Fiscal consolidation in the Philippines ‘challenging,’ says Nomura

MANILA, Philippines — The Marcos administration’s goal to bring down the budget deficit, as a share of the economy, to 3.7 percent by 2028 will be “challenging,” Nomura said, citing the need to sustain spending to support growth amid tariff-induced headwinds and the political hurdles in passing fiscal reforms.

In a commentary, the Japanese investment bank said the Department of Finance’s decision to withdraw its proposal to increase capital gains tax, donor’s tax and estate tax highlighted the challenges that the government is facing in hitting its fiscal consolidation targets.

Nomura said the withdrawal of the tax measure—which would have generated P300 billion in much-needed revenues through 2030—would have an impact on the state’s medium-term fiscal targets. What was known as the Government Revenues Optimization through Wealth Tax Harmonization (GROWTH) bill became a target of criticism online ahead of the May elections.

At this point, Nomura believed that a “likely less conducive political environment” in the run-up to the 2028 presidential elections would make it hard for the Marcos administration to push for any fiscal reforms.

And the situation is compounded by the deteriorating global economic environment, which, Nomura said, might prompt the government to sustain its hefty spending on infrastructure projects to help keep the country’s growth engines humming.

But the bank said the Philippines was not alone in this fiscal dilemma.

“We see increasing signs that fiscal policy could be deployed across the [Association of Southeast Asian Nations] region this year in response to rising downside risks on their respective growth outlooks, owing to global trade tensions and the tariff shock,” Nomura said.

Fiscal shortfall

Latest data showed the state’s fiscal shortfall had widened by 91.78 percent year-on-year to P375.7 billion in March. This was the biggest budget hole in 15 months after revenues contracted while spending posted a strong growth.

That sent the fiscal gap in the first quarter to P478.8 billion, 75.62 percent bigger than the shortfall recorded a year ago. To bridge the budget gap, the government would have to borrow money from creditors at a time when interest rates are not going down as fast as many borrowers would want to.

The Marcos administration, which is aiming for “A” credit rating for the government, is targeting to borrow P2.55 trillion in 2025 to plug a projected budget gap amounting to P1.54 trillion, or equivalent to 5.3 percent of the country’s gross domestic product (GDP).

But Nomura sees a higher deficit-to-GDP ratio of 5.5 percent for 2025, albeit lower than the 2024 fiscal shortfall of 5.7 percent of GDP.