The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch -- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference—that threatens to impoverish us by further destroying the value of our dollars—Dr. Ron Paul
In this issue:
Philippine Fiscal
Performance in Q1 2025: Record Deficit Amid Centralizing Power
I. Public Spending: A
Rising Floor, Not a Ceiling
II. Shifting Power
Dynamics: The Ascendancy of the Executive Branch
III. A Historic Q1 2025 Deficit:
Outpacing the Pandemic Era
IV. Revenue Shortfalls:
The Weakest Link
V. Crowding Out: Public Revenues
at the Expense of the Private Sector
VI. Expenditure Trends:
Centralization in Action as LGUs Left Behind
VII. Debt Servicing: A
Growing Burden
VIII. Foreign Borrowing: A
Risky Trajectory
IX. Savings and Investment
Gap: The Twin Deficits
X. Twin Deficit Structure
XI. Mounting FX Fragility
and Systemic Risks
XII. Fiscal Strain
Reflected in the Banking and Financial System
XIII. Bank Liquidity Drain
and Risky Credit Expansion
XIV. Conclusion: A Fragile Political Economy
Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power
A record Php 478.8 billion deficit, driven by soaring spending and slowing revenues, exposes deepening fiscal imbalances and a dangerous shift toward centralized power, increasing risks to the Philippines’ economic stability
Inquirer.net, May 01, 2025: "The Philippine government in March registered its largest budget deficit in 15 months as revenues contracted amid strong growth in spending. The state’s fiscal shortfall had widened by 91.78 percent year-on-year to P375.7 billion in March, according to the latest cash operations report of the Bureau of the Treasury (BTr). This was the biggest budget gap since the P400.96-billion deficit in December 2023. That sent the fiscal gap in the first quarter to P478.8 billion, 75.62 percent bigger than the shortfall recorded a year ago." (bold mine)
The establishment’s talking heads and pundits tend to gloss over unpalatable economic data, but let us fill in the blanks.
This article dissects the Q1 2025 fiscal performance, highlighting the record deficit, shifting political power dynamics, and underlying economic vulnerabilities.
I. Public Spending: A Rising Floor, Not a Ceiling
In March, we noted: "This suggests that the monthly average of Php 527 billion represents a floor! We are likely to see months with Php 600-700 billion spending." (Prudent Investor, March 2025)
The 2025
enacted budget of Php 6.326 trillion translates to an average monthly
expenditure of Php 527 billion.
Figure 1
However, public spending in March 2025 soared to Php 654.98 billion—the second-highest on record, surpassed only by December 2023’s Php 661.03 billion. Excluding seasonal December spikes, March 2025 set a new benchmark or a new high for monthly expenditure. (Figure 1, topmost window)
For Q1, public spending hit Php 1.477 trillion, representing 23.35% of the annual budget. This translates to a monthly average of Php 492.33 billion—Php 34.84 billion short of the official target. Nonetheless, Q1 spending ranked as the sixth-largest quarterly expenditure in history.
This aggressive spending pace underscores a pattern observed over the past six years, where the executive branch consistently overshoots the enacted budget. (Figure 1, middle image)
Based on this path dependency, the Php 527 billion monthly average should indeed be considered a floor, with monthly expenditures likely to hit Php 600–700 billion—or higher—in subsequent months to meet or exceed the annual target.
II. Shifting Power Dynamics: The Ascendancy of the Executive Branch
Beyond the numbers lies a profound political shift. As we highlighted in March:
"More importantly, this repeated breach of the ‘enacted budget’ signals a growing shift of fiscal power from Congress to the executive branch." (Prudent Investor, March 2025)
The consistent overspending suggests that Congress has implicitly ceded control over the power of the purse to the executive.
This erosion of legislative oversight effectively consolidates political supremacy in the executive branch, rendering elections a formality in the face of centralized fiscal authority.
Indeed, the executive’s growing control over the budget illustrates the erosion of democratic checks and balances among the three branches of the Philippine government.
The widening gap between actual and allocated spending serves as a tangible indicator of this power shift, with the executive branch wielding increasing discretion over national resources.
III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era
The Q1 2025 budget deficit of Php 478.8 billion represents an All-Time high, surpassing even the deficits recorded during the pandemic-induced recession. (Figure 1, lowest diagram)
It ranks as the sixth-largest quarterly deficit in history and the largest non-seasonal (non-Q4) shortfall.
Annualized, this deficit projects to Php 1.912 trillion—14.5% above 2021’s record of Php 1.67 trillion!
This alarming trajectory signals deepening fiscal imbalances, driven by a combination of unrestrained spending growth and the increasing prospect of faltering revenues.
IV. Revenue Shortfalls: The Weakest Link
As we observed last December:
"Briefly, the embedded risks in fiscal health arise from the potential emergence of volatility in revenues versus political path dependency in programmed spending." (Prudent Investor, December 2024)
Figure 2
Q1 2025’s fiscal gap was exacerbated by a 22.4% year-on-year surge in expenditures—the highest since Q2 2020—coupled with a revenue shortfall. (Figure 2, topmost chart)
March revenues contracted by 3.1%, dragging Q1 revenue growth down to 6.9%, a sharp slowdown from previous quarters.
Importantly, the shift to quarterly VAT reporting distorts monthly fiscal data, making end-of-quarter figures critical for assessing fiscal health.
Breaking down the revenue components:
-Bureau of Internal Revenue (BIR): Collection growth decelerated slightly from 17.2% in 2024 to 16.7% in Q1 2025, reflecting steady but insufficient tax performance to close the spending gap.
-Bureau of Customs (BoC): Growth improved from 2.4% to 5.7%, potentially driven by frontloaded exports and imports in anticipation of U.S. tariff policies under US President Trump. This trade dynamic may also bolster Q1 2025 GDP figures.
-Non-Tax Revenues: Non-tax revenues plummeted by 41.21%, contributing only Php 66.7 billion in Q1 2025. The Bureau of the Treasury (BTr) attributes this to delayed GOCC dividend remittances, with only three GOCCs remitting Php 0.027 billion in Q1 2025 compared to 18 GOCCs contributing Php 28.23 billion in Q1 2024. The BTr expects non-tax revenues to recover starting May 2025 as GOCC dividends resume. (BTr, April 2025) (Figure 2, middle graph)
This drastic reduction in GOCC remittances accounts for the bulk of the non-tax revenue shortfall, pulling the total revenue share down to 6.68%—the lowest since at least 2009. Since 2009, non-tax revenues have averaged a 12.4% share of total revenues, underscoring the severity of the Q1 2025 decline.
The heavy reliance on non-tax revenues through volatile GOCC dividends exposes a structural vulnerability in fiscal planning. Delays in remittances, whether due to operational inefficiencies or governance issues within GOCCs, amplified the Q1 2025 deficit, forcing the government to draw on cash reserves and increase borrowing to bridge the gap.
The broader implications are concerning. Tax collections from the BIR and BoC, while still growing, are insufficient to offset aggressive expenditure growth. The dependence on non-tax revenue windfalls introduces heightened unpredictability, as future shortfalls could exacerbate fiscal pressures if GOCCs underperform or remittances are further delayed.
V. Crowding Out: Public Revenues at the Expense of the Private Sector
Moreover, potential weaknesses in the economy or tax administration could lead to a substantial deceleration in tax revenue collections from the BIR and BoC, further widening the fiscal gap.
More critically, this revenue crunch highlights a profound
economic trade-off: the government’s growing resource demands, through
taxes and non-tax collections, divert funds from the private sector,
undermining productivity and long-term growth—a phenomenon known as the crowding-out
effect.
Compounding these challenges, the inability or failure of near-record employment rates and unprecedented (Universal-commercial) bank credit expansion to significantly boost revenues signals softening domestic demand. (Figure 2, lowest visual)
In fact, a chart highlighting the growing gap between public revenues and universal bank lending signals an increasing reliance on credit to drive GDP growth and sustain public coffers.
Figure 3
Declining core CPI, rising real estate vacancies, record-high hunger sentiment, and a decelerating GDP growth trajectory all indicate an economy struggling to convert nominal gains into sustainable fiscal outcomes. (Figure 3, topmost pane)
If public revenue falters and the fiscal deficit explodes, the government may face heightened borrowing needs and rising interest rates, further straining fiscal health and increasing vulnerability to external economic shocks.
VI. Expenditure Trends: Centralization in Action as LGUs Left Behind
The 2019 Mandanas-Garcia Ruling mandated a larger revenue share for Local Government Units (LGUs), yet national government (NG) expenditures have consistently outpaced LGU spending since 2022 under the Marcos administration.
In Q1 2025:
-LGU expenditure growth slowed from 12.6% in 2024 to 11.3%, reducing their share of total spending from 21.5% to 19.6%.
-NG expenditure growth surged from 5.4% to 25.25%, increasing its share from 60.3% to 61.71%. Key drivers included infrastructure projects (DPWH) and public welfare programs (DSWD) in March. (Figure 3, middle image)
This divergence reflects a deliberate centralization of resources, concentrating fiscal and political power in the national government while diminishing LGU autonomy.
The trend aligns with the broader shift of fiscal authority to the executive, further entrenching centralized control.
VII. Debt Servicing: A Growing Burden
In the meantime, interest payments, a primary component of debt servicing, reached a record high in Q1 2025.
While their growth rate slowed from 35.9% in 2024 to
24.9% in 2025, their share of total expenditures rose from 16% to 16.32%. (Figure
3, lowest chart)
Figure 4
Amortization costs plummeted by 87.26%, reducing the total debt servicing burden by 65.3%. (Figure 4, topmost graph)
Mainstream narratives have previously portrayed this as a sign of fiscal improvement—but this is misleading.
The decline in debt servicing is merely a temporary reprieve. With the historic Q1 deficit, future borrowing—and therefore future debt servicing—will inevitably rise.
Moreover, the touted "fiscal consolidation" rests on a flawed assumption: that economically sensitive, variable revenues will increase in lockstep with programmed spending.
The Q1 2025 deficit necessitated a sharp increase in financing, with the Bureau of the Treasury’s borrowing doubling from Php 280.79 billion in 2024 to Php 644.12 billion this year. (Figure 4, second to the highest image)
While the Treasury’s Q1 2025 cash position reached historic highs, it returned to a deficit of Php 325.56 billion in March. This implies the need for increased short-term borrowing to meet immediate cash requirements.
If the deficit trend persists, full-year borrowing targets may need to be revised upward.
As evidence, Public debt surged by Php 319.257 billion month-on-month to a record Php 16.632 trillion in February 2025, marking a historic high. March data, expected next week, may reveal further escalation. (Figure 4, second to the lowest diagram)
This debt increase, driven by robust programmed spending and slowing revenue growth, underscores the deepening fiscal imbalance.
Yet, the gap between the nominal figures of public debt and government spending continues to widen, reaching unprecedented levels and signaling heightened fiscal risks.
VIII. Foreign Borrowing: A Risky Trajectory
A notable shift in Q1 2025 was the increased reliance on foreign exchange (FX)-denominated share of debt servicing, which surged from 15% to 47.6% on increases in interest and amortization payments. (Figure 4, lowest pane)
This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted: (as previously discussed)
-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop.
-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures.
-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral.
-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation
-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations.
IX. Savings and Investment Gap: The Twin Deficits
The Philippine economic development model continues to rely heavily on a Keynesian-inspired spending paradigm. This framework is a core driver behind the record-breaking savings-investment gap.
A key policy anchor supporting this model is the BSP’s long-standing easy money regime, which provides cheap financing primarily to the government and elite sectors. This is intended to stimulate spending through a trickle-down mechanism—boosting GDP while funding government projects, including those often criticized as boondoggles.
However, this approach comes at a significant cost: it depresses domestic savings.
Fiscal spending is an integral component of this paradigm.
During the pandemic recession, the government’s role as a "fiscal stabilizer" expanded significantly, shaping GDP performance in the face of private sector weakness.
However, government spending does not come without consequences. It competes with the private sector for scarce resources and financing, diverting them in the process. The result is structural supply constraints, forcing the economy to import goods to fill domestic shortages created by demand-side excess.
Furthermore, the BSP’s USD-PHP foreign exchange ‘soft peg’ has the effect of overvaluing the peso and underpricing the dollar. This policy further fuels demand for imports and external financing, reinforcing the external deficit.
X. Twin Deficit
Structure
Figure 5
Unsurprisingly, this credit-fueled, trickle-down model has produced a classic “twin deficit” scenario—wherein fiscal imbalances are mirrored by trade deficits. (Figure 5, topmost visual)
As the budget gap soared to historic levels during the pandemic, the trade deficit also expanded to record levels.
With the current political and economic thrust toward centralization, this dynamic is unlikely to reverse. This reality highlights a structural barrier that undermines potential benefits from global trade shifts, such as those arising from Trump’s protectionist tariff regime.
Under Trump’s regime, the Philippines, with one of the region’s lowest tariff rates, remains structurally unprepared to capitalize, due to policies that prioritize consumption over investment, perpetuating reliance on imports and external financing—as previously discussed.
Although the trade gap widened by 12.8% year-on-year in Q1 2025—from USD 11.264 billion to USD 12.71 billion—the all-time high in the fiscal deficit points to an even larger trade gap in the quarters ahead. This will only deepen the twin deficit conundrum.
XI. Mounting FX Fragility and Systemic Risks
Even with support from external borrowings, the growth of BSP’s net foreign assets has largely vacillated following multiple spikes in 2024. This suggests emerging limitations in the central bank’s ability to manage its FX operations effectively. (Figure 5, middle graph)
Despite a recent rally in the Philippine peso—driven by broad dollar weakness and BSP interventions—fragilities from growing external liabilities remain as explained last week.
These vulnerabilities are likely to magnify systemic risks, even as establishment economists—fixated on rigid quantitative models—fail to acknowledge them.
XII. Fiscal Strain Reflected in the Banking and Financial System
Fiscal strains are increasingly impacting the banking system, a dynamic the public scarcely recognizes.
The BSP and its cartelized network of financial institutions have engaged in inflationary financing. Philippine banks have been absorbing a significant share of government securities through Net Claims on Central Government (NCoCG). (Figure 5, lowest chart)
These claims, representing banks’ holdings of government debt, peaked at Php 5.54 trillion in December 2024 but slipped to Php 5.3 trillion in February 2025, reflecting slight easing.
Meanwhile, the BSP’s NCoCG, following the historic Php 2.3 trillion liquidity injections in 2020-21, remains elevated, fluctuating between Php 400 billion and Php 900 billion since 2023, underscoring its role in deficit financing.
Figure 6
Although the growth of NCoCG for Other Financial Corporations (OFCs), such as investment firms and insurers, has slowed since Q1 2024, it reached a record Php 2.491 trillion in Q3 2024 before declining to Php 2.456 trillion in Q4 2024. (Figure 6, topmost image)
Notably, the surge in NCoCG for banks, OFCs, and the BSP began in 2019 and accelerated thereafter, coinciding with the "twin deficits."
Essentially, the Q1 2025 fiscal deficit of Php 478.8 billion and trade deficit of USD 12.71 billion—highlights the financial sector’s entanglement with fiscal imbalances.
XIII. Bank Liquidity Drain and Risky Credit Expansion
Compounding this, the spike in the banking system’s record NCoCG has coincided with the all-time high in Held-to-Maturity (HTM) assets, government bonds held by financial institutions until maturity, which have significantly reduced banks’ liquidity. (Figure 6, middle chart)
This led to the cash-to-deposits ratio hitting a historic low in February 2025, as banks locked funds in HTM assets to finance the government’s borrowing. (Figure 6, lowest graph)
In response, the BSP has implemented a series of easing measures: two reductions in the Reserve Requirement Ratio (RRR) within six months, the doubling of deposit insurance in March 2025, and four policy rate cuts in eight months—officially marking the start of an easing cycle—as previously analyzed.
In parallel, banks have ramped up lending, particularly to risk-sensitive sectors such as consumers, real estate, trade, and utilities. This credit expansion is often rationalized as a strategy to improve capital adequacy ratios in line with Basel standards. However, in practice, it raises sovereign exposure, increases sensitivity to interest rate fluctuations, and thereby amplifies credit, economic, and systemic risks.
XIV. Conclusion: A Fragile Political Economy
In sum, the buildup in fiscal risks is no longer confined to the government budget spreadsheets—it permeates into the broader economy and financial markets.
As we concluded last March: "the establishment may continue to tout the supposed capabilities of the government, but ultimately, the law of diminishing returns will expose the inherent fragility of the political economy. This will likely culminate in a blowout of the twin deficits, a surge in public debt, a sharp devaluation of the Philippine peso, and a spike in inflation, reinforcing the third wave of this cycle—heightening risks of a financial crisis." (Prudent Investor, March 2025)
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References
Prudent Investor Newsletter, January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden March 23, 2025, Substack
Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025 Substack
Prudent Investor Newsletter, October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends December 9, 2025 Substack
Philippine Bureau
of Treasury, Q1
Revenue Collections and Expenditures Sustain Growth, April 29, 2025 treasury.gov.ph
