Budget gap expected to rise as growth slows

The budget deficit of the national government in 2023 is now expected to be even higher than previously forecast due to a slower growth of the domestic economy and higher spending, according to Fitch Solutions.

The Fitch group unit said in a commentary that they now forecast a deficit equivalent to 6.4 percent of the country’s gross domestic product (GDP), wider than the 6.1 percent they previously pencilled in for this year and which was similar to economic managers’ own forecast.

“The Philippines will remain on the path of fiscal consolidation over the medium term, but at a more gradual pace,” Fitch Solutions said.

The research group sees national government expenses to remain high because of the continued emphasis on infrastructure projects.

The Marcos administration has been wooing foreign investors as well as lenders regarding a pipeline of 194 infrastructure flagship projects that cost a total of $165 billion.

Lower tax revenues

Fitch Solutions said, meanwhile, that a combination of slowing economic growth and lower income tax will weigh on revenue growth, which they said will slow to 4 percent this year from 18 percent in 2022.

The group sees this happening amid changes in the Philippine income tax system that take effect this year.

In particular, lower-middle income earners—those who earn more than P250,000 up to P8 million yearly—will have lower personal income tax rates of 15 percent to 30 percent.

Meanwhile those who earn up to P250,000 will remain exempt while those who earn more than P8 million will continue to be subject to a rate of 35 percent.

Government expenditures are forecast to average at 19.8 percent of GDP through 2023-2027, higher than the 2015-2019 average of 17.6 percent of GDP.

Still, Fitch Solutions said the key source of fiscal pressure will be the expected slowdown of the domestic economy, forecast to grow at 5.9 percent this year compared to 7.6 percent last year.

“High domestic inflation, weak external demand and aggressive monetary tightening undertaken by the BSP (Bangko Sentral ng Pilipinas) will constrain economic growth and inevitably weigh on the public coffers,” it added.

And yet, despite its forecast on the budget deficit, Fitch Solutions said this remains on a narrowing trend that augurs well in terms of fiscal sustainability.

The national government’s debt stock accounted for 60.9 percent of GDP at the end of 2022, ballooning from 39.6 percent in 2019 before the pandemic.

“Our prevailing forecast is for the budget deficit to reach 3.8 percent by the end of Marcos’ presidential term,” Fitch Solutions said.

“Consequently, we expect the public debt-to-GDP ratio to decline slightly to 59.8 percent in 2023, and debt levels will likely remain on a downward trend thereafter,” they added. INQ