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The Philippines revealed it budget for 2025 with significantly less drama this year. Last year, a confrontation over discretionary spending for portfolios overseen by Vice President Sara Duterte became a flashpoint for deepening rifts in the Duterte-Marcos alliance, eventually leading to a major feud.
No such fireworks accompanied this year’s budget process, which is not so different from the country’s recent budget habits.
Total expenditure for 2025 is set at PHP6.352 trillion (approximately US$109 billion). At 10 percent, this is a significant increase from the previous year and confirms the Philippines’ commitment to boost government spending through borrowing and addressing deficits. In addition to helping to fracture the ruling coalition, the 2024 budget was built around a set of fairly optimistic macroeconomic projections, and planners have continued to make many of those assumptions in the new budget.
For example, looking at last year’s assumptions, the Office of Budget Management predicted that the economy would grow by at least 6.5 percent in 2024, that inflation would not exceed 4 percent, that the exchange rate would not fall below 57 percent would decline. pesos against the dollar, and that the benchmark interest rate would not exceed 5.5 percent. I was skeptical of these assumptions at the time, and it turns out that planners were indeed pushing the boundaries on many of them.
Throughout 2024, the peso has remained weak against the dollar. Right now it is around 58, but it has been close to 57 for much of the year. The benchmark interest rate is 6 percent, higher than the base forecast. Economic growth has been strong, but tends towards 6 rather than 6.5 percent, while inflation is just below the 4 percent target. This means that the 2024 budget has pushed the boundaries of most of the key assumptions on which it is based.
Even taking these assumptions into account, the 2024 budget planned for a budget deficit of 5.1 percent of GDP, while a series of tax reforms were expected to generate higher revenues to keep the deficit manageable. How did these projections hold up?
Not bad, but a bit off-the-mark. Shortfalls in tax revenues were partially offset by increases in fees, for example from car registrations, and investment income. The need for more revenue from the privatization of state assets may be one of the reasons why the country’s largest airport was quickly transferred to the San Miguel Corporation earlier this year. Still, the deficit is expected to rise to 5.6 percent of GDP by the end of 2024.
Interestingly, budget planners are keeping many of their 2025 assumptions at about the same level. GDP is expected to grow by at least 6.5 percent, inflation will remain below 4 percent and the benchmark interest rate will not exceed 5.5 percent. The only real change they made to their framework was raising the upper limit on the exchange rate to 58 pesos per dollar. That means they’re giving themselves a little more wiggle room on a weaker peso. As in 2024, next year’s budget will continue to borrow to pay for spending, with a projected deficit of 5.3 percent of GDP.
I’m not what you’d call a tax hawk. I think it’s fine for countries to run deficits to pay for government spending (within reason). Some countries have legal limits on deficit spending, such as Indonesia, where annual deficits are capped at 3 percent of GDP, and when the new president said he would push for that cap, markets reacted negatively.
But for the most part, these caps are just based on vibes. The Philippines has been running deficits above 5 percent of GDP in recent fiscal cycles and plans to continue doing so even under challenging macroeconomic conditions when borrowing costs are high.
The key question is not whether states borrow money to finance government operations, but what they spend the money on. The 2025 Philippine budget allocates most of the increase to personnel costs as civil servants and government employees, including the military, will do so. see wage increases and other benefits.
Personnel costs are expected to increase by 13 percent annually. Capital expenditure, including infrastructure spending, is expected to contract slightly in 2025. Given challenging macroeconomic conditions and higher borrowing costs, does it make sense to continue running deficits under optimistic budget assumptions to pay for civil servants’ pay increases? According to the Philippine Budget for 2025, the answer is yes.