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
