Philippines: Budget gap seen at 6% of GDP next year

MANILA, Philippines — The Philippines’ budget deficit is expected to remain wide as the Marcos administration prepares to execute a plan to bring the gap to pre-pandemic levels, according to Singapore-based DBS Bank Ltd.

In a report, DBS economist Chua Han Teng said the Philippines aims to reduce the budget shortfall by one percentage point per year, to reach three percent of gross domestic product by 2028 from a high of 8.6 percent of GDP in 2021 under the Medium-Term Fiscal Framework (MTFF).

“Fiscal consolidation is already underway. The direction is right, but the gap will likely stay wide and register at six percent in 2023, in our view,” Teng said.

According to DBS, the Philippines incurred one of the highest fiscal deficits among ASEAN-6 at the height of the pandemic, reaching 8.6 percent of GDP in 2021, while the national government’s budget shortfall soared to 60.4 percent in 2021 from 39.6 percent in 2019.

Under the plan, the Marcos administration also aims to trim the country’s debt level to less than 60 percent by 2025.

“The wide fiscal gap was driven by a sharp rise in expenditures, rising to a high of 24.1 percent of GDP in 2021, but spending is set to moderate. Current expenditures related to the pandemic are reduced,” Teng said.

Teng said capital and infrastructure outlays have been broadly maintained to improve the Philippines’ lagging infrastructure, which would bolster long-term growth prospects.

“Yet the increased debt burden would raise interest spending. Philippines’ overall revenues-to-GDP were rather steady over the past few years, despite the crisis,” he said.

The Singaporean bank said that the tax base of the Philippines has benefited from the tax reforms, including the removal of certain value-added tax (VAT) exemptions, raising fuel excise taxes and introducing sin taxes on cigarettes and alcohol-supported taxes, implemented by the previous Duterte administration.

It said the Marcos administration is introducing additional taxes to bolster and mobilize revenues, including imposing VAT on digital goods and services, and excise taxes on single-use plastics to curb pollution.

Latest data from the Bureau of the Treasury (BTr) showed that the country’s budget deficit widened by 54 percent to P99.1 billion in October from P64.3 billion in the same month last year as the government spent more than what it earned from revenue collections.

Despite the widening of the gap, the shortfall slipped by 7.6 percent to P1.11 trillion from January to October versus the P1.2 trillion recorded in the same period last year.

After two years of pursuing an accommodative fiscal stance to counter the fallout of COVID on the health of the populace, incomes and employment, DBS said ASEAN-6 governments returned to a consolidative tone this year.

“We expect further narrowing in fiscal deficits in 2023,” it said.

It said that reducing the shortfall was necessary to keep fiscal policy in sync with the withdrawal of monetary accommodation, complement efforts to contain inflation and inflationary expectations and prevent further deterioration in fiscal and debt metrics just as borrowing costs ratchet higher.

“Reopening tailwinds coupled with strong commodity-driven trade outperformance provided a strong cushion to revenues for most ASEAN-6 countries this year, besides a lift from high nominal growth rates. This helped to gradually scale back pandemic-era aid packages and consolidate finances,” DBS said.