FISCAL consolidation progress next year will likely be limited under the government’s proposed P7.2-trillion national budget, a Fitch unit said.
“The proposal supports continued fiscal consolidation through spending restraint and selected tax reforms, but the pace of deficit reduction remains modest,” BMI said in a report released on Friday.
It forecast the fiscal deficit to narrow to 5.1 percent of gross domestic product (GDP) from 5.4 percent in 2026, in line with the government’s target.
BMI noted that while spending as a percentage of GDP would fall, the country’s debt burden was set to continue rising due to the need to repay obligations, higher interest rates and a weaker peso.
Revenue goals also appear “ambitious,” it added.
The 2027 budget proposal, which is 6.6 percent higher compared to last year, calls for a 17.8-percent increase in spending on economic services.
Social services, on the other hand, will see a 5.5-percent cut and defense spending will moderate to 6.8 percent from double digits in the past three budgets.
As a percentage of GDP, total government spending will likely fall to 20.8 percent from 21.3 percent this year, BMI said.
The debt burden — expected to rise 16.8 percent to P1.14 trillion next year — “is set to rise quickly” given mounting interest repayments due to the country’s increased debt stock.
Refinancing obligations have also become costly due to high interest rates, while the weaker peso has made foreign-denominated debt — 30 percent of total outstanding debt — more expensive in local-currency terms.
“The gradual pace of fiscal consolidation will likely sustain this trajectory, consuming more resources that could otherwise be directed towards more productive spending,” BMI said.
Revenues, meanwhile, are expected to ease to 15.7 percent of GDP next year from 15.8 percent in 2026, again broadly in line with the government’s target.
BMI said the decline would largely reflect lower non-tax revenues following a record dividend windfall in 2026.
The tax revenue target, particularly its assumption of a 12.8-percent year-on-year increase in value-added tax (VAT) collections to P860 billion without new reforms, is unlikely to be hit.
While easing inflation and higher Metro Manila minimum wages could support consumption and VAT collections, BMI said these factors alone may not be enough to meet the target.
New tax measures could provide some support, however, with new and higher “sin” taxes — estimated to add P129.7 billion in revenues — seen offsetting losses from proposed tax relief measures announced by Marcos last month.
These include raising the personal income tax exemption threshold and exempting small businesses from corporate income taxes (expected to cost the government P81.7 billion in foregone revenues), a tax amnesty and the removal of system loss charges and the associated VAT from power bills.
The net revenue gain from new tax measures, as estimated by policymakers, is P47.9 billion annually from 2027 to 2030.
On the whole, BMI said “risks are tilted towards a wider fiscal deficit.”
“Revenue targets may prove difficult to achieve even after new tax reforms, particularly as we forecast GDP growth of 4.9 percent in 2027, below the government’s 5.0-6.0 percent budget assumption,” it added.
The US-Iran war is also an additional risk, with delays in the reopening of the Strait of Hormuz possibly extending “the negative economic spillovers into 2027.”
“This would likely dampen revenue collections and raise the pressure for broader cost-of-living support measures, widening the deficit by more than we expect,” BMI said.