The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility

 

Devaluing is a de facto default and the manifestation of the insolvency of a nation—Daniel Lacalle 

In this Issue

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

Part I: The USD-Philippine peso Breach at Php59

IA. The Soft Peg’s Strain Finally Shows

IB. "Market Forces" or Managed Retreat?

IC. Gold, GIR, and the Mirage of Strength

ID. Historical Context: Peso Spikes and Economic Stress

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending

IIB. Misclassified Investment, ICOR and the Productivity mirage

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67?

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility 

How the BSP’s widening savings–investment gap, soft peg, flood control response left the peso exposed—and what it reveals about the Philippine economy.

Part I: The USD-Philippine peso Breach at Php59 

IA. The Soft Peg’s Strain Finally Shows 

This is what we posted at X.com 

After three years, $USDPHP breaks the BSP’s 59 Maginot line. What cracked it?

• 👉 Record savings–investment gap (BSP easing, deficit spending, CMEPA)
• 👉 BSP soft peg (gold sales)
• 👉 Capital controls fueling flight
• 👉 Weak economy + high debt 

The soft peg’s strain finally shows. 

After three years of tacit defense, the BSP’s 59.00 line cracked on October 28. Yet it closed the week—and the month—at 58.85, just below what we’ve long called the BSP’s ‘Maginot line.’ 

IB. "Market Forces" or Managed Retreat? 

The BSP and media attributed the breach to “market forces.” But if the peso’s rate is truly market-determined, why issue a press release at all? To reassure the public? Why the need for reassurance? And if the breakout were merely “temporary,” why frame it at all—unless the goal is to condition perception before the markets interpret the breach as systemic or draw their own conclusions?

Figure 1

Another dead giveaway lies in the BSP’s phrasing: it “allows the exchange rate to be determined by market forces.” (Figure 1, upper image)

That single word—allows—is revealing. 

It presupposes BSP supremacy over the market, implying that exchange rate movements occur only at the central bank’s discretion. FX determination, in this framing, is not a spontaneous process but a managed performance. Market forces operate only within the parameters permitted by the BSP. “Allowing” or “disallowing” thus reflects not market discipline, but bureaucratic control masquerading as market freedom. 

Yet, the irony is striking: they cite “resilient remittance inflows” as a stabilizer—even as the peso weakens. If OFW remittances, BPO earnings, and tourism inflows are as strong as claimed, what explains the breakdown? 

Beneath the surface, the pressures are unmistakable: thinning FX buffers, rising debt service, and the mounting cost of defending a soft peg that was never officially admitted.

IC. Gold, GIR, and the Mirage of Strength

Then there’s the gold angle. 

In 2024, the BSP was the world’s largest central bank seller of gold—offloading reserves to raise usable dollars. (Figure 1, lower chart)

Figure 2

Now, higher gold prices inflate its GIRs on paper—an accounting comfort masking liquidity strain. It’s the same irony we saw in 2021–22, when the BSP sold gold amid a pandemic recession and the peso still plunged. (Figure 2, upper graph) 

Adding to the drama, the government announced a price freeze on basic goods just a day before the peso broke Php 59. Coincidence—or coordination to suppress the impact? 

And there was no “strong dollar” to blame. The breakout came as ASEAN peers—the Thai baht, Indonesian rupiah, Singapore dollar, and Malaysian ringgit—strengthened. This was a PHP-specific fracture, not a USD-driven move. (Figure 2, lower table) 

ID. Historical Context: Peso Spikes and Economic Stress

Figure 3

Historically, sharp spikes in USDPHP have coincided with economic strain:

• 1983 debt restructuring
• 1997 Asian Financial Crisis
• 2000 dotcom bubble bust
• 2008–2010 Global Financial Crisis
• 2020 pandemic recession (Figure 3, upper window)

The BSP even admitted “potential moderation in economic growth due in part to the infra spending controversy” for this historic event. That makes reassurance an even more potent motive. 

Remember: USDPHP made seven attempts to breach 59.00—four in October 2022 (3, 10, 13, 17), three from November 21 and 26 to December 19, 2024. That ceiling revealed the BSP’s implicit soft peg. The communique doesn’t explain why the eighth breach succeeded—except to say it was “market determined.” But that’s just another way of saying the market has abandoned the illusion of BSP control. (Figure 3, lower diagram)

As I’ve discussed in earlier Substack notes, this moment was years in the making: 

• The widening savings–investment gap
• CMEPA’s distortions
• Asset bubbles, the creeping financial repression and fiscal extraction that eroded domestic liquidity 

The peso’s breach of 59 isn’t just a technical move. It’s the culmination of structural stress that monetary theater can no longer hide. 

Part II: The Savings–Investment Gap (SIG) Illusion

IIA. Savings–Investment Gap—a Flawed Metric and Free Lunch Spending 

Spending drives the economy.  That ideology underpins Philippine economic policy—from the BSP’s inflation targeting and deficit spending to its regulatory, tax, and FX regimes—and it has culminated in a record savings–investment (SIG) gap. 

This is the Keynesian hangover institutionalized in Philippine policy—confusing short-term demand management with sustainable capital formation 

But this is not merely technocratic doctrine; the obsession with spending anchors the free-lunch politics of ochlocratic social democracy. 

Yet even the SIG is a flawed metric. 

As previously discussed, “savings” in national accounts is a residual GDP-derived figure riddled with distortions, not an empirical aggregation of household or corporate saving. It even counts government savings—retained surpluses and depreciation allowances—when, in truth, fiscal deficits represent outright dissaving. (see reference) 

Worse, the inclusion of non-cash items such as depreciation and retained earnings inflates measured savings, masking the erosion of actual household liquidity.

IIB. Misclassified Investment, ICOR and the Productivity mirage 

Even the “investment” side is overstated. Much of it is public consumption misclassified as capital formation. Because politics—not markets—dictate pricing and returns, the viability of monopolistic political projects cannot be credibly established. 

Consider infrastructure. Despite record outlays, the Incremental Capital-Output Ratio (ICOR) has worsened—proof that spending does not equal productivity.

Figure 4

According to BSP estimates, the Philippines’ ICOR has fallen from around 8.3 in the 1989-92 period to approximately 4.1 in 2017-19, contracted by 12.7% and recovered to around 3.0 by 2022 (see reference) (Figure 4, topmost visual) 

While the ICOR trend suggests some efficiency gains since the 1990s, it remains a blunt and often misleading proxy—distorted by GDP rebasing, project misclassification, and delayed returns. What it does reveal, however, is the widening gap between spending and sustainable productivity 

Listed PPP firms, meanwhile, sustain appearances through leverage, regulatory capture and forbearance, and mark-to-model accounting. The result is concealed fragility, reinforced by the hidden costs of various acts of malfeasance, conveniently euphemized as by the public as “corruption.” 

In the end, the SIG tells a simple truth: domestic savings are too scarce to fund both public and private investment. The gap is bridged by FX borrowing. 

But this is not a sign of strength—it’s a symptom of deepening structural dependence, masked by monetary theater and fiscal illusion, thus amplifying peso vulnerability. Every fiscal impulse now imports external leverage, entrenching the illusion of growth at the expense of stability. 

Part III: Soft Peg Unravels: Systemic Fragility Surfaces, Confidence Breakdown 

IIIA. The Keynesian Hangover: How "Spending Drives Growth" Became National Pathology 

Spending-as-growth isn’t just policy—it’s pathology.

While the BSP’s mandate is "to promote price stability conducive to balanced and sustainable growth," its inflation-targeting framework—tilted toward persistent monetary easing—has effectively become a GDP-boosting machine to finance free-lunch political projects. 

Banks have realigned their balance sheets accordingly. Consumer loans by universal and commercial banks rose from 8.2% of total lending in December 2018 to 13.5% in August 2025—a 64% surge—while the share of industry loans declined from 91.7% to 86.5% over the same period. (Figure 4, middle pane) 

Fueled by interest rate subsidies and real income erosion, households are leveraging aggressively to sustain consumption. Yet as GDP growth slows, the marginal productivity of credit collapses—meaning every new peso of debt generates less output and more fragility for both banks and borrowers. 

Production credit’s stagnation also forces greater import dependence to meet domestic demand.

IIIB. Credit-Fueled Consumption and Fiscal Excess: Twin Deficits 

Meanwhile, deficit spending—now nearing 2021 pandemic levels—artificially props up consumption at the expense of productivity gains. (See reference for last week’s Substack.) 

Together, credit-fueled consumption and fiscal excess have produced record "twin deficits." (Figure 4, lowest chart) 

The fiscal deficit widened from Php 319.5 billion in Q2 to Php 351.8 billion in Q3, while the trade deficit expanded from USD 12.0 billion to USD 12.76 billion—levels last seen in 2020. 

Historically, fiscal deficits lead trade gaps—it raises import demand. If the budget shortfall hits fresh records by year-end, the external imbalance will likely push the trade deficit back to its 2022 peak.

Figure 5

These deficits are not funded by real savings but by credit—domestic and external. The apparent slowdown in approved public foreign borrowings in Q3 likely masks rescheduling (with Q4 FX borrowings set to spike?), delayed recognition, shift to BSP-led financing (to reduce scrutiny) or accounting prestidigitation (Figure 5, topmost diagram) 

Public external debt accounted for roughly 60% of the record USD 148.87 billion in Q2. Even if Q3 slows, the trajectory remains upward. (Figure 5, middle graph) 

In short, widening twin deficits mean more—not less—debt. 

Slowing consumer sales growth, coupled with rising real estate vacancies, signals that private consumption is already being crowded out—a deepening symptom of structural strain in the economy.

IIIC. CMEPA and the Deepening of Financial Repression: How the State Institutionalized Capital Flight

Yet the newly enacted CMEPA (Capital Market Efficiency Promotion Act, R.A. 12214) deepens the financial repression: it taxes savings, institutionalizes these by redirecting or diverting household savings into state-controlled channels or equity speculation, and discriminates against private-sector financing. By weakening the deposit base, it also amplifies systemic fragility. The doubling of deposit insurance last March, following RRR cuts, appears preemptive—an implicit admission of the risk CMEPA introduces. 

Authorities embraced a false choice. Savers are not confined to pesos—they can shift to dollars or move capital abroad entirely. Capital flight is not theoretical; for the monied class, it can be a reflexive response. 

IIID. Corruption as Symptom, Not Cause: The Flood Control Scandal and Malinvestment Crisis 

The recent “flood control” corruption scandal has merely exposed the deeper rot. 

Consensus recently blames the peso’s fall and stock market weakness on “exposed corruption.” But this is post hoc reasoning: both the peso and PSEi 30 peaked in May 2025—months before the scandal broke. (Figure 5, lowest image)

Corruption, as argued last week, is not an aberration—it’s embedded or a natural expression of free-lunch social democracy 

It begins at the ballot box and metastasizes through centralization, cheap money, financial repression, the gaming of the system and rent-seeking. It explains the entrenchment of political dynasties and the extraction economy they operate on. 

What media and the pundits call “corruption” is merely the visible tip. The deeper pathology is malinvestment—surfacing across: 

• Bank liquidity strains
• Wile E. Coyote NPLs
• Record real estate vacancies
• Slowing consumer spending despite record debt
• Cracks in employment data
• Persistently elevated self-rated poverty ratings (50% + 12% borderline as of September).
• Stubborn price pressures and more… 

The BSP’s populist response to visible corruption? 

Capital controls, withdrawal caps, probes, and virtue signaling. These have worsened the erosion of confidence, potentially accelerating the flight to foreign currency—and escalating malinvestments in the process. (see reference) 

What emerges is not just structural decay, but a slow-motion confidence collapse. 

IIIE. The Soft Peg's Hidden Costs: FX Regime as Subsidy Machine and Flight Accelerant 

And there is more. The BSP also operates a de facto FX soft-peg regime. 

By keeping a lid on its tacit thrust to devalue, its implicit goal is not merely to project macro stability, but to subsidize the USD and manage the CPI within its target band. Unfortunately, this policy overvalues the peso, encouraging USD-denominated borrowing and external savings while providing the behavioral incentive for capital flight.

Figure 6

Including public borrowing, the weak peso has prompted intensified growth in the banking system’s FX deposits. In August 2025, FX deposits rose 11.96%—the second straight month above 10%—reaching 15.07% of total bank liabilities, the highest since November 2017. (Figure 6, topmost window) 

The BSP’s FX regime also includes its reserves management—Gross International Reserves (GIR).

IIIF. Gold Sales Redux: The 2020–2021 Playbook Returns 

As noted above, similar to 2020–2021, the BSP embarked on massive gold sales to defend the USDPHP soft peg. Yet the peso still soared 22.97% from 47.90 in May 2021 to 58.9 in September 2022. That pandemic-era devaluation coincided with a CPI spike—peaking at 8.7% in January 2023. The 2024 gold sales echo this pattern, offering a blueprint for where USDPHP could be heading. 

The BSP insists that benchmarks like the GIR assure the public of sufficient reserves. Yet it has never disclosed the composition in detail. Gold—which the BSP remains averse to—accounts for only ~15% of the GIR (September). A former BSP governor even advocates selling gold "to profit” from it." (2020 gold sales and devaluation occurred in his tenure) 

But since the BSP doesn’t operate for profit-and-loss, but for political objectives such as "price stability," this logic misrepresents intent.

IIIG. GIR Theater: Borrowed Reserves and Accounting Opacity, Slowing NFA and Widening BOP Gap 

A significant portion of GIR—around 5%—consists of repos, derivatives, and other short-term instruments classified as Other Reserve Assets (ORA), introduced during the 2018 peso appreciation. Not only that: national government borrowings deposited with the BSP are also counted as GIR. Hence, “borrowed reserves” make up a substantial share. (Figure 6, middle graph) 

If reserves are truly as strong as officially claimed, why the peso breakout—and the need for a press release? 

All this is reflected in the stagnating growth of BSP net foreign assets (NFA) since 2025, reinforcing a downtrend that began in 2013. While nominally at Php 6.355 trillion, NFA is down 2.1% from the record Php 6.398 trillion in November 2024. (Figure 6, lowest diagram)

Figure 7

This fragility is also evident in the balance of payments (BOP) gap. Though narrowing in recent months, it reached USD 5.315 billion year-to-date—its highest since the post-pandemic recession of 2022. That’s 67% of the November 2022 peak. (Figure 7, topmost graph) 

The apparent improvement merely reflects deferred pressure—delayed borrowings and import compression. 

Despite BSP claims, net outflows reflect more than trade gaps. They signal external debt servicing amid rising leverage, capital flight, and systemic strain.

IIIH. Soft Peg Lessons: Where From Here? Historical Patterns and the Road to 62—or 67? 

Last March, we wrote: 

The USDPHP exchange rate operates under a ‘soft peg’ regime, meaning the BSP will likely determine the next upper band or ceiling. In the previous adjustment, the ceiling rose from 56.48 in 2004 to 59 in 2022, representing a 4.5% increase. If history rhymes, the next likely cap could be in the 61–62 range. (see reference) 

At the time, our lens was historical—measuring breakout levels from 2004 to 2022 and projecting forward to 2025. 

But as noted above, USDPHP spikes rarely occur in a vacuum. They tend to coincide with economic stress. Using BSP’s end-of-quarter data, we find: (Figure 7, middle table) 

• 1983 debt restructuring: +121% over 12 quarters (Q1 1982–Q1 1985)
• 1997 Asian Financial Crisis: +66.15% over 6 quarters (Q1 1997–Q3 1998)
• 1999–2004 dotcom bust: +30.6% over 20 quarters (Q2 1999–Q1 2004)
• 2007–2009 Global Financial Crisis: +16.95% over 5 quarters (Q4 2007–Q1 2009)
• 2020–2022 pandemic recession: +22.64% over 7 quarters (Q4 2020–Q3 2022) 

While the USDPHP also rose from 2013–2018, this episode was largely driven by the Fed’s Taper Tantrum, China’s 2015 devaluation, and Trump-era fiscal stimulus—with no comparable economic event.

IV. Conclusion: Why This Time May Be Worse, the BSP is Whistling Past the Graveyard 

The current moment is different. 

Using the post-2022 low—Q2 2025 at 56.581—as a base, a 10% devaluation implies a target of 62.24. But with the late-cycle unraveling, a weakening domestic economy, and rising debt burdens, the odds tilt towards a deepening of stagflation—or worse. If the peso mirrors its pandemic-era response, a 20% devaluation to 67.90 is not far-fetched. 

Even the BSP now concedes "potential moderation in economic growth." 

Yet it continues to cite “resilient inflows” like tourism. The Department of Tourism data tells another story: as of September 2025, foreign arrivals were down 3.5% year-on-year—hardly a sign of strength. (Figure 7, lowest chart) 

Otto von Bismarck’s maxim applies: 

Never believe anything in politics until it has been officially denied. 

Hounded by diminishing returns and Goodhart’s Law—where every target becomes a distortion—the BSP clings to benchmarks that no longer signal strength. From the USDPHP to GIR composition, Net Foreign Assets, and FX deposit ratios, the metrics have become theater. The more they’re defended, the less they reflect reality.

In the face of unraveling malinvestments, deepening institutional opacity, and accelerating behavioral flight, the BSP is whistling past the graveyard. 

Caveat emptor. The illusion is priced in.  

____ 

References 

Bangko Sentral ng Pilipinas, Discussion Paper Series No. 2024-10: Estimating the Incremental Capital Output Ratio (ICOR) for the Philippines, Towards Greater Efficiency: Estimating the Philippines’ Total Factor Productivity Growth and its Determinants BSP Research Academy, June 2024. 

Prudent Investor Newsletters: 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

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

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design, Substack, July 27, 2025 

The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay, Substack, October 26, 2025 

BSP’s Gold Reserves Policy: A Precursor to a Higher USD-PHP Exchange Rate? Substack, March 03, 2025 

How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, Substack, January 02, 2025 

June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 03, 2025

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal

 

Democratic socialism—thereby fusing populist authorization with bureaucratic command—inverts civil society’s logic: spontaneous coordination yields to electoral control, property, and precedent to administrative discretion. The quest for legibility breeds discretion, opacity, colonizing associations, and politicizing provision. The polity grows more ceremonially majoritarian as its structure turns illiberal. Human relations become increasingly politicized. The space for autonomous and dissenting freedom steadily recedes—Vibhu Vikramaditya 

In this issue: 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal

I. Selective Framing: The "Smallest Deficit" Headline

II. Bigger Picture: Weak Revenues, Sluggish Spending, Cumulative Deficit Near Record Highs

III. Quietly Moving the Goalposts, Budget Gaps: Enacted vs. Revised

IV. Interventionist Mindset: The Root of the Fiscal Imbalance

V. The Economics of "Free Lunch" Politics: The Law of Scarcity Meets the Welfare State

VI. Debt Dynamics and the Savings–Investment Gap

VII Corruption as Symptom, Not Cause

VIII. Public Spending at Historic Highs and the DPWH Flood Control Scandal

IX. The DPWH Scandal: A Systemic Threat

X. A Policy Dilemma: The Impossible Choice 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal 

What the DPWH scandal reveals about the fragility of a spending‑driven political economic order

I. Selective Framing: The "Smallest Deficit" Headline 

Inquirer.net, August 29, 2025: A modest increase in government spending narrowed the Philippines’ budget deficit in July to its smallest level in nearly five years, keeping the shortfall within the Marcos administration’s target. The state continued to spend more than it collected after recording a fiscal deficit of P18.9 billion, albeit smaller by 34.42 percent compared with a year ago, latest data from the Bureau of the Treasury showed.

Figure 1

The July budget deficit headline—“smallest in nearly five years”—is a textbook case of selective framing. 

While technically accurate, it obscures deeper fiscal concerns by exploiting the optics of quarterly VAT reporting, which front-loads revenue at the start of each quarter. Since 2023, firms have filed VAT returns quarterly instead of monthly, so revenues at the start of each quarter appear inflated, producing artificial “surpluses” or unusually slim deficits. (as discussed last year, see reference) [Figure 1, upper image] 

This makes July look exceptional, but it is little more than a timing quirk—not a sign of genuine fiscal improvement.

II. Bigger Picture: Weak Revenues, Sluggish Spending, Cumulative Deficit Near Record Highs 

In reality, the cumulative January–July shortfall has ballooned to Php 784.4 billion, the second-largest on record. [Figure 1, lower chart] 

Revenues grew by only 3.26% while expenditures posted a meager 1.02% increase. The Bureau of the Treasury itself attributed the spending slowdown to the "timing of big-ticket disbursements of the Department of Public Works and Highways, Department of Social Welfare and Development, and Department of National Defense for their respective banner programs." 

Year-to-July, expenditures are up 8.2%, slower than 13.2% in 2024, but the bigger story lies in revenue weakness: collections grew just 4.8% this year compared with 14.75% in 2024. The 24.9% contraction in non-tax intake and the sharp deceleration in Bureau of Customs growth (1.5% vs. 5.8% in 2024) dragged overall revenues down. 

III. Quietly Moving the Goalposts, Budget Gaps: Enacted vs. Revised 

July’s Php 491.2 billion in expenditures also fell sharply below the Php 561 billion monthly average needed to meet the Php 6.326 trillion enacted budget. 

Figure 2

Compounding this, the Bureau of the Treasury reported that 2025 fiscal targets had been revised downward (by the DBCC) for both revenue and spending, now pegged at Php 6.08 trillion. [Figure 2, upper table] 

Authorities attributed the adjustment to "heightened global uncertainties," but the subtext is clear: the government is quietly recalibrating expectations to preserve its 5.5% deficit ceiling, even as structural weaknesses deepen. The headline may offer comfort, but the underlying trajectory points to fragility, not fiscal strength. 

The enacted budget sets the ceiling—what government aims to spend—while the revised budget marks the floor, revealing what it can realistically afford as conditions shift. 

Yet the jury is still out on whether the current administration will break its six-year trend of exceeding the enacted budget—or whether this implicit admission of slower growth will instead spur even more spending in the second half of the year. 

IV. Interventionist Mindset: The Root of the Fiscal Imbalance 

Of course, the fiscal imbalance is merely a symptom. 

As previously discussed, it is driven by behavioral factors—such as the heuristics of recency bias and overconfidence—combined with an overreliance on a technocratic bureaucracy fixated on flawed econometrics as the fountainhead of interventions. (see reference on our previous post dealing with the rising risks of a Fiscal Shock) 

Most importantly, it is fueled by a populace increasingly dependent on social democracy’s "free lunch" politics, anchored in a deepening interventionist mindset. 

As Mises Institute’s Joshua Mawhorter lucidly describes, "by living under a modern, highly interventionist modern nation-state, the default paradigm of political elites and the general public is that, whenever a problem arises, the government must do something, that not doing something would be irresponsible and disastrous, that it can only help, and that the worst possible option would be doing nothing. This might be called the interventionist mindset or interventionist paradigm." (bold added)

V. The Economics of "Free Lunch" Politics: The Law of Scarcity Meets the Welfare State 

This mindset lays the policy framework for trickle-down Keynesian spending programs financed by the BSP’s easy money. 

Public spending on an ever-widening scope of social services—including the proposed "universal healthcare" for all Filipinos—illustrates this. [Figure 2, lower left image] 

In simple terms, while such programs may appear ideal, the law of scarcity dictates that there must be sufficient savings to sustain a welfare state. 

If the rate of redistribution exceeds the growth of savings, funding must come from elsewhere—either by borrowing from future taxpayers or through the inflation tax, via financial repression and fiscal dominance enabled and facilitated by central bank accommodation. 

Yet a persistent reliance on borrowing or inflation is not sustainable. Both are subject to ‘reversion to the mean’ and will eventually face a reckoning through crisis.

VI. Debt Dynamics and the Savings–Investment Gap 

The thing is, while some authorities acknowledge the burden of public debt—"every Filipino now owes P142,000"—most attribute it to "corruption," a convenient strawman. [Figure 2, lower right picture]

Figure 3

Alongside rising expenditures, public debt surged to a record Php 17.56 trillion last July, sustaining its upward trajectory and accelerating in both scale and velocity! MoM changes depict this uptrend. [Figure 3, topmost and center graphs] 

All told, the Philippines suffers from a record savings–investment gap, which hit a new high in Q2 2025. [Figure 3, lowest chart] 

But "savings" in national accounts is a residual GDP-derived figure that is deeply flawed; it even includes government "savings" such as retained surpluses and depreciation, when in reality, the fiscal deficit reflects dissaving (as discussed during CMEPA last July; see reference). 

With public debt up Php 296.2 billion month-on-month, Php 1.873 trillion year-on-year, and Php 1.512 trillion year-to-date, the government is suggesting a forthcoming decline in public debt by the end of 2025. 

Technically, while a ‘slowdown’ may occur, this is a red herring—it omits the fact that soaring deficit spending inevitably translates into higher debt, higher inflation, or both.

VII Corruption as Symptom, Not Cause 

Social democrats fail to heed the lessons of EDSA I and EDSA II: corruption is a legacy of big government. 

What is often forgotten is that corruption is not the disease but a symptom of vote-buying politics—of a system built on free-lunch populism, where political spending buys loyalty, entrenches dependence, transfers wealth, consumes savings, and simultaneously erodes institutions through ever-deepening interventions. 

Per the great Frédéric Bastiat, 

"When plunder has become a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it." (Bastiat, 1848) 

Still, social democrats cling to the illusion that electing an "angel" leader can deliver an ideal command-and-control economy. They overlook that forced redistribution—or legalized plunder—breeds societal tensions and unintended consequences, triggering a vicious cycle of interventions and power concentration —exactly what Tocqueville warned against when he said absolute power corrupts absolutely. 

Again, Bastiat reminds us: 

"legal plunder may be exercised in an infinite multitude of ways. Hence come an infinite multitude of plans for organization; tariffs, protection, perquisites, gratuities, encouragements, progressive taxation, free public education, right to work, right to profit, right to wages, right to assistance, right to instruments of labor, gratuity of credit, etc., etc. And it is all these plans, taken as a whole, with what they have in common, legal plunder, that takes the name of socialism." (Bastiat, 1850) 

The bigger the government, the greater the corruption. 

VIII. Public Spending at Historic Highs and the DPWH Flood Control Scandal

Figure 4

Today, public spending as a share of GDP is at its highest level (!!) compared to pre-EDSA I and pre-EDSA II—and that’s counting only direct public expenditures, excluding construction and private sector participation in government projects such as PPPs and other ancillary ventures. [Figure 4, upper diagram] 

From this perspective, the ongoing flood control scandal is merely the tip of the iceberg, with contractors and select authorities in the “hot chair” serving as convenient fall guys for a much larger, systemic issue. 

IX. The DPWH Scandal: A Systemic Threat 

These X.com headlines provide a stark clue as to how public spending and GDP might be affected: [Figure 4, lower images]

• DPWH, DBM set 2-week deadline to review DPWH budget
• Palace says review of DPWH’s 2026 budget could expand to other agencies
• DPWH Secretary Vince Dizon suspends bidding for locally funded projects amid massive corruption scandal 

The unfolding DPWH scandal threatens more than reputational damage—it risks triggering a contractionary spiral that could expose the fragility of the Philippine top-down heavy economic development model. 

With Php 1.033 trillion allotted to DPWH alone (16.3% of the 2025 budget)—which was lowered to Php 900 billion (14.2% of total budget)—and Php 1.507 trillion for infrastructure overall (23.8% and estimated 5.2% of the GDP), any slowdown in disbursements could reverberate across sectors. 

Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity. 

Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. 

Or if infrastructure spending is curtailed or delayed, growth slows and tax revenues fall—VAT, corporate, and income tax collections all weaken when economic activity contracts. 

This means the deficit doesn’t necessarily shrink despite spending restraint; the “fiscal hole” may, in fact, widen—imperiling fiscal stability and setting the stage for a potential fiscal shock. 

The irony is stark: efforts to contain corruption by tightening spending could deepen the very gap they aim to close.

To be clear, this is not a defense of corruption but rather a reminder of how dependent GDP growth has become on public spending, leaving it vulnerable to the vagaries of political oscillation—including the ongoing flood control corruption scandal.

X. A Policy Dilemma: The Impossible Choice

Figure 5

With debt servicing already absorbing a growing share of the budget (7-month interest payment accounted for 14.8% share of expenditure), and revenue buoyancy dependent on infra-led growth, the administration faces a dilemma—either sustain spending through a compromised political pipeline or risk a broader economic and fiscal unraveling. 

The lesson is, the real danger lies not in the scandal itself, but in the systemic exposure it threatens to reveal: 

• A growth model overly reliant on state-led spending
• A fiscal framework vulnerable to both political shocks and bureaucratic paralysis
• A debt trajectory that leaves little room for error when revenues falter 

In short, the interventionist mindset at the core of social democracy’s "free lunch" political economy entrenches structural fragility, as shown by the mounting fiscal imbalance. 

The DPWH scandal crystallizes a deeper tension—forcing the political economy to weigh popular demands for ‘good governance’ against the imperatives of a development model structurally reliant on public spending. 

As Roman historian Tacitus warned (The Annals of Imperial Rome): 

"The more corrupt the state, the more numerous the laws."

____

References 

Vibhu Vikramaditya How Democratic Socialism Inverts the Logic of Civil Society Mises.org, September 3, 2025 

Prudent Investor Newsletter, 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 Substack 

Prudent Investor Newsletter, June 2025 Deficit: A Countdown to Fiscal Shock, August 3, 2025 Substack 

Joshua Mawhorter Interventionist Non-Interventionism Mises.org, September 5, 2025 

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

Frédéric Bastiat Economic sophisms, 2nd series (1848), ch. 1 Physiology of plunder ("Sophismes économiques", 2ème série (1848), chap. 1 "Physiologie de la spoliation"). Econolib 

Frédéric Bastiat, The Law (1850), Ludwig von Mises Institute 2007 Mises.org