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
