THE Philippines’s efforts to rein in its fiscal deficit are likely to plateau, as ‘ambitious’ revenue targets prove difficult to meet and mounting debt service costs eat up more government resources, according to BMI, a unit of Fitch Solutions.
BMI said in a report on Friday that it forecasts a ‘slow’ fiscal consolidation, with the budget deficit narrowing from 5.4 percent of gross domestic product (GDP) in 2026 to 5.1 percent in 2027-still in line with the government’s target.
‘Risks are tilted towards a wider fiscal deficit,’ it said, noting that revenue targets may prove ‘difficult to achieve’ despite the new tax reforms lobbied by the government.
The Department of Finance has proposed a comprehensive tax reform package, dubbed the ‘Progress Bill,’ which seeks to raise the personal income tax-exempt threshold and remove the minimum corporate income tax on small businesses, while increasing the excise taxes on sin products to offset revenue losses. This is expected to generate a net revenue gain of P47.9 billion annually over 2027 to 2030.
However, the measure has not yet been incorporated into next year’s P4.851 trillion tax revenue target.
‘The government’s tax revenue target appears ambitious at first glance,’ BMI said. ‘While easing inflation and higher Metro Manila minimum wages-which will reportedly benefit over 1.1 million workers-should support consumption and VAT collections in 2027, we doubt that this alone will be sufficient to hit the target.’
Still, the revenue-to-GDP ratio is seen to ease modestly from 15.8 percent of GDP in 2026 to 15.7 percent in 2027-also in line with the government’s target.
At the same time, debt servicing, which is becoming more expensive, is expected to strain government finances further as higher interest rates and a weaker peso push up costs, BMI said.
‘The gradual pace of fiscal consolidation will likely sustain this trajectory, consuming more resources that could otherwise be directed towards more productive spending,’ it added.
Budget documents showed that next year’s proposed allocation for debt servicing increased by 16.8 percent to P1.143 trillion from P978.7 billion under the 2026 enacted budget. This is significantly higher than the 6-percent growth in the overall budget worth P7.2 trillion.
BMI projects total government expenditure to decline to 20.8 percent of GDP in 2027 from 21.3 percent in 2026.
Economic services are proposed to receive the largest increase in the 2027 budget, while social services face a reduction. Defense spending growth is also set to moderate from the double-digit pace of the past three budgets.
‘Escalating tensions with Beijing in the South China Sea, especially with increasingly frequent and intense maritime incidents, strengthen the case for higher military outlays,’ BMI said. ‘Yet, defense spending growth is set to ease further in 2027, underscoring the difficult trade-offs imposed by limited fiscal room.’
‘Nothing wrong with having debts’
At a forum organized by the Economic Journalists Association of the Philippines on Friday, Budget Secretary Kim Robert C. De Leon said the government remains committed to gradually reducing the fiscal deficit.
‘Fiscal discipline does not mean refusing to spend, but knowing where to spend, why we are spending, and what the Filipino people should get in return,’ De Leon said.
Despite debt servicing accounting for 15.9 percent of next year’s total budget, De Leon said, ‘there is nothing inherently wrong with a country having debts.’
‘Until the government can generate sufficient resources to fund investments and close our country’s infrastructure and development gaps, we will need to borrow,’ he added.
The debt-to-GDP ratio rose to 66 percent in the second quarter, the highest since 2004. This comes after public debt reached P19.065 trillion, while GDP grew by 2.3 percent.
‘What matters is that money is used for the right purposes and the government can repay it without compromising other essential programs and services,’ De Leon said. ‘Government programs, activities, and projects are not mere expenses, but investments intended to achieve a minimum required economic return.’