Economic growth in the Philippines remains on a solid trajectory, but the government has struggled in recent years to reduce its budget deficit.
Last month, the Philippines’ House of Representatives approved the 2026 budget, with total spending set to hit 6.79 trillion pesos (around $116 billion), a 7.4 percent increase over the previous year. The budget is now being reviewed by the Senate. Typically, this is pretty straightforward but recently the budgeting process in the Philippines has become a forum for political showdowns and the airing of grievances.
This was the case in 2024 when funding was cut for portfolios overseen by Vice President Sara Duterte, an act that helped fracture the Marcos-Duterte alliance. Last year’s budget was uneventful by comparison, but this year it appears another kerfuffle is brewing as the Senate indicated it will cut spending already approved by the House. As reported by the Inquirer, Senate President Vicente Sotto III recently said: “We will reduce the [National Expenditure Program]. That means the final budget will be even lower – so we’ll have to borrow less. That’s our target.”
The tentative plan for accomplishing this involves slashing funding appropriated for the Department of Public Works and Highways (DPWH). DPWH is currently under intense scrutiny thanks to a major corruption scandal from the Duterte era in which large sums of money were spent on low-quality or fictitious public works projects. So tightening the screws in service of faster deficit reduction might seem like a safe play. But is it necessary?
There is an argument for more fiscal prudence in the Philippines, where the deficit has remained above 5 percent of GDP for the last several years. Every year, the Department of Budget and Management projects the deficit will shrink, driven by rapid economic growth and increased revenue. And every year they miss the forecast, requiring more borrowing.
Last year, planners assumed a growth rate of between 6.5 and 7.5 percent in 2025. Latest estimates from the World Bank project the economy will actually grow around 5.6 percent in 2025. And even that figure might be a bit high, as new data came in showing the economy slowed more than expected in the third quarter. Economic growth in the Philippines remains on a solid trajectory, but for the past several years, budget planners have consistently overestimated the rate of growth. As a consequence, the government tends to miss its deficit target.
A year ago, the Department of Budget and Management was projecting the deficit would shrink to 5.3 percent of GDP in 2025, and then fall further to 4.7 percent in 2026. According to the latest budget projections, the deficit will, in fact, come in around 5.5 percent of GDP in 2025 and is now projected to hit 5.3 percent in 2026. And the estimate for 2026 is again based on arguably optimistic projections that the economy will grow by at least 6 percent next year. If it doesn’t, the government may struggle to narrow the deficit in line with projections.
Perhaps as a consequence of this, there have been some innovative efforts recently to increase revenue. For instance, earlier this year, the Supreme Court heard oral arguments in a case where the government transferred surplus funds from state-owned insurer PhilHealth to the Treasury, arguing that the money should be used to fund unprogrammed appropriations. The case has yet to be decided, but the government did transfer the funds back earlier this year.
Privatization is also continuing apace. Following the privatization of Ninoy Aquino International Airport last year, the government plans to privatize more state assets in 2026, including government-operated casinos. This is expected to generate a one-time revenue boost of around 100 billion pesos in 2026, which if realized, will help reduce the deficit.
Another interesting detail about the budget showdown is that the Senate is targeting spending cuts at the DPWH. Given the optics of the corruption scandal, we can see the logic there. But in fact, recent increases in government spending have come almost entirely from higher debt servicing and personnel costs, not infrastructure.
Capital outlays, including on infrastructure, have been steadily falling since the Duterte years and were already set to contract a further 9 percent in 2026 under the House’s spending plan, even before any cuts were made by the Senate. Meanwhile, personnel expenses are expected to increase by 15 percent next year.
The budgeting process in the Philippines has thus fallen into a fairly predictable pattern in recent years, with revenue and deficit forecasts based on optimistic projections about economic growth. When growth comes in lower, the deficit tends to remain above the target, which has helped inspire some innovative ideas on the revenue side.
Meanwhile, most of the increased spending is being allocated toward personnel costs. Given this context, does it make sense to squeeze funding for public works to send a message? For the time being, it seems that the Senate thinks so.