June 2025 Deficit: A Countdown to Fiscal Shock

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

In this issue

June 2025 Deficit: A Countdown to Fiscal Shock 

I. A Delayed Reckoning: Anatomy of a Fiscal Shock

1. Easy Money–Financed Free Lunch Politics

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

3. Chronic Policy Diagnostic Blindness

4. Econometric Myopia: Forecasting the Past

5. Behavioral Fragility: The Psychology of Denial

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

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

IV. Technocratic Overreach, Authorized Expenditures, Congressional Irrelevance

V. Deficit Forecasting: Averaging Toward a Crisis

VI. Financing Strain and the Debt-Debt Servicing Spiral

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

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

IX. Mounting USDPHP Exchange Rate Tension

X. Conclusion: The Structural Fragility of Deficit Philosophy 

June 2025 Deficit: A Countdown to Fiscal Shock 

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

I. A Delayed Reckoning: Anatomy of a Fiscal Shock 

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

Here are the five pillars of this reckoning: 

1. Easy Money–Financed Free Lunch Politics 

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

Deficits don’t matter. Debt is painless. 

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

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

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

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

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

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

3. Chronic Policy Diagnostic Blindness 

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

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

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

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

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

4. Econometric Myopia: Forecasting the Past 

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

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

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

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

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

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

5. Behavioral Fragility: The Psychology of Denial 

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

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

Years of perceived “resilience” dulled vigilance: 

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

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

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

Figure 1

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

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

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

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

Figure 2 

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

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

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

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

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

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

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

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

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

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

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

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

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

IV. Technocratic Overreach, Authorized Expenditures, Congressional Irrelevance 

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

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

Figure 3

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

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

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

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

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

V. Deficit Forecasting: Averaging Toward a Crisis 

Looking at pandemic-era averages:

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

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

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

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

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

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

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

VI. Financing Strain and the Debt-Debt Servicing Spiral 

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

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

Figure 4 

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

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

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

Figure 5

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

Why?

Likely causes:

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

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

As we warned last May

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

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

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

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

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

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

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

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

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

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

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

IX. Mounting USDPHP Exchange Rate Tension

Figure 6 

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

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

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

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

X. Conclusion: The Structural Fragility of Deficit Philosophy

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

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

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

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

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

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

____

References 

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

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

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

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

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

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

 

Why Deficit-to-GDP May Reach 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion!

Christmas is a time when kids tell Santa what they want and adults pay for it. Deficits are when adults tell the government what they want and their kids pay for it—Richard Lamm

In this issue

Why Deficit-to-GDP May Reach 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion!

-2018 Deficit Will Likely Exceed the 3% Target: From Underspending to Overspending

-2018 Deficit Will Likely Exceed the 3% Target: A Possible Revenue Miss as November BIR and BOC Collection Plunges!

-Poor Revenues from Economic Headwind: Plunging Growth in Industrial Production, Consumer Loans and External Trade

-2018 Deficit-To-GDP May Surge to 3.5% or MORE!

-BSP Financed 46% of 11-month Record Fiscal Deficit; Public Plus Private Bank Debt Reach Php 15.06 Trillion or 98% of GDP in November!

-2019 Opened with Exceedingly Panglossian Expectations; Expect the Unexpected in 2019

Why Deficit-to-GDP May Reach a Record 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion!

2018 Deficit Will Likely Exceed the 3% Target: From Underspending to Overspending

November 2018’s fiscal deficit, as reported by the Bureau of Treasury, sprinted to a fresh record at Php 477.217 billion. That’s 36.1% or Php 126.6 billion higher than the full year deficit of 2017! And that’s only Php 46.4 billion shy from the 2018 target of 3% to GDP at Php 523.6 billion! (see figure 1, upper window)

The Department of Budget and Management (DBM) also projects a 3% to GDP in 2019 and 2020.  That would amount to Php 575.6 billion and Php 633.7 billion, respectively, according to the DBM Proposed People’s Budget (see figure 1, lower window)

There hardly seems any discussion of the consequences of a possible overreach of the 3% deficit-to-GDP target. And there barely seems any inquiry on the likely misses in the fiscal targets of revenues and the possible excess on spending as contributors to the monster deficit.

Let us look at expenditures first.

Figure 1

With the 11-month expenditure at Php 3,095 billion; the annual (2018) target of Php 3,364.1 billion is just Php 269.1 billion away.

2018’s 11-month spending growth clip of 24.15% exceeds significantly last year’s annual growth rate of 10.05% and will likely surpass the projected 19.3% annual target for 2018.

And attaining the expenditure target would be a cinch since unmet targets for outlays are usually spent on the last month of the year. That said, the largest monthly outlays of any year have mostly occurred in December.

The present regime has instituted an extravagant budget to implement its profligate neo-socialist spending programs.

The previous record deficits of 2016 and 2017 culminated with December expenditures of Php 283.555 billion and Php 330.240 billion, respectively.  Its two-year average: Php 306.9 billion

National Government’s budget secretary Mr. Benjamin Diokno asserted last week that underspending in 2018 will be zero as infrastructure spending-to-GDP ratio for 2018 have been expected to hit 6.2%, nearly triple the 2-percent average between 1986 and 2016.

That being the case, December 2018’s expenditure will find a base of at least Php 330 billion!

2018 Deficit Will Likely Exceed the 3% Target: A Possible Revenue Miss as November BIR and BOC Collection Plunges!

Political spending is hardly the issue since it is programmed, what matters is the revenue component of the deficit target.

For the 11-months of 2018, NG revenues have grown at the rate of 16.35% which fulfills the annual growth rate objective (16.3%).

The 11-month revenue has reached Php 2,618 billion or Php 222.5 billion distant from the annual revenue goal of Php 2,840.5 billion. If collections would hit its monthly average for the year of Php 238 billion, then yes, this goal would be met.

However, revenue collection in December of 2016 was at Php 165.326 billion and in 2017 Php 223.092 or for a two year average of Php 194.209 billion.  

Revenues are principally dependent on economic conditions, and secondarily, the NG’s tax administration efforts. While the December 2017’s collection of Php 223.092 may function as a likely base for December 2018, that would not be assured.

Figure 2

Higher revenues from increases in consumption taxes applied against broader tax base have signified the objective of the newly instituted RA 10963 or Tax Reform for Acceleration and Inclusion (TRAIN)

While it may be true that TRAIN initially did goose up revenue collections early on, the NG’s providence appears to be running dry.

BIR collection growth has been trending south since TRAIN’s implementation. The growth magic from Bureau of Custom’s (BoC) collections appears to have peaked in April. (figure 2, upper window)

In 11-months, collections from the BoC and Non-Tax revenues have offset the subpar performance of the BIR.  (figure 2, middle window)

As a share of total collections the BIR account for 68.8%, the BoC 20.6%, and Non-Tax 9.9% in November. 

And a tinge of uncertainty may have been elicited from the November data.

NG Total Revenues grew by a paltry 6.66% based on Tax Revenue growth of 6.12% and non-tax revenue growth of 14.73%.  BIR collections delivered another anemic 7.01% growth, while BoC collection growth stunningly crashed to a mere 3%!

BIR collections registered a 15.68% growth in October and -7.68% growth in September. The BoC, on the other hand, posted a 30.38% and 26.86% over the same period.

Poor Revenues from Economic Headwind: Plunging Growth in Industrial Production, Consumer Loans and External Trade

Why the slowdown in collections?

Figure 3

Has the tightening financial conditions, partly from the BSP rate hikes, weighed on domestic demand?  Recall of the CPI’s tumble to 6% in November from October’s 6.7%? Has the NG’s tax revenues been weighed down by the sharp downturn in domestic liquidity growth?

The downdraft in total bank lending has resonated with tax revenue collection growth. Total bank lending growth slowed significantly to 16.89% in November from 18.36% a month ago. Bank loan growth has turned steeply lower since July or three months after the BSP began its series of five hikes. (figure 2, lowest window)

Tax revenue growth tumbled to 6.12% in November from October’s 19.17%.

Last week, the National Government published pertinent economic data that chimed with tax revenue conditions. 

Industrial production growth slumped by over half to 2.1% in November from October’s 4.9% and September’s 6.4%, according to the Philippine Statistics Authority (PSA). So November tax performance reverberates not only with bank lending and domestic liquidity but also industrial production.(figure 3, upper pane)

The sharp downdraft in the Bureau of Custom’s (BoC) November collections showcased the sharp slowdown not only in imports but also in exports. From the PSA: “The country’s total external trade in goods in November 2018 reached $15.04 billion,reflecting an increase of 4.1 percent from $14.45 billion recorded value during the same month of the previous year. The total exports were valued at $5.57 billion in November 2018, representing a decrease of 0.3 percent, from $5.58 billion in November 2017. On the other hand, total imports rose to $9.47 billion in November 2018, from $8.86 billion in November 2017 or a growth rate of 6.8 percent.  Furthermore, the country’s balance of trade in goods (BoT-G) increased to a $3.90 billion deficit in November 2018, from $3.28 billion deficit in November 2017.” (italics added)  

October and September import growth registered at 21.44% and 26.05%, respectively. On the other hand, export growth for the same period clocked in at 5.51% and .75%, thereby the total trade growth recorded at 14.92% and 15.02%, respectively.  (figure 3, lower middle and lowest panes)

If industrial production and external trade had been down, what about consumer spending?

Figure 4

Based on the BSP’s consumer credit and liquidity data last November, consumers struggled.

Consumer loan growth slowed to 13.82% in November from 14.64% in October and 18.19% in September.  The components were all down. Credit card growth fell to 20.2%, from 21.69% and 22.19%. Auto loans registered more declines, 13.13% from 14.23% and 21.91%. Salary or payroll loans shriveled by -1.71% from -.86%, and -1.21% over the same period.

M1 or currency in circulation or cash (plus demand deposit) improved slightly to 9.46% in November from 9.03% in October but was significantly lower than 11.04% in September.

So with slowing cash and credit growth, how will these wobbly growth numbers justify strong consumer spending?

From the expenditure side of the GDP, a weak consumer and external trade would mean either capital formation or the government picks up the slack.

The record deficit suggests that only government spending will provide the boost to 4Q GDP.

Or, if the substantial pullback BIR and BoC collection growth in November had been a result of a slowing economy, then 4Q GDP could decline substantially.

Seen from the lens of the fiscal gap, unless considerable improvements in the financials and the economy occurred in December, the fiscal gap will likely register a blowout or an unexpected widening.

Pieces of the jigsaw puzzle have been falling into their respective places.

2018 Deficit-To-GDP May Surge to 3.5% or MORE!

How will the revenues, spending and the deficit look at the end of 2018?

Should both annual revenues and spending targets be attained, then December deficit should register Php 46.4 billion only. But that would be out of the league with recent history.

In 2016 and 2017 where the fiscal deficit reached respective records of Php 353.422 billion and Php 350.637 billion, registered deficits of December were at Php 118.229 billion and Php 107.15 billion, respectively. December’s share of the annual deficit was at 33.45% in 2016 and 30.56% in 2017.

However, if spending in December 2018 would be on the same level with 2017 at Php 330.24 billion, and if the revenue target of Php 222.525 billion would be achieved, then December 2018’s deficit would reach Php 107.715 billion for a year-end total of a whopping Php 584.932 billion! That’s Php 61.322 billion or 11.7% more than the target! That’s 3.5% of the 9-month annualized real GDP!

The assumption here is that revenues hit its target. But what if it doesn’t?

The other assumption is for the rate of the 9-month GDP to be sustained through 4Q, thereby 2018.  But what if 4Q GDP slides anew? And what if the 4Q fall will drag the annual (2018) GDP lower? The deficit-to-GDP could even be higher!

And under the reach-the-target case, the December 2018 deficit will only account for 18.42% share of the annual deficit in contrast to the 33.45% share in 2016 and 30.56% in 2017. So one might expect a significantly higher December expenditure than 2017’s Php 330 billion!

Yes, the base rate of 2018’s deficit-to-GDP will likely be at 3.5% or even much higher!

BSP Financed 46% of 11-month Record Fiscal Deficit; Public Plus Private Bank Debt Reach Php 15.06 Trillion or 98% of GDP in November!

Hardly anybody asks how financing works for such monster deficits.

Since there is no such thing as free lunch, there will always be (direct and indirect) trade-offs on these.

Such deficit will have to be funded by debt or by monetization or a combination of both.

First, funding from the capital markets.

Figure 5

Domestic debt jumped 11.9% year on year to Php 4.708 trillion last November. Foreign debt also vaulted 11.57% to Php 2.487 trillion while total public debt advanced by 11.77%. (Figure 5, upper and lower windows)

As an aside, foreign debt has mainly been used to provide forex funding of public and private institutions.

Next, BSP monetization.

Net claims on central government by the Bangko Sentral ng Pilipinas, on the other hand, vaulted by 12.16%.  From the BSP’s November Domestic Liquidity report: “net claims on the central government grew by 12.1 percent in November, faster than the 11.2-percent (revised) growth in the previous month.” (Figure 5, upper window)

Through 11-months the BSP printed money worth Php 220.377 billion to finance 46.17% of the NG’s record deficit of Php 477.217 billion.

Meanwhile, the NG used the capital markets to fund 55.89% or Php 266.727 billion of the monster deficit through debt securities.

Of course, BSP money printing and Bureau of Treasury debt issuance signify direct funding of the NG’s spending spree. 

Indirectly, through credit expansion, the banking system also helped finance the NG’s tax revenues. 

In the previous administration, the buildup in systemic leverage had mainly been in the private sector.

The present administration has mobilized leveraging to grow in two fronts: the private sector and the public sector.

Thus, the combined credit expansion from the private sector banking bubble (Php 7.86 trillion) with the public sector bubble (Php 7.195 trillion) has accrued to Php 15.06 trillion or a stunning debt-to-GDP (annualized 9-month) of 98.8%! Total debt growth jumped by 14.38% in November from 14.32% a month ago, principally from contributions of public debt.

Unfortunately, the public spending boom has been crowding out the private sector in various ways; namely, street inflation (relative prices), production structure (resource allocation favoring areas benefiting credit most), liquidity (expressed via treasury yields), and credit distribution (financial flows favoring the government).

And symptoms of the crowding out effect have become more apparent in the economic landscape.

2019 Opened with Exceedingly Panglossian Expectations; Expect the Unexpected in 2019

Since we are in a halfway through January, financial markets appear to be blinded by extreme Panglossian expectations.

The establishment may be forcibly painting a scenario that grotesquely overestimates fiscal conditions and the economic outcome of the 4Q and the calendar year of 2018.

Remember, tax revenues, credit growth, industrial production, merchandise trade, and consumer spending experienced a waterfall in the first two months of the 4Q.

And if there has been an unexpected surge in the deficit, from the toxic mix of lethargic collections and excessive spending in December, the BSP may have shouldered the bulk of the financing that has helped yields domestic treasury notes and bonds slide. That’s aside from lower inflation expectations. Otherwise, public debt growth would accelerate. And reliance on public debt would intensify the worsening liquidity imbroglio in the system.

Not only has the NG has begun to implement TRAIN 2.0 and SIN taxes, but it has opened the year with foreign borrowings (USD 1.5 billion).

And because of the shortfall in tax collections from increases SIN Taxes, more taxes will be slapped on it.

Curiously, the NG seems caught in an intractable economic contradiction. From the Inquirer: “The finance chief earlier said that the government really wanted sugar-sweetened beverages as well as “sin” products such as cigarettes and alcoholic drinks to become more expensive so that there would be less consumption and, in turn, improve the health of Filipinos.”

If they expected less consumption from higher prices, why carp over the deficiencies in collections?

From the same article: “As excise tax collections from sugary drinks fell below target, the Department of Finance (DOF) has ordered the Bureau of Internal Revenue (BIR) to check if manufacturers were paying the correct rates. In a statement Thursday, the DOF said that the excise tax take from sugar-sweetened beverages from January to October last year amounted to only P29.9 billion, lower than the P40-billion goal for the 10-month period. The DOF quoted Finance Undersecretary Karl Kendrick T. Chua as saying that the collection goal was not achieved “possibly because sugar-sweetened beverage manufacturers might not be paying the correct taxes.””

If you tax something, you get less of it. Or, if you tax something, economic activities shift underground.

Will the NG achieve something it has failed to accomplish over the last year? Will more tax increases deliver more revenues?

If the economy slows materially, with policies at ICU mode (record low rates, historic BSP monetization, uncharted fiscal stimulus), what would be left for the NG to boost the GDP?

Here’s a guess, print, print, print the peso!

As said earlier, expect the unexpected in 2019.