Is the Philippines on the Brink of a 2025 Fiscal Shock?

 

You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt. They don’t include the greater risk that the countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting). Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying—Ray Dalio

In this issue

Is the Philippines on the Brink of a 2025 Fiscal Shock?

I. A Brewing Fiscal Storm?

II. April 2025 vs April 2024: A Sharp Deterioration

III. Four-Month Performance: Weak Revenue Momentum

IV. Weak Revenue Despite Loose Conditions: A Structural Problem?

V. Budget Math: A Deficit Blowout in the Making?

VI. Economic Fragility Threatens Further Revenue Weakness

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

B. External Trade: Consumer Import Growth Sharply Slows

C. Headline and Core CPI: More Evidence of Demand Weakness

D. Labor Market Deterioration, Hidden Labor Market Realities

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

B. Debt Payment Dynamics

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition

X. Crowding Out Effect and Interest Rate Pressures

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

XIII. Conclusion: Fiscal Shock Watch 2025 

Is the Philippines on the Brink of a 2025 Fiscal Shock? 

April's budget surplus masks a deeper fiscal crisis brewing beneath record-high deficits and weakening revenue collection

I. A Brewing Fiscal Storm? 

Is the Philippines teetering on the brink of a fiscal shock?  We are about to find out after eight months of government data. 

The Bureau of the Treasury’s April 2025 cash operations report confirms our suspicion that the government is struggling to meet critical fiscal targets, which should raise concerns about economic stability. 

As noted in early May: "A hypothetical Php 200 billion surplus in April would be required to partially offset Q1’s Php 478 billion fiscal gap and keep the official trajectory on track." (Prudent Investor, May 2025) 

The Inquirer.net reported on May 28, 2025: "The national government recorded a budget surplus of P67.3 billion in April, surging by 57.51 percent or P24.6 billion from a year ago, as tax revenues posted stronger growth and spending slowed for the month. However, for the January to April period, the cumulative budget deficit surged by 78.98 percent to P411.5 billion, as public spending rose by 13.57 percent to support economic activity and the priority programs of the Marcos administration." 

Media narratives either echoed the official line on tax revenue strength or highlighted spending restraint as causes for April’s surplus. But both perspectives overlook a critical detail: April’s surplus aligns not just with the 2023 VAT filing shift to a quarterly basis (previously discussed) but—more importantly—with the "annual tax filing deadline"—a period typically associated with a revenue spike. Yet, even this failed to close the fiscal gap. 

Additionally, the record-high deficits in Q1, persisting into the first four months, have gone largely unaddressed in mainstream discussions. 

To cut to the chase: April data signals a further weakening in the revenue base—right in the face of unrelenting public expenditure, pushing the deficit to historic levels. 

Let’s delve into the details to understand the scope of this fiscal challenge. 

II. April 2025 vs April 2024: A Sharp Deterioration 

In April 2025: 

• Revenues fell 2.82%
• Tax revenues grew 7.84%
• Non-tax revenues plunged 68.08%
• Bureau of Internal Revenue (BIR) growth of 11.1% boosted tax revenues
• Bureau of Customs (BoC) 7.5% declined, which weighed on overall performance

Compare that to April 2024: 

• Revenues soared 21.9%
• Tax revenues surged 13.9%
• Non-tax revenues rocketed 114%
• Tax revenues were anchored by BIR's 12.65% growth and the BoC delivered a strong 19.5%.

Clearly, April 2025 showed a sharp drop in performance despite the same structural advantages related to annual filings.

Figure 1       

The nominal (peso) figures show revenue collections falling significantly short of April 2024's all-time high. (Figure 1, topmost window)

Relative to the VAT’s quarterly cycle, note that the combined January and April 2025 surpluses (Php 135.66 billion) exceeded 2024’s (Php 130.7 billion) by just 3.8%—barely moving the needle against the Q1 fiscal gap. (Figure 1, second to the highest image) 

III. Four-Month Performance: Weak Revenue Momentum 

For January to April 2025: 

• Revenues grew a meager 3.3%.
• Tax revenues rose 11.5%, while non-tax revenues collapsed 51.94%.
• The BIR and BoC posted 14.5% and 2.16% growth, respectively.

In contrast, the first four months of 2024 showed:

• Revenues up 16.8%.
• Tax revenues up 13.22%.
• Non-tax revenues up 48.81%.
• The BIR and BoC grew by 15.35% and 6.47%, respectively. 

Clearly, April 2025 didn’t just underperform—it dragged down the already fragile broader four-month revenue trend. (Figure 1, second to the lowest visual) 

IV. Weak Revenue Despite Loose Conditions: A Structural Problem? 

Critically, Q1’s collection performance coincided with the full effects of the BSP’s first easing cycle in 2024, while April began reflecting partial effects of the second phase. 

Additionally, macro conditions were supportive:

• Bank credit growth was strong.
• Labor market conditions were reported as near full employment.
• Inflation slowed.

Universal-commercial bank loans jumped 11.85% in April to a record Php 12.931 trillion. Yet, public revenues stalled. (Figure 1, lowest graph) 

In short, despite historically loose financial conditions, the government has already been experiencing collection issues—a potential symptom of diminishing returns from BSP’s easy-money regime.

This suggests that further monetary stimulus yields progressively smaller positive impacts on revenue generation or economic growth, potentially reflecting inefficiencies in credit transmission due to mounting balance sheet problems. 

Which leads us to the trillion-peso question: What happens when financial conditions tighten? 

V. Budget Math: A Deficit Blowout in the Making?

From January to April, total revenues reached Php 1.520 trillion. Annualized, that projects Php 4.561 trillion—assuming average monthly intake of Php 380.06 billion. 

Compare that to the 2025 enacted budget of Php 6.326 trillion—already a base case considering six straight years of overspending. Authorities have already disbursed Php 1.932 trillion, implying a remaining monthly average of Php 549.28 billion. 

Bluntly put: At the current pace, 2025 could register a deficit of Php 1.765 trillion—5.7% higher than 2021’s all-time high of Php 1.67 trillion!

The key difference? 2021’s deficit was a deliberate fiscal stabilizer—alongside the BSP's unprecedented monetary and regulatory measures—in response to the pandemic. 

In 2025, no downturn has yet emerged—but the deficit itself threatens to trigger one.

VI. Economic Fragility Threatens Further Revenue Weakness 

A. Manufacturing: Price Softening Amid Trump Tariff Volatility

Figure 2

Since its peak in July 2024, manufacturing loans have been decelerating. March growth was just 2%. However, PPI rose only 0.06% in April YoY—barely moving. (Figure 2, topmost pane)

Though manufacturing volume/value both rose 4.2–4.3% inApril, this likely reflected distortions from new Trump tariffs effective that month.

The S&P PMI index showed a similar spike to 53 in April but slumped to 50 in May. (Figure 2, second to the highest chart)

B. External Trade: Consumer Import Growth Sharply Slows

April imports fell 7.2%, while exports rose 7%, compressing the trade deficit by 26%. (Figure 2, second to the lowest diagram)

But consumer goods imports slumped from 25.8% in March to just 2.83% in April. (Figure 2, lowest graph)

Agri-based products—led by coconut and sugar—boosted exports.

C. Headline and Core CPI: More Evidence of Demand Weakness

Headline CPI slipped from 1.4% in April to 1.3% in May, mainly due to quasi-price controls known as Maximum Suggested Retail Prices (MSRP) on rice and pork. The government also began rolling out Php 20 rice subsidies in select areas, distributing them among targeted groups.

Figure 3

However, Core CPI (non-food and non-energy) steadied at 2.2% for a third straight month, backed by a base-forming month-over-month rate of 0.16%—marking a second consecutive month. A soft CORE CPI reflects underlying weakness in demand. (Figure 3, topmost image)

D. Labor Market Deterioration, Hidden Labor Market Realities

Labor data reveals further vulnerabilities. The unemployment rate rose from 3.9% in March to 4.1% in April, but this excludes an estimated 24 million “functionally illiterate workers” (47% of the labor force or 30% of the population aged 15 and above). Many of these workers are likely employed in the informal sector or MSMEs (67% of employment in 2023, per DTI) or are underemployed, part-time, or not in the labor force. 

The “not in the labor force” population, defined by the PSA as those not seeking work due to reasons like housekeeping or schooling or permanent disability, has risen since November 2022, potentially masking the true unemployment rate and raises questions about the true extent of labor underutilization. (Figure 3, middle chart) 

The correlation between universal-commercial bank consumer salary loans and CPI trend since 2021 highlights consumer strain, further eroding aggregate demand. (Figure 3, lowest diagram) 

VII. The Conundrum of "Aggregate Demand" Policies and Consumer Strain 

Amidst all of this, we must ask: what has happened to "aggregate demand," particularly consumer demand? If consumers have shown worsening strains at the start of Q2, its continuity bodes ill for GDP growth and could likely be expressed in potential shortfalls in tax collections. 

So how will the government attempt to keep the GDP afloat? Given their top-down bias, the mechanical recourse would be to front-load public spending, thereby heightening the risks of a fiscal deficit blowout! 

Naturally, because the government is not a wealth generator but rather a redistributor and consumer, someone has to finance that swelling deficit. That "someone" is the individuals in the wealth-generating productive private sector. 

VIII. The Looming Debt Burden: Financing a Widening Deficit

A. April Financing Activities

Figure 4 

With the first four-month deficit at a record high of Php 411.5 billion, authorities raised Php 155.61 billion in April, leading to a 190% spike in financing of Php 799.73 billion in 2025. This effectively reversed the three-year (2021-2024) decline previously hailed by mainstream experts as prudential management. (Figure 4, topmost window)

The financing surge increased BTr's cash reserves to Php 1.205 trillion (Jan-Apr), though authorities held net cash reserves of only Php 188.9 billion in April. 

April's financing was mostly acquired through domestic issuance.

B. Debt Payment Dynamics 

April debt payments soared 73.72% to Php 280.898 billion, accruing to Php 622.921 billion in the first four months of 2025. (Figure 4, middle image) 

Total debt payments remained 45.7% below 2024's record levels. However, FX payments grew 17.3%, partly offsetting the 59.64% plunge in peso payments.

The FX share of debt servicing relative to the total has been rising since 2024. (Figure 4, lowest chart) 

The lag in payment data may be due to scheduling issues or information deliberately withheld for political reasons. 

While we find the preponderance of media announcements showing how debt payment has substantially slowed this year rather amusing, logic dictates that widening deficits will lead to a critical increase in debt that will have to be serviced over time. 

IX. All-time High April Public Debt: Currency Effects Distorts Debt Composition 

April debt hit a record Php 16.753 trillion. Thanks to a strong peso, FX-denominated loans fell 2.7% or Php 142.33 billion. 

Per Bureau of Treasury (BTr): "The reduction was primarily due to the P124.74 billion decrease in the peso value of external debt owing to peso appreciation." 

However, domestic debt grew 1.85% or Php 211 billion, resulting in a net increase of 0.41% or Php 68.690 billion. 

Reality Check: Philippine foreign debt did not actually shrink. The peso simply strengthened, lowering the debt's peso equivalent. Remember, FX liabilities still have to be repaid in dollars or other foreign currencies. In short, it's a revaluation trick—a statistical façade, not a real debt decrease. 

X. Crowding Out Effect and Interest Rate Pressures

Figure 5

In any case, the widening deficit, brought about by the mismatch between accelerating public spending and weakening revenue growth, underwrites the escalation of public debt. The rise in public debt has already been outpacing the growth trend of public spending, driven by the deficit and likely by amortization requirements. (Figure 5, topmost pane)

This escalating fiscal deficit means that competition for access to the public's diminishing savings will intensify, as government requirements will likely crowd out the domestic credit needs of banks and non-private sector firms, thereby putting pressure on interest rates. For businesses, this translates to higher borrowing costs and reduced access to credit, potentially stifling private sector investment and job creation. For ordinary citizens, it could mean higher interest rates on loans for homes, cars, or personal consumption. 

As an aside, the relentless rise in debt levels is not only a manifestation of the consequences of the government-BSP's "trickle-down" policies (debt-financed "savings-investment gap," "twin deficits," and "build and they will come" malinvestments); critically, they also signify the indirect ramifications of the Philippine social democratic system. In essence, this is what you have voted for! 

XI. Crowding Out Effect and Policy Paralysis: The Limits of Monetary Easing 

So, despite authorities' earnest attempts to push down the CPI—mainly via price controls or Maximum Suggested Retail Prices (MSRP) for rice and pork—to accommodate a desired easing cycle, T-bill rates have barely budged since 2022!  (Figure 5, middle chart) 

T-bills, the most sensitive to BSP's rate cuts, have remained unresponsive to April's CPI data! 

The widening spread between market (T-bills) and the CPI suggests that, aside from the crowding-out effect, Treasury markets view the present disinflation as "transitory," or they are hardly convinced of the integrity of the government's data. 

Consider this: The punditry consensus has been clamoring for lower rates on the back of a slumping CPI, but treasury dealers for their companies continue to price Treasuries as if the CPI remains inordinately high!

In short, the crowding out has rendered the government-BSP's easing cycle ineffective: Fiscal stimulus has hit a wall due to diminishing returns!

At worst, the mounting discrepancy could translate into increasing policy risks—or a potential blowback—that could be expressed through an inflation surge or a USD/PHP spike.

As seen in banks' balance sheets, this crowding out has led to a plunge in their liquidity positions (evidenced by falling cash-to-deposits and liquid assets-to-deposits ratios).

This increasing demand for public savings also applies to foreign exchange (FX) requirements. This means that to meet the economy's foreign exchange (FX) requirements and support the BSP's "soft peg" or foreign exchange policy, a surge in external debt can be expected. 

Evidently, public savings have not been sufficient. Authorities have increasingly relied on banks to finance public requirements via net claims on the central government (NCoCG), which have been rising in tandem with public debt. These assets have been siloed via banks' held-to-maturity (HTM) assets. The all-time high in public debt has been accompanied by a near-record NCoCG in April. (Figure 5, lowest diagram)

Figure 6

It is unsurprising that trades in government securities have been booming, even as 10-year yields have been on an uptrend. (Figure 6, topmost diagram) 

This phenomenon suggests two things: potential disguised losses in banks and financial institutions, and second, that these trades have crowded out trading activities in the Philippine Stock Exchange (PSE). 

In 2020, the BSP's historic Php 2.3 trillion intervention occurred partly via its own NCoCG, which is conventionally known as "quantitative easing." Although the present economy has supposedly ‘normalized,” the BSP's NCoCG remains at 2020 levels. This can be expected to surge when public savings and banks' capacity have reached their maximum. (Figure 6, middle image) 

Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time. 

We doubt if they can maintain the USD/PHP peg or if they would accommodate a limited peso devaluation. 

XII. The Inevitable Path: Debt, Inflation, and Future Taxation

With this in mind, we can expect both public debt and debt servicing to experience an accelerated rise. Public debt to GDP could hit 2003-2004 levels, while debt servicing should see an equivalent uptrend over the coming years. (Figure 6, lowest chart) 

We should not forget: rising public debt inevitably leads to higher debt servicing, which in turn necessitates more public spending. 

As 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)

Following this, after grappling with debt and inflation, the government is bound to raise taxes. 

XIII. Conclusion: Fiscal Shock Watch 2025 

Unless BSP’s easing gains real economic traction, the first four months of 2025 point to a growing likelihood of a fiscal shock. 

• Revenue collection has deteriorated.
• Economic indicators signal fragility.
• Consumers are heavily indebted and weakening.
• External pressures—Trump's tariffs, deglobalization, and the re-emergence of "bond vigilantes" (investors who sell off government bonds when they believe fiscal policies are unsustainable, thus driving up borrowing costs for the government) could tighten external liquidity and worsen domestic financial conditions. 

Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026. 

If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate.

___

References 

Prudent Investor Newsletter, Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm, May 18, 2025 

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

 

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) 

____ 

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

 

January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden

Monetary pumping and government spending cannot remove the dependence of demand on the production of goods. On the contrary, loose fiscal and monetary policies impoverish real wealth generators and reduce their ability to produce goods and services, thus weakening effective demand for other goods—Dr. Frank Shostak 

In this issue

January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden

I. The Mirage of Fiscal Prudence: A Closer Look at January’s Surplus

II. January’s Surplus: A Closer Look, Changes in VAT Reporting Effective 2023

III. Diminishing Returns? Slowing Revenue Growth Amid Record Bank Credit Expansion

IV. The VAT Effect, Public Spending Trends and Breaching the Budget: A Shift in Political Power

V. Fiscal Challenges Deepen as Interest Payments Soar and Crowds Out Public Allocation

VI. January’s Record Cash Spike

VII. Rising Public Debt, Increasing FX Financing and Mounting Pressure on the Philippine Peso

VIII. Banks and the BSP as Fiscal Lifelines

IX. Symptoms of Crowding Out: Weak Demand and Slowing GDP

X. Conclusion: Mounting Fragility Beneath Sanguine Statistical Benchmarks 

January Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden 

VAT reporting changes drove January 2025’s surplus, despite slowing revenue growth, record-high interest payments, and ballooning public debt—exposing growing fiscal vulnerabilities.

I. The Mirage of Fiscal Prudence: A Closer Look at January’s Surplus 

Businessworld, March 21, 2025: "FINANCE Secretary Ralph G. Recto said the budget surplus recorded in January is unlikely to continue in the following months. Asked if the surplus will be sustained in the runup to the elections, Mr. Recto told BusinessWorld: “No. Our deficit target this year is 5.3% of the GDP (gross domestic product).”" 

It’s remarkable how media portrays government fiscal management as though it’s a model of efficiency and foresight. 

This supposedly impartial business outlet echoes the optimism with little scrutiny, displaying a certain undue enthusiasm in their narrative. 

-The “manageable” budget? Public outlays continue to grow, often exceeding the allocations set by Congress. 

-Revenues? These are presented as if they align seamlessly with the government’s projections—reality, it seems, is expected to comply. 

-Changes to VAT reporting? The January surplus was largely a result of this adjustment that took effect in 2023. As a media outlet, they should have recognized this. Instead, the omission conveniently aligns with their theme of unquestioning deference. 

-And the political context of deficit spending? It’s treated as a non-issue, as though public resources are always managed with the utmost prudence and altruism. Yet, this framing sidesteps how deficit spending often fuels projects with short-term appeal but long-term consequences. 

Underlying all this is the assumption that the government is all-knowing, omnipotent, and in perfect command of the economy—a notion more fictional than factual. 

II. January’s Surplus: A Closer Look, Changes in VAT Reporting Effective 2023 

Let us dive into the details. 

Back in September, we noted: "So, there you have it: The rescheduling of VAT declarations from monthly to quarterly has magnified revenues and "narrowed" deficits at the "close" of each taxable quarter."  (Prudent Investor, 2024) 

The changes in VAT reporting took effect on January 1, 2023. 

Though expenditures grew by 19.45%, outpacing revenues’ 10.75% increase, in peso terms, January 2025 revenues exceeded outlays, leading to the month’s surplus.         

Revenues of Php 467.15 billion marked the third-largest monthly total in pesos, following April and October 2024.

Figure 1 

Meanwhile, expenditures were the smallest monthly amount since February 2024. Nevertheless, the long-term spending and revenue trends remain intact so far. (Figure 1, upper window) 

III. Diminishing Returns? Slowing Revenue Growth Amid Record Bank Credit Expansion 

However, despite the revenue outperformance—driven by tax collections—growth rates materially declined in January 2025. Total tax and Bureau of Internal Revenue (BIR) collection growth slowed from 25.03% and 31.35% in 2024 to 13.6% and 15.13% in 2025, respectively.  (Figure 1, lower graph) 

On the other hand, Bureau of Customs (BoC) collections jumped from 3.98% to 7.98% in 2025. Since BIR accounted for 81.2% of the total, tax revenues largely reflected its growth rate.

Figure 2

And this slowdown in revenue growth is occurring alongside record-breaking bank credit expansion! Universal commercial banks reported a 13.3% surge in bank lending growth—the highest rate since December 2020—reaching Php 12.7 trillion in January, slightly below December 2024's record. (Figure 2, upper image)

In a nutshell, the decelerating revenue growth reflects the diminishing returns of the Marcos-nomics fiscal stimulus.

IV. The VAT Effect, Public Spending Trends and Breaching the Budget: A Shift in Political Power

The quarterly shift in VAT reporting resulted in a Php 68.4 billion surplus, the third largest after January 2024 and April 2019. (Figure 2, lower chart)

Although public spending may have appeared subdued in January, the government has an enacted 2025 budget of Php 6.326 trillion, averaging Php 527.2 billion monthly.

Figure 3

Yet, the Executive branch has hardly been frugal—it has consistently outspent legislated allocations since 2016! (Figure 3, upper visual)

If spending, which they have the power to control, cannot be managed, then revenues—being dependent on spontaneous economic and financial interactions—are even less controllable. 

This persistent spending overreach signals an implicit yet pivotal shift in the distribution of political power. As we noted earlier: "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) 

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. 

V. Fiscal Challenges Deepen as Interest Payments Soar and Crowds Out Public Allocation 

January 2025 interest payments (IP) soared to a record Php 104.4 billion, pushing their share of total expenditures to 26.2%—a peak last seen in 2009! (Figure 3, lower diagram) 

Authorities attributed this to a "shift in coupon payment timing due to the issuance strategy of multiple re-offerings of treasury bonds," as well as "an earlier servicing of a Global Bond with a February 1 coupon date falling on a weekend." 

Nonetheless, the programmed budget for interest payments in 2025 is Php 848 billion. January’s interest payment equates to 12% of this total 2025 allocation for interest payments, while 26.2% represents its share of January’s total expenditures. 

Interest payments and overall debt servicing data in the coming months will shed light on the true conditions. 

Once again, as we noted earlier: "Government spending will increasingly be diverted toward debt payments or rising debt service costs constrain fiscal flexibility, leaving fewer resources for essential public investments" (Prudent Investor, March 2025) 

VI. January’s Record Cash Spike 

Figure 4

Another striking figure in the government’s cash operations report was the January cash balance surplus, which soared to an all-time high of Php 1.23 trillion, despite reported financing of only Php 211 billion. (Figure 4, topmost pane) 

The Bureau of Treasury (BoTr) reported cash flow deficits of Php 104 billion, Php 261 billion, and Php 370.04 billion in the last three months of 2024, totaling Php 735 billion. The BoTr offered no explanation for this discrepancy. One plausible reason could be the USD 3.3 billion ROP Global bond issuance. 

VII. Rising Public Debt, Increasing FX Financing and Mounting Pressure on the Philippine Peso 

During the same period, public debt rose by Php 261.5 billion month-on-month (MoM) or Php 1.134 trillion year-on-year (YoY) to a record Php 16.313 trillion in January.  (Figure 4, middle graph) 

Authorities are programmed to borrow Php 2.545 trillion in 2025, slightly down from Php 2.57 trillion in 2024. 

Yet, outpacing domestic debt growth of 10.3%, external borrowings rose 13% in January, with their share of the total reaching 32.05%—nearly matching November’s 32.13% and reverting to 2020 levels. (Figure 4, lower image) 

Since 2020, reliance on foreign exchange (FX) borrowings has steadily increased. 

Greater dependence on FX financing raises internal pressure for the Philippine peso to devalue. As we have previously explained, the widening credit-financed savings-investment gap (SIG)—a key element of the structural economic model pursued by authorities—has resulted in persistent 'twin deficits,' which has been magnified by the pandemic era. 

Consequently, it is unsurprising that the upper limit of the USD-PHP ‘soft peg’ continues to be tested by mounting liabilities. The government is increasingly resorting to Hyman Minsky’s "Ponzi Finance"—as organic fund flows decline, reliance on debt refinancing to manage the balance sheet deepens. 

VIII. Banks and the BSP as Fiscal Lifelines

Figure 5

Banks remain a primary source of government financing, with Net Claims on Central Government (NCoCG) up 7.42% YoY to Php 5.409 trillion, though slightly down from December’s all-time high of Php 5.541 trillion. (Figure 5, upper window) 

The Bangko Sentral ng Pilipinas (BSP) is another source. January’s spending decline mirrored the BSP’s NCoCG, which rose 14.54% YoY to Php 390.3 billion but fell 34% MoM from December’s Php 590 billion. The fluctuations in BSP’s NCoCG have closely tracked public spending, with correlations tightening since its historic rescue of the banking system. (Figure 5, lower graph) 

IX. Symptoms of Crowding Out: Weak Demand and Slowing GDP 

Figure 6

Weak demand, potentially exacerbated by lower public spending in January, contributed to the decline in Core CPI, with non-food and energy inflation falling from 2.6% in January to 2.4% in February 2025. (Figure 6, upper diagram) 

It is worth reiterating that record public spending in Q4 2024 accompanied just 5.2% GDP growth—evidence of the crowding-out syndrome in action. (Figure 6, lower chart) 

X. Conclusion: Mounting Fragility Beneath Sanguine Statistical Benchmarks 

The January 2025 surplus is a fleeting anomaly rather than a sign of sustainable fiscal health. The underlying trends—slowing revenue growth, surging debt servicing costs, and increasing reliance on external borrowings—paint a concerning picture of fiscal vulnerabilities, with long-term consequences for economic stability and growth. 

Given that politics often relies on path-dependent economic policies, meaningful reforms are unlikely to occur until they are forced upon the government by market pressures. 

The BSP’s easing cycle, characterized by cuts in interest rates and the Reserve Requirement Ratio (RRR), further underscores this dynamic. These measures effectively accommodate the government’s borrowing-and-spending cycle, exacerbating fiscal imbalances and delaying necessary structural reforms. 

Or, 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. 

____

References 

Prudent Investor Newsletters, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024 

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