Fiscal deficit seen widening to 6% of GDP

MANILA, Philippines — The country’s fiscal deficit is expected to widen to six percent of gross domestic product (GDP), signaling a slowdown in fiscal consolidation efforts amid rising global economic headwinds, a study showed.

A study by BMI Country Risk & Industry Research found that 2025 brought a more challenging external environment, potentially hindering efforts and straining the Philippines’ already limited economic policy space.

“Washington is preparing to impose 19 percent tariffs on all imports from the Philippines. If fully implemented, this would further dampen external demand and add to existing structural weaknesses,” according to the BMI report.

The Cabinet-level Development Budget Coordination Committee expects the debt-to-GDP ratio to ease to 5.5 percent this year from the 2024 level of 5.7 percent.

For the six-month period, the budget deficit rose by nearly 25 percent to P765.5 billion from the P613.9 billion last year as spending outpaced revenue growth from January to June.

A budget deficit means that the government is spending beyond what it earned from revenue collections, although at a slower pace this time around.

BMI estimates that government spending would need to increase by one percentage point from the current level of 21.9 percent of GDP to meet its medium-term growth target.

“The Philippines’ public finances remain fragile, with the debt-to-GDP ratio having risen to around 60 percent from the pre-pandemic level of 40 percent. This places the country among the regional laggards in fiscal recovery,” it said.

BMI said elevated borrowing costs and a narrow revenue base restrict the country’s ability to provide large-scale fiscal support without undermining debt sustainability.

By the end of June, the debt-to-GDP ratio of the Philippines was at 63.1 percent from the first quarter’s 62 percent.

The research found that the full impact of US tariffs and broader trade fragmentation remains uncertain, as geopolitical tensions and supply chain shifts make potential economic consequences difficult to quantify. It noted that the impact may be less severe than feared.

“Policymakers are unlikely to rely solely on fiscal spending. Instead, we expect a more balanced policy response that includes monetary easing, targeted subsidies and efforts to diversify trade partners, particularly within ASEAN and the Indo-Pacific region,” it added.

BMI said the Philippines must choose between accepting structurally slower GDP growth and extending its fiscal adjustment timeline, as limited fiscal space and mounting external risks test the government’s ability to maintain balance.