The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

As the cycle nears its end, a country is typically beset by chronic fiscal deficits. Low domestic savings and current account deficits render it dependent on foreign lenders. As lenders become wary, the average maturity of the public debt shortens. The central bank finds it impossible to set interest rates at the level which balances the needs of both creditors and borrowers. Once interest rates rise, governments’ debt servicing costs become increasingly onerous. Government finances come to resemble a Ponzi scheme, with new debt being issued to service old borrowing—Edward Chancellor 

In this issue

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

I. Introduction: Evading the Real Issue

II. The Fallacies Behind the CMEPA’s Defense

A. False Equivalence

B. Red Herring

C. Categorical Error

D. Begging the Question

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”)

F. Appeal to the General (Overgeneralization)

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback 

Logical fallacies aren’t harmless—they shape policy narratives. In CMEPA’s case, they obscure financial repression and pave the way for systemic economic backlash. 

This is a follow-up on my original piece: The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

I. Introduction: Evading the Real Issue 

The Capital Market Efficiency Promotion Act (CMEPA) has stirred significant debate, not merely because of its tax provisions but because of what it signals about the evolving relationship between the state and citizen savings. 

While defenders of CMEPA claim it merely modernizes financial taxation and expands savings options, these arguments often rest on flawed logic and misleading equivalencies that mask the deeper issues: the erosion of true savings, the rise of speculation, and creeping state control over private capital.

Besides, in classical economic thought, savings is deferred consumption—a temporal anchor against uncertainty, a moral wager on future stability. Time-bound, low-risk instruments like term deposits have long served this function. They do not aspire; they buffer. When the state flattens the tax incentives protecting this buffer, it doesn’t merely tweak an equation—it alters the meaning of saving. 

II. The Fallacies Behind the CMEPA’s Defense 

CMEPA's defenders lean on several logical fallacies to support their case: 

A. False Equivalence: By equating time-bound savings with speculative financial assets such as stocks or REITs, proponents confuse two fundamentally different financial behaviors. Savings are deferred consumption; risk assets are bets on volatility. 

B. Red Herring: Arguments pointing to alternative investment vehicles like Pag-IBIG MP2 or Retail Treasury Bonds distract from the core concern: CMEPA disincentivizes bank-based, low-risk savings that traditionally fund long-term development. 

C. Categorical Error: To assume that financial markets can substitute for savings systems ignores the institutional role of savings in capital formation, stability, and intermediation. 

D. Begging the Question: CMEPA defenders assume what they must prove: that taxed savings instruments still count as savings (tax = savings or 1-1=2), or that savings will simply shift outside time deposits without consequence. This begs the question. 

It presumes that risk assets and government-managed schemes are natural substitutes for time deposits. It conflates taxation with neutrality, ignoring how incentives shape behavior.

In reality, aside from extraction, tax is a signal, not a passive overlay. And when the signal penalizes duration, it redefines savings itself. 

Worst, it also treats financial repression as benign without examining its structural damage to intermediation, capital formation, and systemic liquidity.

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”) 

Defenders highlight only the seen—that capital might shift to “alternative” instruments like stocks or Pag-IBIG MP2. 

What is seen:

1. Lower taxes on REITs and stocks = more investment.

2. Flat tax on deposits = not new, fairness 

But they ignore the unseen: 

1. weakening of bank intermediation via the erosion of long-term bank funding,

2. The crowding out of private credit channels, and

3. The behavioral shift toward liquidity-chasing speculation, which gives rise to

4. increased market and economic volatility 

Policy must be judged not just by its immediate effects, but by its downstream damage. This is the classic Bastiat fallacy—what is unseen—the fragility, the distortion, the systemic cost—often matters more. 

F. Appeal to the General (Overgeneralization) 

CMEPA’s defenders argue that because some financial instruments like stocks, REITs, or Pag-IBIG MP2 exist, they can generally serve as adequate substitutes for traditional savings. 

But this overlooks key details: liquidity risk, volatility, transitional frictions or tensions, accessibility, ceilings, investor profile and behavioral inertia that constrain real-world reallocation. 

Not all instruments serve the same function—especially for households that need capital preservation over yield. 

This fallacy blurs crucial distinctions between risk assets and true savings vehicles. By appealing to broad categories, it sidesteps the very real limitations and risks of reallocating savings. In policy, the details are the difference between resilience and fragility. 

Policy design and evaluation demands specificity: Without disaggregated data on household savings patterns, bank funding structures, and instrument uptake, differentiating between resilience and fragility, the defense becomes narrative and rhetoric, not analysis. 

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities 

Since the BSP’s structural easing cycle began in the early 2000s, both the savings and time deposit shares of M2 have steadily declined. 

This erosion has profound implications for the liquidity foundations of the Philippine financial system. 

Figure 1 

Notably, time deposits briefly surged during two critical junctures: first, when the BSP’s policy rates hit record lows during the pandemic, and again when aggressive rate hikes resumed in 2022. Yet this rebound proved short-lived. (Figure 1, topmost pane) 

Subsequent M2 growth increasingly leaned on more liquid components—such as demand deposits and currency in circulation—rather than long-term savings. 

In effect, liquidity transformation has shifted away from stable deposits toward more volatile sources: demand-driven credit expansion and the banking system’s financing of government liabilities, as evidenced by the surge in net claims on the central government (NCoCG). (Figure 1, middle graph) 

The CMEPA tax will likely accelerate this liquidity vacuum by further penalizing traditional savings vehicles. 

This structural shift presents a systemic challenge. As deposits decline, credit expansion becomes increasingly unanchored from genuine savings. In tandem with both implicit liquidity support (via bank balance sheets) and direct quantitative easing (via the BSP), this dynamic becomes inherently inflationary and destabilizing. 

The dilemma is mirrored in bank balance sheets. 

The time deposit share of total bank liabilities has collapsed—from over 32% in 2008 to just 17.5% by mid-2022, before rebounding modestly in response to BSP’s tightening cycle. (Figure 1, lowest diagram) 

This plunge coincides with a decade of financial repression: persistently low real rates, high inflation, and the rise of state-directed instruments like RTBs, MP2, and PERA accounts. 

As traditional deposits dwindled, banks turned increasingly to borrowings to fill the liability gap. 

The share of bank borrowings from capital markets has been rising since 2015, ironically peaking just before the pandemic recession in 2019. This share temporarily declined to 5.4% by Q3 2023, as ‘tighter’ policy conditions set in. 

Yet as liquidity stress intensified, bank borrowing surged anew—hitting 7.9% in March 2025—before moderating after the BSP’s second leg of RRR cuts. 

In this context, what CMEPA promotes as capital market reform in practice amounts to an escalation of the erosion of the deposit base. It trades long-term stability for short-term borrowing, redirecting household savings away from private financial intermediation and into state debt. 

The result? A more fragile banking system, less private capital formation, and greater macro-financial risk. 

Moreover, these bank borrowings now compete directly with government financing needs and private sector credit demand—exacerbating the crowding-out effect and tightening liquidity conditions for the broader economy. 

This fragility is amplified by the growing concentration of liquidity within a handful of dominant players.

Figure 2

As of May, Philippine banks controlled 82% of total financial resources or assets, with universal-commercial banks accounting for 76%. (Figure 2, topmost image) 

Meanwhile, even as the M2-to-GDP ratio soared from 63% in 2019 to a pandemic-era peak of 76.2% in 2021, it dropped sharply to 66.3% by Q1 2025—a sign that not only has GDP become dependent on liquidity, but, importantly, money creation is no longer translating into real economic or savings growth. (Figure 2, middle chart) 

Taken together, as banks increasingly monopolize liquidity while time deposits diminish, the financial system becomes more fragile. It is precisely this growing instability that forced the BSP to roll out confidence-boosting measures—including the doubling of deposit insurance coverage and the second phase of the RRR cut. These are not signs of strength. They are signs of deepening systemic stress.

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap 

At first glance, gross domestic savings (GDS) might seem useful for assessing national savings conditions, but its use to account for real savings conditions is generally misleading. 

First, as a derived indicator—not a strict accounting identity—it suffers from definitional inconsistency. 

For instance, the World Bank reports it at 9.3% in 2024, while Trading Economics, citing the same source, shows 29.24%. Same source, vastly different realities. (Figure 2, lowest window) 

Second, it is calculated as: 

GDS = GDP – Total Consumption (private + public). 

But GDP itself is indifferent to distributional nuances. As we always ask here: Cui bono or Who benefits? 

Is the savings outcome driven primarily by genuine productivity gains—or by increasing dependence on leverage? What is the quality of the growth? What ratios of cost, allocation, and extraction were involved? 

Third, the GDS measure masks household savings weakness—especially during capital flight or high profit repatriation. 

Fourth, how are these "savings" reflected in the banking system? 

Even when elevated GDS suggests high aggregate capacity, the reality is that available savings for productive intermediation—such as long-term deposits and investible capital—are scarce. CMEPA threatens to worsen this distortion by tilting incentives toward consumption and speculation. 

Put differently: while 2024 GDS appears deceptively high at over 29% of GDP, net national savings—after accounting for income and transfer leakages—is a mere 9.3%, per World Bank estimates. 

This reveals a deep structural fragility in the country's true capacity to accumulate capital. By penalizing savings and redirecting flows into speculative capital markets, CMEPA threatens to widen this gap and exacerbate the very vulnerabilities it claims to address.

Figure 3

Yet—and this is key—BusinessWorld recently produced a chart based on Philippine Statistics Authority (PSA) data showing the second widest gap between saving rates (apparently from the World Bank) and investment rates —which we discussed last March. (Figure 3, topmost visual) 

If savings were truly robust, why does this gap persist? What finances this chasm? 

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage 

Cherry-picking numbers to defend the law ignores that the savings-investment gap has been manifested through ‘twin deficits’—fiscal and external trade. Despite supposed normalization post-pandemic, the Philippine economy remains at pandemic-level dependency on credit. (Figure 3, middle graph) 

Here’s the key: public spending is part of those investment rates. 

Bureau of the Treasury data revealed that the 2025 first-half fiscal deficit hit a record Php 765.49 billion—even without a recession! This confirms earlier warnings, which we’ll expand on in another post. (Figure 3, lowest diagram) 

So, who finances this? Domestic banks and foreign lenders are now absorbing this growing imbalance. 

As previously noted: 

"A shrinking domestic savings pool limits capital accumulation, increases dependence on external financing, and exposes the economy to risks such as debt distress and currency fluctuations."— Prudent Investor, March 2025

Figure 4

As of May, public debt hit a record Php 16.918 trillion, with June data expected to breach Php 17 trillion —the all-time high deficit will accelerate its increase. Didn’t the administration hint at pushing up the debt-to-GDP corridor from 60% to 70%? (Figure 4, upper graph) 

Meanwhile, combined with total bank credit expansion, systemic leverage reached a new record of Php 31.225 trillion, or 118% of 2024 nominal GDP. (Figure 4, lower chart) 

And that figure excludes: 

• Capital market debt issuance (corporate bonds, CMBS)
• FDI-linked intercompany loans
• Informal debt (pawnshops, personal lending, unregulated finance)

Think of the costs: this credit buildup means rising debt servicing burdens, declining real incomes, and growing risks of delinquencies and defaults. 

More importantly, in the absence of productivity-led savings growth, the Philippine economy is running on borrowed money—and borrowed time.

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2 

Defenders of CMEPA point to alternatives like RTBs or Pag-IBIG’s MP2 as substitutes for taxed time deposits. 

But these are neither comprehensive nor scalable: 

MP2 has annual ceilings and requires Pag-IBIG membership. 

RTBs are state-managed, episodic, and offer limited liquidity.

Figure 5 

Latest BSP data: (Figure/Table 5) 

• Total time deposits in the PH banking system: Over Php 5 trillion
• Long-term deposits (>5 years): ~Php 500–Php 700 billion
• RTB retail uptake: ~Php 175 billion
• MP2 inflows: ~Php 30–Php 50 billion/year 

Combined, RTBs + MP2 absorb just 5–10% of the capital displaced by CMEPA’s flattening of tax incentives. The rest sits idle, chases risk, or exits the formal system. 

More critically, these instruments are not substitutes for a diverse, open savings ecosystem. They represent state-controlled pipelines—a form of financial repression where household capital is diverted into funding public consumption, and paid for by the diminishing purchasing power of the peso. And this is supposed to ‘encourage’ savings growth? Really?

This contradicts the narrative that these flows remain as ‘savings outside’ time deposits. On the contrary, it is a narrowing of financial autonomy. 

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den 

As previously discussed, the policy-induced gambling mentality has migrated to the equity markets. Instead of encouraging true savings, CMEPA will foster boom-bust cycles that further erode wealth and fuel capital consumption. 

This week’s coordinated pre-closing and afternoon pumps illustrate how institution-dominated markets manage the main index for optics—what we might call "benchmark-ism." (Figure 5, lower graph)

Though it escapes the Overton Window, this behavior—like CMEPA—distorts the price signal function of capital markets, leading to the misallocation of capital goods in the economy. 

By stoking gambling instincts, markets become casinos where savings and credit—someone else’s savings or bank-issued liquidity—is converted into house profits. 

When capital markets are manipulated for non-market goals, the effect is the same: momentum cloaking a wealth transfer. 

CMEPA leads savers straight into the lion’s den. 

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

In an age where reform rewards liquidity and penalizes patience, true saving becomes a philosophical—and revolutionary—act. It’s no longer just economic prudence. It’s resistance to engineered ephemerality. 

The ideology driving CMEPA whispers: Be fast. Be fluid. Be speculative. Be extravagant. Be taxable. Be subservient to the state. 

The public must reply: Be steady. Be real. Be cautious. And above all—be sovereign. 

This is not academic critique—it’s a warning. When incentives distort prudence, the fallout is material, not theoretical. 

CMEPA does not act alone. It fuses with a wider architecture of distortion:

• BSP’s redistributionist easing cycle
• Record deficit spending
• An implicit USDPHP soft peg
• Accelerating bureaucratization and economic centralization 

Together, they form the scaffolding of financial and social maladjustment. 

And when crises surface—households hemorrhaging stability, banks scrambling for duration, systems unraveling under engineered fragility—the reckoning will be felt everywhere. 

In that moment, accountability will matter. 

We must remember: Who authored this distortion? Who rationalized it as progress? 

And we must prepare—for its backlash. 

___

References

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025, Substack

 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

 

When you net out all the assets and liabilities in the economy, the only thing that remains is our stock of productive investments, inventions, education, organizational structures, and unconsumed natural resources. Those are the basis of our national wealth—Dr. John P. Hussman 

In this issue 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design

I. Reform as Spectacle: Bastiat’s Warning and the Mask of Inclusion

II. What is Seen: Promises of Efficiency and Modernization

III. The Unseen: How CMEPA Undermines the Socio-Political Economy

Theme 1: Taxing Savings, Undermining Capital Formation

Theme 2: Systemic Financial Risks and Policy Incoherence

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy

Theme 4: Institutional and Socio-Political Deterioration

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

A wolf in sheep’s clothing: A policy not only distorting capital markets but reprogramming society toward short-termism, volatility, and fragility. 

I. Reform as Spectacle: From Rhetoric to Repercussion—CMEPA Through Bastiat’s Eyes 

All legislation arrives adorned in rhetoric—its presentation aimed to evoke public trust and collective good. Much like Potemkin villages, reforms such as CMEPA appear to serve Jeremy Bentham’s ‘greater good,’ yet beneath the façade lies the concealed agenda of entrenched interests. 

Echoing Frédéric Bastiat’s indispensable insight, we must learn to discern between what is seen and what is unseen. 

"The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee. 

However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately" (Bastiat, 1850) [bold added] 

With this lens, we examine the Capital Markets Efficiency Promotion Act (CMEPA)—Republic Act No. 12214, enacted on May 29, 2025, effective July 1. 

II. What is Seen: Promises of Efficiency and Modernization 

CMEPA has been billed as a modernization effort to deepen financial markets and enhance participation. Its measures include:

• A flat 20% tax on passive income, including interest from long-term deposits and peso bonds
• Reduced stock transaction tax (STT) to 0.1%
• Expanded definition of “securities” to widen taxable instruments
• Removal of exemptions for GOCCs and long-term depositors, while retaining perks for FCDUs and lottery bettors 

Portrayed as a reform designed to streamline taxation and deepen the capital markets, CMEPA hides a more troubling reality beneath its glitter. It reveals a policy that taxes the foundations of financial stability and long-term capital formation. While it reduces transaction taxes and simplifies some rates, its deeper impact is a radical shift in how the Philippine state attempts to influence public mindset and choices—how it allocates risk, treats saving, and commandeers private resources. 

III. The Unseen: How CMEPA Undermines the Socio-Political Economy 

This critique identifies several thematic consequences: 

Theme 1: Taxing Savings, Undermining Capital Formation

Figure/Table 1

1 Flattening Tax Across All Maturities 

The new 20% final withholding tax (FWT) rate now applies across all maturities, including long-term deposits and investment instruments previously exempted. (Figure/Table 1) 

Retail savers and retirees, dependent on deposit-based income, now face disincentives for capital preservation. Long-term financial instruments lose their privileged status, undermining capital formation. 

2 Financial Repression by Design

By taxing time deposits, foreign currency deposits, and peso-denominated long-term instruments, CMEPA imposes a de facto penalty on saving. Rather than encouraging financial inclusion or stability, it aligns with financial repression tactics: using policy tools to channel private savings toward public financing. 

Moreover, savings and capital are diverted from productive sectors to fund fiscal deficits, choking investment and inviting misallocation. 

3 Regressive Impact on Small Savers 

The uniform tax rate applies regardless of investor profile. Small savers and retirees lose disproportionately. Meanwhile, the wealthy retain flexibility—shifting funds offshore or into tax-exempt alternatives. 

4 Deepening the Savings-Investment Divide 

CMEPA taxes the engine of investment—savings—while encouraging speculative behavior. As domestic savings weaken, investment becomes more reliant on volatile international capital flows and risky leveraging, heightening systemic vulnerability. 

Theme 2: Systemic Financial Risks and Policy Incoherence 

5 Balance Sheet Mismatches 

CMEPA induces short-term liabilities against long-term assets, eroding liquidity buffers. Banks stretch to meet Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) thresholds while chasing yield in speculative sectors—real estate, retail, accommodation, construction. 

FX funding stability worsens as offshore placements rise, increasing currency mismatch risk for entities with dollar-denominated obligations. 

This weakens the stability of the banking system. 

6 Weaker Bank Profitability and Liquidity 

Banks face tighter net interest margins, especially as liabilities are taxed while fixed-yield assets remain unchanged. Asset durations can’t adjust as quickly as funding costs, intensifying balance sheet compression undermining liquidity. 

Combined with BSP’s RRR cuts and other easing, this suggests rising liquidity stress rather than financial deepening.

Figure 2

The weakened deposit base—as revealed by the downtrend in the growth of deposit liabilities—partly explains the doubling of deposit insurance in March, a reactive gesture to rising liquidity risk. Notably, the slowdown appears to have accelerated in 2025. (Figure 2)

Figure 3

But it is not just deposits: the decline in cash and liquid assets—as shown by falling cash-to-deposit and liquid assets-to-deposit ratios—highlights the mounting fragility of bank conditions. (Figure 3)

Figure 4

The law compounds the fragile cash position of Philippine banks, redistributing liquidity into riskier corners of the balance sheet. 

7 Systemic Leverage Risk 

Taxing interest income inflates debt servicing costs, worsening liquidity stress across sectors already burdened with leverage. The gap between savings returns and borrowing costs widens, deepening household and corporate fragility. 

8 Undermining Financial Deepening 

Instead of encouraging broader access to financial instruments, the reform may drive savers toward informal systems, offshore accounts, or speculative assets—increasing volatility and disintermediation. 

9 Incoherence with Monetary Policy 

When interest income is taxed heavily, monetary policy transmission weakens. A rate hike meant to incentivize saving may be neutralized by post-tax returns that remain unattractive. This creates friction between fiscal and monetary authorities. 

10 Disincentivizing Long-Term Domestic Funding 

Removing exemptions from long-duration peso instruments weakens the domestic funding base. The government may respond by issuing shorter-tenor bonds, amplifying rollover risk—particularly amid widening deficits. 

Theme 3: Fiscal Extraction, the Wealth Effect and the Political Economy 

11 From Market-Based to Tax-Based Government Financing

Figure 5

CMEPA shifts the state's financing strategy from indirect borrowing (via banks' net claims on government) to direct taxation of interest income. This reduces the role of market-based funding and deepens reliance on financial repression. (Figure 5)

Philippine banks have long underwritten the government’s historic deficit spending. But with deposits eroding and liquidity thinning, can CMEPA’s pivot toward direct taxation rebalance this dynamic—or will banks be forced to sustain an inflationary financing regime they may no longer afford?

12 Crowding Out, Capital Misallocation, and Short-Termism

Taxing savings redirects capital from private to public use. Outside of government, the investment community is pushed toward velocity over duration, incentivizing speculative short-term returns rather than productive long-term investments. This leads to boom-bust cycles that consume capital and savings, ultimately lowering the standard of living for the average citizen. 

13 Reform Signals to Mask Fiscal Strain

CMEPA is marketed as efficiency reform, but its primary effect is increased revenue extraction. This is fiscalism masquerading as modernization—a stealth tax hike under the guise of pro-market policy. 

14 Wealth-Effect Ideology and Speculative Diversion 

DOF claims that CMEPA will "diversify income sources," implicitly inviting or encouraging ordinary Filipinos to engage in asset (stock and real estate) speculation. 

The BSP’s inflated real estate index, as discussed last week, aligns perfectly with this narrative. 

Yet if savings have weakened, with what are people supposed to speculate? 

In essence, the law encourages speculative behavior over productive undertakings—gambling on the trickle-down “easy money”-fueled wealth effect to stimulate growth. 

Theme 4: Institutional and Socio-Political Deterioration 

15 Favoring Non-Depository Institutions and Digital Control 

With capital markets shallow, the government’s pivot appears aimed at stock and real estate price inflation to support GDP optics. 

But there might be more to this: could the erosion of savings-based intermediation serve as a stepping-stone—or perhaps a gauntlet—to the advent of a Central Bank Digital Currency (CBDC) regime? 

16 Widening Inequality 

As savings erode and productive investment slows, the burden of taxation and financial volatility falls hardest on low- and middle-income households. Elites with offshore access or alternative vehicles thrive—amplifying the wealth gap. 

17 Capital Consumption and the Attack on Private Property 

CMEPA’s redistributive logic undermines the sanctity of private property. Through financial repression, taxation, and inflation, it transforms capital into consumption, violating the very principles of long-term economic development. 

18 Behavioral Reprogramming Toward Short-Termism 

CMEPA reorients household and institutional incentives by elevating time preferences, nudging actors toward short-term consumption and speculative tendencies. The long-term result encompasses not only economic and financial dimensions, but also social, political, and cultural shifts away from prudence. 

19 Increased State Power and Erosion of Economic and Civil Liberties

The flattening of tax treatment and the reallocation of savings toward the state reassert the growing dominance of the government over economic life. As household and institutional financial autonomy is curtailed, this fiscal centralization represents a creeping erosion of civil liberties. This is not merely fiscal policy—by asserting greater command over private savings and reducing the role of banks and savers in capital allocation, the CMEPA accelerates the centralization of economic control. 

20 Desperation, Not Reform 

Beneath the reformist language lies the scent of desperation. As government spending outpaces revenues and "free lunch" policies proliferate, the state appears increasingly willing to extract resources wherever possible, even at the cost of long-term economic damage. 

CMEPA may be seen less as a policy of modernization and more as a pretext to justify a broader power grab for control over the nation’s remaining financial surpluses. Such fiscal maneuvers reveal a growing reliance on coercive tools to finance political programs and preserve power.

IV. Conclusion: CMEPA—A Wolf in Sheep’s Clothing: Behavioral Reprogramming and the Unseen Costs of Reform 

CMEPA is not neutral. 

It is policy with intent—velocity over virtue, spectacle over substance. Beneath its reformist gloss lies a deliberate reordering of incentives: a behavioral reprogramming that elevates time preference across households, businesses, banks, and the state itself. 

The ramifications are profound. As savings erode, the economy pivots toward a spend-and-speculate framework, exposing malinvestments and shortening planning horizons. Bank balance sheets tilt toward short-duration, high-risk assets. Businesses recalibrate toward immediacy, while regulatory structures and political priorities—including education—subtly shift to accommodate the new paradigm: favoring current events over historical depth, short-term fixes over long-term resilience. 

As immediacy becomes institutionalized, political incentives may shift as well—gravitating toward authoritarian tendencies, where centralized authority and executive expedience increasingly replace civic pluralism. 

This drift accelerates leverage and volatility. Coupled with BSP’s easy money, fiscal splurging, deepening economic concentration, the entrenching of the “build and they will come” paradigm, benchmark-ism, and the subtle embrace of a war economy—where economic centralization and speculative asset inflation substitute for organic growth—the system veers toward the bust phase of a boom-bust cycle. 

CMEPA, dressed in reformist language, delivers structural inversion through a reordering of incentives—substituting short-term economic activity for long-term capital formation. It penalizes saving, rewards speculation, and manufactures stability to perform confidence. Its impact is philosophical as much as economic: undermining the sanctity of private property and sabotaging the long-term architecture of capital. 

As Ludwig von Mises warned: 

Saving, capital accumulation, is the agency that has transformed step-by-step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumulation was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving. (Mises, 1956) 

The unseen consequences of policy often outweigh the visible promises, as Bastiat warned us. 

CMEPA’s structural tax changes reprogram public incentives in ways that may appear benign, but will likely unleash instability, fragility, and misallocation—outcomes not immediately visible, but deeply consequential. 

Unless reversed, CMEPA’s legacy will be one of hollowed market and social institutions, increased fragility of public governance, and ultimately, social unraveling—where the erosion of savings and stability gives way to volatility, inequality, and the breakdown of trust in both economic and civic life. 

CMEPA is a wolf in sheep’s clothing. 

____

References: 

Frédéric Bastiat What is Seen and What is Not Seen, or Political Economy in One Lesson [July 1850], https://oll.libertyfund.org/ 

Ludwig von Mises, The ANTI-CAPITALISTIC MENTALITY, p 39, D. VAN NOSTRAND COMPANY (Canada), LTD 1956, Mises Institute 2008, Mises.org

 

 

 

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power

 

The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch -- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference—that threatens to impoverish us by further destroying the value of our dollars—Dr. Ron Paul 

In this issue:

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power

I. Public Spending: A Rising Floor, Not a Ceiling

II. Shifting Power Dynamics: The Ascendancy of the Executive Branch

III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era

IV. Revenue Shortfalls: The Weakest Link

V. Crowding Out: Public Revenues at the Expense of the Private Sector

VI. Expenditure Trends: Centralization in Action as LGUs Left Behind

VII. Debt Servicing: A Growing Burden

VIII. Foreign Borrowing: A Risky Trajectory

IX. Savings and Investment Gap: The Twin Deficits

X. Twin Deficit Structure

XI. Mounting FX Fragility and Systemic Risks

XII. Fiscal Strain Reflected in the Banking and Financial System

XIII. Bank Liquidity Drain and Risky Credit Expansion

XIV. Conclusion: A Fragile Political Economy  

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power 

A record Php 478.8 billion deficit, driven by soaring spending and slowing revenues, exposes deepening fiscal imbalances and a dangerous shift toward centralized power, increasing risks to the Philippines’ economic stability         

Inquirer.net, May 01, 2025: "The Philippine government in March registered its largest budget deficit in 15 months as revenues contracted amid strong growth in spending. The state’s fiscal shortfall had widened by 91.78 percent year-on-year to P375.7 billion in March, according to the latest cash operations report of the Bureau of the Treasury (BTr). This was the biggest budget gap since the P400.96-billion deficit in December 2023. That sent the fiscal gap in the first quarter to P478.8 billion, 75.62 percent bigger than the shortfall recorded a year ago." (bold mine)

The establishment’s talking heads and pundits tend to gloss over unpalatable economic data, but let us fill in the blanks. 

This article dissects the Q1 2025 fiscal performance, highlighting the record deficit, shifting political power dynamics, and underlying economic vulnerabilities.

I. Public Spending: A Rising Floor, Not a Ceiling 

In March, we noted: "This suggests that the monthly average of Php 527 billion represents a floor! We are likely to see months with Php 600-700 billion spending." (Prudent Investor, March 2025) 

The 2025 enacted budget of Php 6.326 trillion translates to an average monthly expenditure of Php 527 billion.

Figure 1

However, public spending in March 2025 soared to Php 654.98 billion—the second-highest on record, surpassed only by December 2023’s Php 661.03 billion. Excluding seasonal December spikes, March 2025 set a new benchmark or a new high for monthly expenditure. (Figure 1, topmost window)

For Q1, public spending hit Php 1.477 trillion, representing 23.35% of the annual budget. This translates to a monthly average of Php 492.33 billion—Php 34.84 billion short of the official target. Nonetheless, Q1 spending ranked as the sixth-largest quarterly expenditure in history.

This aggressive spending pace underscores a pattern observed over the past six years, where the executive branch consistently overshoots the enacted budget. (Figure 1, middle image) 

Based on this path dependency, the Php 527 billion monthly average should indeed be considered a floor, with monthly expenditures likely to hit Php 600–700 billion—or higher—in subsequent months to meet or exceed the annual target.

II. Shifting Power Dynamics: The Ascendancy of the Executive Branch

Beyond the numbers lies a profound political shift. As we highlighted in March:

"More importantly, this repeated breach of the ‘enacted budget’ signals a growing shift of fiscal power from Congress to the executive branch." (Prudent Investor, March 2025) 

The consistent overspending suggests that Congress has implicitly ceded control over the power of the purse to the executive. 

This erosion of legislative oversight effectively consolidates political supremacy in the executive branch, rendering elections a formality in the face of centralized fiscal authority. 

Indeed, the executive’s growing control over the budget illustrates the erosion of democratic checks and balances among the three branches of the Philippine government. 

The widening gap between actual and allocated spending serves as a tangible indicator of this power shift, with the executive branch wielding increasing discretion over national resources. 

III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era 

The Q1 2025 budget deficit of Php 478.8 billion represents an All-Time high, surpassing even the deficits recorded during the pandemic-induced recession. (Figure 1, lowest diagram) 

It ranks as the sixth-largest quarterly deficit in history and the largest non-seasonal (non-Q4) shortfall. 

Annualized, this deficit projects to Php 1.912 trillion—14.5% above 2021’s record of Php 1.67 trillion! 

This alarming trajectory signals deepening fiscal imbalances, driven by a combination of unrestrained spending growth and the increasing prospect of faltering revenues. 

IV. Revenue Shortfalls: The Weakest Link 

As we observed last December: 

"Briefly, the embedded risks in fiscal health arise from the potential emergence of volatility in revenues versus political path dependency in programmed spending." (Prudent Investor, December 2024)

Figure 2

Q1 2025’s fiscal gap was exacerbated by a 22.4% year-on-year surge in expenditures—the highest since Q2 2020—coupled with a revenue shortfall. (Figure 2, topmost chart) 

March revenues contracted by 3.1%, dragging Q1 revenue growth down to 6.9%, a sharp slowdown from previous quarters. 

Importantly, the shift to quarterly VAT reporting distorts monthly fiscal data, making end-of-quarter figures critical for assessing fiscal health. 

Breaking down the revenue components: 

-Bureau of Internal Revenue (BIR): Collection growth decelerated slightly from 17.2% in 2024 to 16.7% in Q1 2025, reflecting steady but insufficient tax performance to close the spending gap. 

-Bureau of Customs (BoC): Growth improved from 2.4% to 5.7%, potentially driven by frontloaded exports and imports in anticipation of U.S. tariff policies under US President Trump. This trade dynamic may also bolster Q1 2025 GDP figures. 

-Non-Tax Revenues: Non-tax revenues plummeted by 41.21%, contributing only Php 66.7 billion in Q1 2025. The Bureau of the Treasury (BTr) attributes this to delayed GOCC dividend remittances, with only three GOCCs remitting Php 0.027 billion in Q1 2025 compared to 18 GOCCs contributing Php 28.23 billion in Q1 2024. The BTr expects non-tax revenues to recover starting May 2025 as GOCC dividends resume. (BTr, April 2025) (Figure 2, middle graph) 

This drastic reduction in GOCC remittances accounts for the bulk of the non-tax revenue shortfall, pulling the total revenue share down to 6.68%—the lowest since at least 2009. Since 2009, non-tax revenues have averaged a 12.4% share of total revenues, underscoring the severity of the Q1 2025 decline. 

The heavy reliance on non-tax revenues through volatile GOCC dividends exposes a structural vulnerability in fiscal planning. Delays in remittances, whether due to operational inefficiencies or governance issues within GOCCs, amplified the Q1 2025 deficit, forcing the government to draw on cash reserves and increase borrowing to bridge the gap. 

The broader implications are concerning. Tax collections from the BIR and BoC, while still growing, are insufficient to offset aggressive expenditure growth. The dependence on non-tax revenue windfalls introduces heightened unpredictability, as future shortfalls could exacerbate fiscal pressures if GOCCs underperform or remittances are further delayed. 

V. Crowding Out: Public Revenues at the Expense of the Private Sector 

Moreover, potential weaknesses in the economy or tax administration could lead to a substantial deceleration in tax revenue collections from the BIR and BoC, further widening the fiscal gap. 

More critically, this revenue crunch highlights a profound economic trade-off: the government’s growing resource demands, through taxes and non-tax collections, divert funds from the private sector, undermining productivity and long-term growth—a phenomenon known as the crowding-out effect.

Compounding these challenges, the inability or failure of near-record employment rates and unprecedented (Universal-commercial) bank credit expansion to significantly boost revenues signals softening domestic demand. (Figure 2, lowest visual) 

In fact, a chart highlighting the growing gap between public revenues and universal bank lending signals an increasing reliance on credit to drive GDP growth and sustain public coffers.

Figure 3

Declining core CPI, rising real estate vacancies, record-high hunger sentiment, and a decelerating GDP growth trajectory all indicate an economy struggling to convert nominal gains into sustainable fiscal outcomes. (Figure 3, topmost pane) 

If public revenue falters and the fiscal deficit explodes, the government may face heightened borrowing needs and rising interest rates, further straining fiscal health and increasing vulnerability to external economic shocks. 

VI. Expenditure Trends: Centralization in Action as LGUs Left Behind 

The 2019 Mandanas-Garcia Ruling mandated a larger revenue share for Local Government Units (LGUs), yet national government (NG) expenditures have consistently outpaced LGU spending since 2022 under the Marcos administration. 

 In Q1 2025: 

-LGU expenditure growth slowed from 12.6% in 2024 to 11.3%, reducing their share of total spending from 21.5% to 19.6%. 

-NG expenditure growth surged from 5.4% to 25.25%, increasing its share from 60.3% to 61.71%. Key drivers included infrastructure projects (DPWH) and public welfare programs (DSWD) in March. (Figure 3, middle image) 

This divergence reflects a deliberate centralization of resources, concentrating fiscal and political power in the national government while diminishing LGU autonomy. 

The trend aligns with the broader shift of fiscal authority to the executive, further entrenching centralized control. 

VII. Debt Servicing: A Growing Burden 

In the meantime, interest payments, a primary component of debt servicing, reached a record high in Q1 2025. 

While their growth rate slowed from 35.9% in 2024 to 24.9% in 2025, their share of total expenditures rose from 16% to 16.32%. (Figure 3, lowest chart)

Figure 4

Amortization costs plummeted by 87.26%, reducing the total debt servicing burden by 65.3%. (Figure 4, topmost graph)

Mainstream narratives have previously portrayed this as a sign of fiscal improvement—but this is misleading.

The decline in debt servicing is merely a temporary reprieve. With the historic Q1 deficit, future borrowing—and therefore future debt servicing—will inevitably rise.

Moreover, the touted "fiscal consolidation" rests on a flawed assumption: that economically sensitive, variable revenues will increase in lockstep with programmed spending.

The Q1 2025 deficit necessitated a sharp increase in financing, with the Bureau of the Treasury’s borrowing doubling from Php 280.79 billion in 2024 to Php 644.12 billion this year. (Figure 4, second to the highest image)

While the Treasury’s Q1 2025 cash position reached historic highs, it returned to a deficit of Php 325.56 billion in March. This implies the need for increased short-term borrowing to meet immediate cash requirements.

If the deficit trend persists, full-year borrowing targets may need to be revised upward.

As evidence, Public debt surged by Php 319.257 billion month-on-month to a record Php 16.632 trillion in February 2025, marking a historic high. March data, expected next week, may reveal further escalation. (Figure 4, second to the lowest diagram)

This debt increase, driven by robust programmed spending and slowing revenue growth, underscores the deepening fiscal imbalance. 

Yet, the gap between the nominal figures of public debt and government spending continues to widen, reaching unprecedented levels and signaling heightened fiscal risks.

VIII. Foreign Borrowing: A Risky Trajectory

A notable shift in Q1 2025 was the increased reliance on foreign exchange (FX)-denominated share of debt servicing, which surged from 15% to 47.6% on increases in interest and amortization payments. (Figure 4, lowest pane)

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

-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. 

IX. Savings and Investment Gap: The Twin Deficits 

The Philippine economic development model continues to rely heavily on a Keynesian-inspired spending paradigm. This framework is a core driver behind the record-breaking savings-investment gap. 

A key policy anchor supporting this model is the BSP’s long-standing easy money regime, which provides cheap financing primarily to the government and elite sectors. This is intended to stimulate spending through a trickle-down mechanism—boosting GDP while funding government projects, including those often criticized as boondoggles. 

However, this approach comes at a significant cost: it depresses domestic savings. 

Fiscal spending is an integral component of this paradigm. 

During the pandemic recession, the government’s role as a "fiscal stabilizer" expanded significantly, shaping GDP performance in the face of private sector weakness. 

However, government spending does not come without consequences. It competes with the private sector for scarce resources and financing, diverting them in the process. The result is structural supply constraints, forcing the economy to import goods to fill domestic shortages created by demand-side excess. 

Furthermore, the BSP’s USD-PHP foreign exchange ‘soft peg’ has the effect of overvaluing the peso and underpricing the dollar. This policy further fuels demand for imports and external financing, reinforcing the external deficit. 

X. Twin Deficit Structure

Figure 5

Unsurprisingly, this credit-fueled, trickle-down model has produced a classic “twin deficit” scenario—wherein fiscal imbalances are mirrored by trade deficits. (Figure 5, topmost visual)

As the budget gap soared to historic levels during the pandemic, the trade deficit also expanded to record levels.

With the current political and economic thrust toward centralization, this dynamic is unlikely to reverse. This reality highlights a structural barrier that undermines potential benefits from global trade shifts, such as those arising from Trump’s protectionist tariff regime.

Under Trump’s regime, the Philippines, with one of the region’s lowest tariff rates, remains structurally unprepared to capitalize, due to policies that prioritize consumption over investment, perpetuating reliance on imports and external financing—as previously discussed. 

Although the trade gap widened by 12.8% year-on-year in Q1 2025—from USD 11.264 billion to USD 12.71 billion—the all-time high in the fiscal deficit points to an even larger trade gap in the quarters ahead. This will only deepen the twin deficit conundrum. 

XI. Mounting FX Fragility and Systemic Risks 

Even with support from external borrowings, the growth of BSP’s net foreign assets has largely vacillated following multiple spikes in 2024. This suggests emerging limitations in the central bank’s ability to manage its FX operations effectively. (Figure 5, middle graph) 

Despite a recent rally in the Philippine peso—driven by broad dollar weakness and BSP interventions—fragilities from growing external liabilities remain as explained last week. 

These vulnerabilities are likely to magnify systemic risks, even as establishment economists—fixated on rigid quantitative models—fail to acknowledge them. 

XII. Fiscal Strain Reflected in the Banking and Financial System 

Fiscal strains are increasingly impacting the banking system, a dynamic the public scarcely recognizes.

The BSP and its cartelized network of financial institutions have engaged in inflationary financing.  Philippine banks have been absorbing a significant share of government securities through Net Claims on Central Government (NCoCG). (Figure 5, lowest chart) 

These claims, representing banks’ holdings of government debt, peaked at Php 5.54 trillion in December 2024 but slipped to Php 5.3 trillion in February 2025, reflecting slight easing. 

Meanwhile, the BSP’s NCoCG, following the historic Php 2.3 trillion liquidity injections in 2020-21, remains elevated, fluctuating between Php 400 billion and Php 900 billion since 2023, underscoring its role in deficit financing.

Figure 6

Although the growth of NCoCG for Other Financial Corporations (OFCs), such as investment firms and insurers, has slowed since Q1 2024, it reached a record Php 2.491 trillion in Q3 2024 before declining to Php 2.456 trillion in Q4 2024. (Figure 6, topmost image) 

Notably, the surge in NCoCG for banks, OFCs, and the BSP began in 2019 and accelerated thereafter, coinciding with the "twin deficits." 

Essentially, the Q1 2025 fiscal deficit of Php 478.8 billion and trade deficit of USD 12.71 billion—highlights the financial sector’s entanglement with fiscal imbalances. 

XIII. Bank Liquidity Drain and Risky Credit Expansion 

Compounding this, the spike in the banking system’s record NCoCG has coincided with the all-time high in Held-to-Maturity (HTM) assets, government bonds held by financial institutions until maturity, which have significantly reduced banks’ liquidity. (Figure 6, middle chart) 

This led to the cash-to-deposits ratio hitting a historic low in February 2025, as banks locked funds in HTM assets to finance the government’s borrowing. (Figure 6, lowest graph) 

In response, the BSP has implemented a series of easing measures: two reductions in the Reserve Requirement Ratio (RRR) within six months, the doubling of deposit insurance in March 2025, and four policy rate cuts in eight months—officially marking the start of an easing cycle—as previously analyzed. 

In parallel, banks have ramped up lending, particularly to risk-sensitive sectors such as consumers, real estate, trade, and utilities. This credit expansion is often rationalized as a strategy to improve capital adequacy ratios in line with Basel standards. However, in practice, it raises sovereign exposure, increases sensitivity to interest rate fluctuations, and thereby amplifies credit, economic, and systemic risks. 

XIV. Conclusion: A Fragile Political Economy 

In sum, the buildup in fiscal risks is no longer confined to the government budget spreadsheets—it permeates into the broader economy and financial markets. 

As we concluded last March: "the establishment may continue to tout the supposed capabilities of the government, but ultimately, the law of diminishing returns will expose the inherent fragility of the political economy. This will likely culminate in a blowout of the twin deficits, a surge in public debt, a sharp devaluation of the Philippine peso, and a spike in inflation, reinforcing the third wave of this cycle—heightening risks of a financial crisis." (Prudent Investor, March 2025) 

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References 

Prudent Investor Newsletter, January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden March 23, 2025, Substack 

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025 Substack 

Prudent Investor Newsletter, October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends December 9, 2025 Substack 

Philippine Bureau of Treasury, Q1 Revenue Collections and Expenditures Sustain Growth, April 29, 2025 treasury.gov.ph