. Countdown to Fiscal Shock: The Hidden Story of June’s Blowout

Figure 1

In May, we warned that if June 2025's deficit merely hits its four-year average of Php 200 billion, the six-month budget gap would surge to Php 723.9 billion—surpassing the pandemic-era record of Php 716.07 billion. (Figure 1, upper window) 

Inquirer.net, July 25, 2025: The Marcos administration exceeded its budget deficit limit in the first half of 2025 after narrowly missing both its spending and revenue targets. This happened amid a gradual fiscal consolidation program. Latest data from the Bureau of the Treasury (BTr) showed the government logged a budget gap of P765.5 billion in the first six months, which it needed to plug with borrowings. This was 24.69 percent bigger compared with a year ago. (italics added) 

Then came the payload: Php 241.6 billion in fresh red ink last June!   

The government’s first-half deficit reached Php 765.5 billion—24.69% higher than last year and larger than even our most aggressive baseline x.com forecast (Php 745.18–Php 756.53 billion). (Figure 1, table)

Figure 2 

Bullseye! Our projections weren't just close—they were surgical. And the final blowout went further still. (Figure 2, topmost chart) 

Curiously underreported, June’s deficit marked an all-time high, driven by expenditure growth of 8.5% outstripping revenue growth of 3.5%. (Figure 2, middle graph) 

• BIR Collections: Up 16.24% YoY—a strong bounce from 10.71% in May and 4.71% in June 2024.
• BoC Collections: Recovered 3.23% YoY, compared to –6.94% in May and 0.67% in June 2024.
• Non-Tax Revenues: Plunged 43.25% YoY—from 40.93% in May and 81.7% in June 2024. 

Behind the aggregate improvement lies deeper fragility: June’s revenue outperformance was narrow, uneven, and ultimately insufficient to contain the programmed spending expansion—a predictable artifact of the conventional socio-democratic ochlocratic political model. 

Populist instincts override structural diagnostics. And the fiscal narrative remains hostage to crowd-pleasing interventionism rather than incentive discipline or institutional coherence.

III. Q2 Slowdown, Q1 Surge: Anatomy of the Half-Year Blowout—From Past Binge to Present Reckoning 

Despite June's record deficit, Q2 posted just Php 319.5 billion, the second slowest since 2020. That means the bulk of the six-month deficit—Php 446.03 billion—was frontloaded in Q1. 

Even then, authorities revised March spending down by Php 32.784 billion, artificially narrowing the Q1 deficit. Adjustments may mask the underlying magnitude but not the fiscal trajectory. 

This six-month outcome validates what we’ve long emphasized: programmed spending vs. variable revenues is no longer an assumption—it’s a structural vulnerability, a primary source of instability 

Importantly, this wasn’t an emergency stimulus. Unlike 2021, there’s been no recession nor one in the immediate horizon—per consensus. 

Yet the deficit beat that year’s record—despite BSP’s historic easing:

• Policy rate cuts
• Reserve requirement reduction
• USDPHP cap
• Liquidity injections
• Deposit insurance expansion 

Behind the optics: a quiet financial bailout, not of households or industries, but of the banking system. 

IV. Technocratic Overreach, Authorized Expenditures, Congressional Irrelevance 

As we earlier noted: the government continues to use linear extrapolation in a complex environment. Even with declared economic slowdown, the BIR posted 14.11% growth, buoyed by May–June outperformance. (Figure 2, lowest image) 

But has "benchmark-ism" inflated performance claims? Have authorities padded the numerator (tax data) to rationalize a fragile denominator (spending data)?

Figure 3

Non-tax revenue was the Achilles’ heel—its 2024 spike became the baseline for 2025’s enacted spending binge. The result: forecast miscalibration leading directly to fiscal shock. Beyond mere overconfidence, it was technocratic hubris that helped trigger today’s blowout. (Figure 3, topmost visual) 

Again, an underperforming economy—whether a below-target GDP, sharp slowdown, or even recession—would only reinforce this SPEND-and-RESCUE dynamic, repackaged and sold as stimulus. 

Meanwhile, authorized expenditures: Php 3.026 trillion. Remaining balance: Php 3.3 trillion, implying a floor monthly average of Php 550.05 billion. 

Budgets have been breached 6 years in a row—highlighting a redistribution of budgetary power from Congress to the Executive. 

Whether through creative reinterpretation or technical loopholes, these breaches signal a quiet transfer of fiscal power from Congress to the Executive. 

V. Deficit Forecasting: Averaging Toward a Crisis 

Looking at pandemic-era averages:

• Q3 deficits averaged Php 374 billion
• Q3 2024 hit Php 356.32 billion (–5.7% below average)
• Q4 averaged Php 537.9 billion Q4 is typically the largest—as government drops all remaining balance and more
• Q4 2024 deficit: Php 536.13 billion (–0.4% deviation)
• 2H Average: Php 911.6 billion
• 2H 2024: Php 892.45 billion (–2.6% vs trend) 

If 2025 follows this pattern, the full-year deficit could hit Php 1.677 trillion—Php 7 billion above prior records. 

But averages conceal real-world volatility, political discretion, and data manipulation—can skew results. 

Once again, it bears emphasizing: all this unfolded as the BSP eased aggressively—through rate and RRR cuts, doubled deposit insurance, capped USDPHP volatility, and expanded credit (mostly consumer-focused). 

Despite the stimulus, vulnerabilities not only persist—they’re escalating. 

If so, the DBCC's revised deficit-to-GDP target of 5.5% would be breached, necessitating another substantial upward adjustment. (Figure 3, middle table) 

Authorities would be mistaken to treat this as mere statistical noise; its implications extend far beyond the ledger into the real economy

VI. Financing Strain and the Debt-Debt Servicing Spiral 

Treasury financing soared 86.2%, from Php 665 billion to Php 1.238 trillion in H1 2025. (Figure 3, lowest diagram) 

Even with record high cumulative cash reserves of Php 1.09 trillion, June alone posted a residual cash deficit of Php 90.09 billion—evidence that surplus buffers are already depleted.

Figure 4 

As such, in June, public debt spiked Php 1.783 trillion YoY (+11.52%) or Php 348 billion (+2.06%) MoM to reach a historic Php 17.27 trillion! (Figure 4, topmost pane) 

Critically, this growth has outpaced the spending curve, suggesting potential deficit understatement or an acceleration of off-book liabilities. (Figure 4, middle image) 

Despite this, external debt share rebounded in June—a pivot back to foreign financing amid domestic constraints. (Figure 4, lowest graph)

Figure 5

Meanwhile, total debt servicing fell 40.12% YoY due to a 61% plunge in amortizations, even though interest payments hit a record. (Figure 5, topmost diagram) 

Why?

Likely causes:

• Scheduling choices
• Prepayments in 2024
• Political aversion to public backlash 

But the record and growing deficit ensures that borrowing—and debt servicing—will keep RISING. This won’t be deferred—it will amplify. 

As we warned last May

• More debt → more servicing → less for everything else.
• Crowding out hits both public and private spending.
• Revenue gains won’t keep up with servicing.
• Inflation and peso depreciation risks climb.
• Higher taxes are on the horizon 

VII. Tax Dragnet, CMEPA’s Forced Financial Rotation: The Economic Asphyxiation Tightens 

Debt-to-GDP hit 62%, triggering a quiet revision: Malacañang raised the ceiling to 70%. 

To accommodate this, authorities imposed a hefty tax on interest income via the Capital Markets Efficiency Promotion Act (CMEPA), engineering a forced rotation out of long-dated fixed income into leverage-fueled speculation and spending— (see previous discussions) 

This fiscal extraction dragnet is poised to widen—ensnaring more of the economy and constricting what little fiscal breathing room remains. 

VIII. Bank’s Fiscal Complicity, Liquidity Strains, Treasury Market’s Mutiny 

Banks continue to stockpile government securities through net claims on the central government (NCoCG). (Figure 5, middle image) 

Yet despite BSP’s easing, treasury yields barely moved—fueling further Held-to-Maturity (HTM) hoarding and deepening the industry's liquidity drain. 

At end of July, despite dovish guidance: (Figure 5, lowest graph) 

• Yields across the curve stayed above ONRRP, muting or blunting transmission
• Curve flattened unevenly: front and long ends softened, belly firmed—signaling hedging against medium-term risk
• T-bill rates remained elevated —signaling inflation fears and short-term funding stress 

Despite rate cuts, the treasury market refused to follow. Monetary policy faces bond mutineers. 

IX. Mounting USDPHP Exchange Rate Tension

Figure 6 

Following the June fiscal report, the USDPHP surged 1.29% on July 31, wiping out prior losses to post a modest 0.52% year-to-date return. 

With wider deficits on deck, foreign borrowing becomes more attractive—and a weaker dollar, further incentivized by the BSP’s soft peg, adds fuel to that pivot. But beneath the surface, this dynamic strain long-term currency stability. 

While global dollar softness might offset domestic fragilities, the USDPHP’s recent breakout hints at further testing—possibly probing the BSP’s 59-Maginot line, a psychological and tactical policy threshold. (Figure 6 upper chart) 

Should that line give, external financing costs and FX volatility could surge, exposing cracks in the peg architecture. (Figure 6, lower graph) 

X. Conclusion: The Structural Fragility of Deficit Philosophy

The Php 17.27 trillion debt—and growing—isn’t the cost of failure. It’s the price of consensus under a soft-focus ochlocratic social democracy. 

These systems don’t just elect leaders—they ratify an ethos: that deficit-fueled expansion is not only moral but inevitable. Redistribution becomes ritual. The annual SONA pipelines new spending schemes, boosting short-term political capital—but the structural anchors are threadbare. 

Compassion without discipline sedates policy. Voters misread rhetoric as reform, empathy as capability, largesse as virtue, and control as stewardship. Time preferences spiral, gravitating toward the instant dopamine hit of political dispensation. 

Alas—the tragedy is not merely fiscal. It’s intergenerational erosion. Each electoral cycle mortgages future agency, compounding fragility over time. 

What’s swelling isn’t just debt. It’s a philosophical incoherence—subsidizing dysfunction and labeling it 'development.’ 

When such convictions are deeply embedded, a disorderly reckoning is inevitable. 

____

References 

Prudent Investor Newsletter, The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock? Substack July 7, 2025 

Prudent Investor Newsletter, Is the Philippines on the Brink of a 2025 Fiscal Shock? Substack June 8, 2025 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, Substack May 4, 2025 

Prudent Investor Newsletter, The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design, Substack, July 20, 2025 

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?

 

THE question of deficit finance is at the center of public discussion of economic matters today, as it is in any society undergoing serious price inflation, and as it should be, for there is no more basic connection in economic affairs than that linking deficit finance and inflation. Though Milton Friedman's aphorism that ''inflation is always and everywhere a monetary phenomenon'' is true (or as true as economic aphorisms get), it is equally true that sustained monetary expansions are always and everywhere a consequence of printing money to cover the difference between Government expenditures and tax revenues—Robert E. Lucas 

In this issue

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock?

I. The Illusion of Fiscal Soundness: Benchmark-ism, Political Signaling, and the Fiscal Narrative

II. The Five-Month Reality Check: The Mask of March’s Spending Rollback

III. Revenue Performance: Strong Headline, Weak Underpinnings

A. May 2025 Revenue Dynamics

B. Five-Month Revenue Trends

IV. DBCC Downgrades 2025 GDP and Macroeconomic Targets

V. The Politics of Economic Forecasting and Revenue Implications

VI. Public Spending Patterns: Election Effects and Structural Trends

A. May 2025 Expenditure Analysis

B. Five-Month Spending Trends

C. Budget Execution and Future Projections

VII. Deficit Financing and Debt Servicing: A Ticking Time Bomb

A. Interest Payment Trends

B. Financing Implications

C. Liquidity, Interest Rate Pressures and the Bond Vigilantes

VIII. Conclusion: Beyond the Headlines: A Looming Fiscal Shock 

 

The Philippines’ May and 5-Month 2025 Budget Deficit: Can Political Signaling Mask a Looming Fiscal Shock? 

Fiscal Theater vs. Market Reality: A Critical Look at the 2025 Budget Trajectory Using May and 5-month Performance as Blueprint 

I. The Illusion of Fiscal Soundness: Benchmark-ism, Political Signaling, and the Fiscal Narrative 

This article is an update to our previous piece titled “Is the Philippines on the Brink of a 2025 Fiscal Shock?" 

Are Philippine authorities becoming increasingly desperate in their portrayal of economic health? Is there an escalating reliance on "benchmark-ism"—the artful embellishment of statistics and manipulation of market prices—to project an aura of ‘sound macroeconomics?’ 

Beyond the visible interventions—such as the quasi-price controls of Maximum Retail Prices (MSRPs) and the Php 20 rice initiatives, which signal low inflation—amid the emerging disconnect between market dynamics and banking conditions, does May’s fiscal deficit reflect political signaling? 

This article dissects the National Government’s (NG) fiscal performance for May 2025 and the first five months of the year, revealing structural nuances behind the headline figures and questioning the sustainability of current fiscal policies.

Figure 1

The Bureau of Treasury (BTr) reported: "The National Government’s (NG) fiscal position significantly improved in May 2025, with the budget deficit narrowing to Php 145.2 billion from Php 174.9 billion in the same month last year. This lower deficit was primarily driven by a robust 13.35% growth in revenue collections, alongside a moderation in expenditure growth to 3.81% during the national elections month. The cumulative deficit for the five-month period reached Php 523.9 billion, 29.41% (Php 119.1 billion) higher year-on-year (YoY), as the government accelerated investments in infrastructure and social programs to support inclusive growth. NG remains on track to meet its deficit target for the year through prudent fiscal management and efficient use of resources, in line with its Medium-Term Fiscal Program" (BTr, June 2025) [bold added] [Figure 1, upper graph] 

However, beneath the fog of political rhetoric, the election-induced public spending cap—mainly on infrastructure—appears to be the true catalyst behind May's reported budget improvement. The temporary restraint on government expenditures during the electoral period created an artificial enhancement in fiscal metrics that masks underlying structural concerns. 

II. The Five-Month Reality Check: The Mask of March’s Spending Rollback 

Examining the January-to-May period reveals a more complex narrative. The stated deficit of "Php 523.9 billion, 29.41% (Php 119.1 billion) higher year-on-year" actually reflects a substantial revision in March spending that resulted in a lower reported deficit. 

March public spending was revised downward by 2.2% or Php 32.784 billion, from Php 654.984 billion to Php 622.2 billion. This revision cascaded into a 5.9% reduction in the five-month deficit, from the original Php 556.7 billion to the revised Php 523.9 billion. Authorities attributed this revision to "trust transactions." 

Despite this rollback, the current deficit represents the THIRD-highest level on record, trailing only the unprecedented Php 566.204 billion and Php 562.176 billion recorded in 2021 and 2020, respectively. [Figure 1, lower chart]

Figure 2

Those record-high deficits reflected ‘fiscal stabilization’ policies during the pandemic recession, when deficit-to-GDP ratios reached 7.6% and 8.6% amid negative GDP growth of -8.02% in 2020 (pandemic recession) and +8.13% in 2021 in nominal terms, or -9.5% and +5.7% in real GDP terms.  (Figure 2, topmost window)  

Of course, these were funded by all-time high public debt (excluding indirect liabilities incurred by private firms under PPP projects). 

Remarkably, without a recession on the horizon, the five-month deficit has already surpassed the budget gaps of the last three years (2022-2024) and appears likely to either match or even exceed the 2020-2021 levels. 

This trajectory stands in stark contrast to authorities' optimistic target of a 5.3% deficit-to-GDP for 2025—revised to 5.5% just last week. Just 5.5%! Amazing. 

With financial markets seemingly complacent—barely pricing in any surprises—would the eventual revelation that the early 2025 deficit “blowout” might mimic the fiscal health of 2020–2021 trigger a significant market shock? 

Or has the risk premium been quietly numbed by a narrative of “contained inflation” and headline-driven optimism? 

In this climate, the interplay between fiscal slippage and monetary posture warrants closer scrutiny. If macro fundamentals continue to diverge from market sentiment, will the ‘bond vigilantes’ remain silent—or are they simply biding their time? 

III. Revenue Performance: Strong Headline, Weak Underpinnings 

While the five-month headline figures for revenues and expenditures did set new nominal records, the underlying structural details will ultimately dictate the fiscal year's trajectory. 

A. May 2025 Revenue Dynamics 

Total revenues grew by 13.35% in May 2025, slightly below the 14.6% recorded in May 2024. Tax revenues, comprising 75% of total revenues, expanded by 6.25%—nearly double the 3.35% growth rate of May 2024. This improvement was driven by the Bureau of Internal Revenue's (BIR) robust 10.71% growth, while the Bureau of Customs (BoC) contracted by 6.94%, contrasting with 2024's respective growth rates of 3.35% and 4.33%. 

Non-tax revenues surged 40.9% in May 2025, though this paled compared to the 98.6% spike recorded in May 2024. 

B. Five-Month Revenue Trends 

May's revenue outperformance lifted the cumulative five-month results. From January to May 2025, total revenue grew by 5.4%, representing significant deceleration from the 16.34% surge in the corresponding 2024 period. (Figure 2, middle diagram) 

Tax revenues, accounting for 89.7% of total collections, increased by 10.5%, marginally down from 2024's 11.2%. The BIR demonstrated resilience with 13.8% growth compared to 12.8% in 2024. However, the BoC stagnated with a mere 0.22% increase, dramatically lower than the previous year's 6% growth. 

Despite May's surge, non-tax revenues contracted by 24.8% in the first five months of 2025, a sharp reversal from the 60.6% growth spike recorded last year. 

While the BIR shows resilience, the BoC and non-tax revenues lag, signaling vulnerabilities in revenue diversification. 

IV. DBCC Downgrades 2025 GDP and Macroeconomic Targets 

Authorities markedly lowered their GDP target for 2025. According to ABS-CBN News on June 26, "The Philippines has again revised its growth target for the year, citing heightened global uncertainties such as the conflict in the Middle East and the imposition of US tariffs. The Development and Budget Coordination Committee on Thursday said it was targeting an economic growth range of 5.5 to 6.5 percent. In December last year, the target for 2025 was set at 6 to 8 percent." (bold added) (Figure 2, lower image) 

The BSP's June rate cut also hinted at growth moderation. As reported by ABS-CBN News on June 19: "BSP Deputy Governor Zeno Abenoja said the central bank also eased rates due to the possible 'moderation' in economic activity." (bold added) 

The most striking revision involved reducing the upper end of the growth target from 8% to 6.5%—a substantial markdown that signals underlying economic concerns! 

V. The Politics of Economic Forecasting and Revenue Implications 

The Development Budget Coordination Committee (DBCC), as an inter-agency body, represents an inherently political institution plagued by ‘optimism bias’—the tendency to overestimate GDP growth. This bias stems from multiple sources: political pressure to maintain public confidence for approval ratings, the need to justify ambitious economic targets for budget and spending projections, and the imperative to maintain access to affordable financing through public savings. 

Authorities also embrace the Keynesian concept of ‘animal spirits,’ believing that overly optimistic predictions boost business and consumer confidence, thereby spurring increased spending to drive GDP growth. 

Likewise, by promoting investor sentiment, they hope that buoyant markets will create a ‘wealth effect’ that further bolsters spending and economic growth. Rising asset markets may translate capital gains into increased consumption, while higher collateral values encourage more debt-financed spending to energize GDP. 

However, because authorities rely on “data-dependent” approaches, they turn to economic models anchored in historical data and rigid assumptions—often constructed through ex-post analysis. 

Yet effective forecasting requires more than backward-looking templates; it demands grappling with the complexities of purposive human action, where theory operates not as a passive derivative of data, but as a deductive logical framework for validation or falsification. 

As economist Ludwig von Mises observed: 

"Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories." (Mises, 1998) (bold added) 

Because the DBCC relies on “data-dependent” econometric models that essentially project the past into the future, authorities attempt to smooth out forecasting errors through revisions. 

They often rely on ‘availability bias or heuristic’ to inject perceived relevance into their projections.  

They also embrace ‘attribution bias’—crediting positive developments as their accomplishments, while assigning blame for adverse outcomes to exogenous factors. 

Last week’s GDP downgrade exemplifies this pattern. Authorities cited the Middle East conflict and new US tariffs to justify the lower projections—an example of political messaging shaped by both availability and attribution biases. 

This GDP downgrade carries significant implications, as revenues depend on both economic conditions and collection efficiency. If authorities have already observed signs of economic “moderation” that warranted substantial downward revisions—yet continue to overstate targets—this suggests that actual GDP may fall well below projections. 

A lower GDP would likely erode public revenues, potentially setting off a vicious cycle of fiscal deterioration. 

VI. Public Spending Patterns: Election Effects and Structural Trends 

A. May 2025 Expenditure Analysis 

Public spending barely grew in May—the mid-term election period—increasing by only 0.22% compared to 22.24% in 2024. National disbursements remained virtually unchanged at 0.12% versus 22.22% in 2024. Local government unit (LGU) spending increased 14.5%, accelerating from 8.54% last year. Interest payments jumped 14.5% compared to 47.8% in 2024. 

The national government commanded the largest expenditure share at 69.9%, followed by LGUs at 16.15% and interest payments at 12.1%. 

B. Five-Month Spending Trends 

Though public spending in the first five months of 2025 reached record levels in peso terms, growth moderated to 9.7% from 10.6% in 2024. LGU spending growth of 13.2% exceeded 2024's 10.6%. Both national government and interest payments registered lower growth rates of 9.24% and 11.14% respectively, compared to 14.83% and 40% in the previous year.

Figure 3 

Despite decreased growth rates, interest payments hit record highs in peso terms, with their expenditure share reaching 14.43%—the highest level since 2010. (Figure 3, upper visual) 

C. Budget Execution and Future Projections 

The selective infrastructure ban during elections, combined with March's spending cuts, clearly reduced five-month disbursements and the fiscal deficit. Public spending in the first five months totaled Php 2.447 trillion, representing 39.16% of the annual budget. 

With seven months remaining to utilize the annual allocation of Php 6.326 trillion, government outlays must average Php 549.83 billion monthly. If the executive branch continues asserting dominance over Congress, the six-year trend of budget excess will likely extend to a seventh year in 2025. (Prudent Investor, May 2025) 

Crucially, with authorities anticipating a potential significant shortfall in GDP, the recent spending limitations due to the exercise of suffrage could translate into a substantial back-loading of the budget in June or Q3. (Figure 3, lower chart) 

That is to say, even if June 2025's deficit merely hits its four-year average of Php 200 billion, the six-month budget gap would soar to Php 723.9 billion, surpassing the 2021 record of Php 716.07 billion! 

Thus, it defies sensible logic for authorities to assert, "NG remains on track to meet its deficit target for the year through prudent fiscal management," as this would amount to a complete inversion of economic reality. 

The crucial question is, ‘how would markets react to a likely fiscal blowout?’

VII. Deficit Financing and Debt Servicing: A Ticking Time Bomb 

How will the current deficit be financed? 

A. Interest Payment Trends 

While 2025's five-month interest payment growth of 11.14% was considerably slower than 2024's 40%, nominal values reached record highs, with interest payments' share of public expenditure rising to its highest level since 2010.

Figure 4

Including amortizations, public debt servicing costs declined significantly by 42.22% compared to the previous year, which had posted a 48.5% growth spike. This wide gap primarily resulted from a 61.4% plunge in amortizations. (Figure 4, topmost graph) 

However, the five-month foreign exchange (FX) share of debt servicing accelerated dramatically from 18.94% in 2024 to 38.6% this year. (Figure 4, middle window) 

B. Financing Implications 

Several critical observations emerge from the data. 

First, authorities may currently be paying less due to scheduling reasons, 2024 prepayments, or political considerations—to avoid arousing public concern or triggering uproar over the rising national debt. 

Second, the widening deficit represents no free lunch—someone must fill the financing void. In the first five months, debt financing surged 86.24%, from Php 527.248 billion to Php 981.94 billion. (Figure 4, lowest image) 

Regardless of how authorities obscure these costs, sustained borrowing will inevitably translate into higher servicing burdens. 

As we noted last May: 

This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted: 

-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop.  

-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures.  

-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral.  

-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation  

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. (Prudent Investor, May 2025)

Figure 5

Third, public debt surged 10.24% YoY to hit a fresh all-time high of Php 16.95 trillion in May and will likely continue climbing through bond issuance to finance a swelling deficit! (Figure 5, topmost pane) 

The increase in May’s public debt was partly muted by a stronger peso. The BTr noted, "The decrease was due to P3.55 billion in net repayments and the strengthening of the peso, which reduced the peso value of foreign debt by P29.35 billion." 

But of course, this represents statistical "smoke and mirrors," as FX debt will ultimately be repaid in foreign currency—not pesos. In a nutshell, the strong peso disguises the actual extent of the public debt increase. 

Fourth, despite record-high government cash holdings of Php 1.181 trillion, the Bureau of the Treasury reported a cash deficit of Php 23.14 billion in May—underscoring underlying liquidity strains. 

Fifth, banks will likely remain the primary vehicle for deficit financing. While their Held-to-Maturity (HTM) assets slightly declined from a record Php 4.06 trillion in March to Php 4.036 trillion in April, this was mirrored in net claims on the central government (NCoCG), which moderated from Php 5.58 trillion in March to Php 5.5 trillion in May (+9.36% YoY). Notably, NCoCG has closely tracked the trajectory of HTM assets. (Figure 5, topmost and middle visuals) 

C. Liquidity, Interest Rate Pressures and the Bond Vigilantes 

Beyond government debt affecting bank liquidity conditions, competition for public savings between banks and non-financial conglomerates continues to tighten financial conditions—via liquidity constraints and upward pressure on interest rates. 

The crowding-out effect from rising issuance of government, bank, and corporate debt further diverts savings toward non-productive ends: debt refinancing, politically driven consumption, and speculative “build-and-they-will-come” ventures. 

Despite this, Philippine Treasury markets and the USD-PHP exchange rate appear defiant in the face of the BSP’s easing cycle—even as the Consumer Price Index (CPI) trends lower—as previously discussed) 

Globally, rising yields amid mounting debt loads have reawakened the specter of “bond vigilantes”—their resurgence partly driven by balance sheet reductions and Quantitative Tightening. Their presence is evident in the upward drift of sovereign yields (e.g. Japan 10Y, US 10Y, Germany 10Y and UK 10Y), posing a risk that could reverberate across local markets. (Figure 5, lowest chart) 

In response, the Philippine government has redoubled efforts to lower rates through a variety of channels—ranging from quasi-price controls to market interventions to an intensified BSP easing cycle. 

Yet perhaps most telling is its increasing reliance on statistical legerdemain or "benchmark-ism"—notably, the reconstitution of the real estate index to erase prior deflationary prints, despite soaring commercial vacancy rates—a subject, of course, for another post. 

VIII. Conclusion: Beyond the Headlines: A Looming Fiscal Shock 

What authorities frame as "prudent fiscal management" increasingly looks like an exercise in political optics designed to pacify markets and voters, while deeper structural risks build beneath the surface. Headline improvements in the deficit mask the reality of slowing revenue momentum, surging financing needs, rising reliance on FX debt, and a likely surge in second-half deficit. 

As markets remain lulled by political signaling, the Philippines moves closer to a fiscal reckoning — one where statistical smoothing and policy theater will no longer suffice. 

The key question: how will markets and the public react when the full weight of these imbalances becomes undeniable? 

___

References 

Bureau of Treasury, National Government’s Budget Deficit Narrows to Php 145.2 Billion in May 2025 Amid Sustained Strong Revenue Growth June 26, 2025 https://www.treasury.gov.ph/

Ludwig von Mises, Human Action, p.348 Mises Institute, 1998, Mises.org 

Prudent Investor Newsletter, Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power, Substack May 4, 2025