Our national debt matters

When asked about our government debt, BBM brushed aside the question saying it is just a number… it doesn’t mean anything… it is all in the air.

But P19.39 trillion worth of national debt isn’t nothing. That’s a lot of money. It is a tangible burden heavily felt in everyday life.

For instance, the mechanisms the government uses to finance, manage or survive high debt almost always push prices up. When debt peaks, the government faces immense pressure to raise cash quickly to cover mandatory interest payments.

That’s why our government has pivoted away from progressive income taxes to indirect consumption taxes (like value-added taxes, fuel excise taxes). This tax burden is passed directly to the consumer, causing a policy-driven bump in the cost of living. This explains why consumer spending growth, which accounts for over 75 percent of  gross domestic product (GDP), slowed down to 2.8 percent from 5.2 percent during the same period last year.

Perhaps his economic advisers told BBM there is nothing to worry about if our GDP grows faster than our debt. That’s a big IF.

He was probably also told it is alright because our debt-to-GDP ratio, which measures our debt against the total value of our economic output, is in the mid-60s and below the internationally accepted ceiling of 70 percent of GDP.

That made BBM think we are “healthier than many other economies.”

But there are red flags all over that shouldn’t be ignored. The clearest one is the gap that has widened considerably between what the government spends and what it collects, forcing heavy borrowing.

Let’s see… our government is projecting revenues of P5.21 trillion for 2027, debt interest payments will eat up more than half of that. With a budget of P7.2 trillion, a deficit of P1.7 trillion is expected.

To cover both this P1.7-trillion deficit and the P1.59-trillion maturing principal debt repayments, the Treasury will have to borrow P3.30 trillion, bringing us very close to our absolute borrowing capacity.

Perhaps, BBM is banking on assurances from Economic Planning Secretary Arsenio Balisacan who sees a robust macroeconomic rebound toward the five to six percent growth by focusing on core policy adjustments and operational reforms.

Balisacan is banking on accelerating high-impact infrastructure projects to immediately inject capital back into the economy and boost GDP. To make this recovery happen, Balisacan is pushing for stricter governance and procurement transparency to restore investor confidence.

But our government has little ability to institute reforms and improve governance and procurement transparency to restore investor confidence.

The government’s official Budget of Expenditures and Sources of Financing projects the debt-to-GDP ratio to settle between 63.6 and 64.8 percent by end of 2027. This assumes that nominal GDP growth will hit around 8.97 percent (with real GDP growth at five to six percent). As long as economic growth outpaces the accumulation of new debt, the ratio remains theoretically manageable.

To keep the national debt from breaching the 70 percent debt-to-GDP ceiling, the Philippine economy must maintain a nominal GDP growth rate of at least six percent.

Given current economic conditions, many economists view the government’s official real GDP growth target of five to six percent for 2027 as highly optimistic. The economic reality on the ground is significantly more challenging.

Our actual GDP growth fell to a post-pandemic low of 2.3 percent in the second quarter of the year, dragging average expansion for the first half down to a meager 2.6 percent. That’s quite far from the six percent we need to avoid hitting our borrowing ceiling.

Balisacan also assumes a frictionless, perfectly rational government. But in the real world, political cycles dictate economic outcomes.

Because the 2027 budget is structurally engineered to function as an election war chest rather than a development plan, the chances of the Philippines hitting that optimistic five to six percent growth target get slimmer by the day — bringing that 70 percent debt-to-GDP danger zone uncomfortably close.

By 2027, the Philippines will be fully engulfed in the 2028 presidential election cycle. Historically, when an election year approaches, long-term technocratic economic planning takes a back seat to short-term political survival.

For instance, no politician running for office will vote for new taxes or painful economic adjustments that could alienate voters. Congress will be in gridlock, focused entirely on political posturing rather than passing rational economic legislation.

That’s why the House emphasized handouts over infrastructure. Handouts provide immediate political goodwill, but they have a very low economic multiplier effect. Money funneled into local political patronage is money taken away from the massive infrastructure projects needed to trigger an economic rebound.

Then there is the election ban on public infrastructure spending in the months leading up to an election. That means lower public spending, the primary engine Balisacan is banking on.

A risk assessment by the Congressional Policy and Budget Research Department reveals that if real economic growth is choked by global shocks (such as energy price increases), nominal GDP growth could plummet to 2.9 percent in 2027. Under this severe condition, the debt-to-GDP ratio is projected to hit 70.7 percent in 2027.

Breaching 70 percent would likely trigger international credit rating agencies to downgrade the Philippines. This immediately makes future borrowings more expensive, further compounding the debt service burden.

If the economy stays trapped in its current sluggish pace of under four percent growth, the denominator (GDP) fails to expand fast enough to match the massive P3.30 trillion in new borrowing.

That’s why BBM is wrong to say our debt level is just a number that doesn’t mean anything. Not minding it enough can cause very serious economic problems just as we are preparing to choose the next president. BBM may even have to go into exile as a consequence of his failure in this area.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco.