Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion

 

The vulgar Keynesian focus on consumption unfortunately tempts politicians to approve “stimulus” measures aimed at pumping up this part of total spending…Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption—Robert Higgs 

In this issue

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion

I. BSP’s Easing Cycle and Mainstream’s GDP Expectations

II. The Big Consensus Miss Versus a Contrarian View of the GDP

III. On GDP: Methodological Skepticism and Political Incentives

IV. The Financialization of the Economy and the Raging Bank Stock Market Bubble!

V. Slowing Liquidity and Money Supply Trends

VI. Fiscal Surge Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP Composition

VII. The Fiscal Cost of Stimulus Driven GDP: Record Public Debt

VIII. Employment Paradox: Full Employment, Slower GDP—What’s Going On?

IX. Labor Force Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation

X. Liquidity as a Mirror of the GDP; Phase Two of BSP’s Easing Cycle

XI. Salary Loans: A Proxy for Financial Distress?

XII. CPI Distortions and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope

XIII. Conclusion: The Politics of Numbers: GDP and the CPI, Faith in the Overton Window 

Q1 2025 5.4% GDP: The Consensus Forecast Miss and the Overton Window’s Statistical Delusion 

A crucial Q1 2025 GDP forecast miss by the consensus, and why embracing mainstream ideas can be perilous for investors. 

I. BSP’s Easing Cycle and Mainstream’s GDP Expectations 

Q1 2025 GDP should fully reflect the initial phase of the Bangko Sentral ng Pilipinas’ (BSP) easing cycle, launched in the second half of 2024 with three interest rate cuts and a reduction in the reserve requirement ratio (RRR). 

While this policy shift may be touted as stimulating credit growth and investment, its actual goal may be to inject liquidity into the system while simultaneously lowering debt servicing costs. 

The combined effects of the 2024 and 2025 easing phases are expected to influence the performance of Q2 and first-half 2025 GDP 

II. The Big Consensus Miss Versus a Contrarian View of the GDP

Figure 1

Two days before the Philippine Statistics Authority (PSA) released its Q1 2025 GDP estimates, consensus forecasts predicted a robust 5.9% growth rate. We challenged this optimism, arguing (in x.com) that it likely overestimated actual performance. (Figure 1, upper image) 

Three critical indicators provide essential clues to the economy’s trajectory: 

1. Bank Revenues Signal Weakening Demand 

First, the combined Q1 2025 gross revenues of two of the Philippines’ largest banks, BDO Unibank [PSE: BDO] and Metropolitan Bank & Trust [PSE:MBT], recorded a fourth consecutive quarterly decline since Q1 2024, with Q1 2025 marking the sharpest deceleration. 

Given that their revenues accounted for approximately 1.72% of 2024 nominal GDP (NGDP), this slowdown signals broader economic weakness. 

Despite aggressive lending, banks appear to be yielding diminishing returns. That said, while banks may be aggressively lending, they may not be "getting a bang for their buck," as an old saw goes. 

This trend underscores inefficiencies in credit allocation, potentially dampening economic activity. 

And yes, Financial GDP slowed in Q1 (Figure 1, lower window) 

2. Declining Headline CPI Reflects Softening Demand 

Headline CPI has now posted three consecutive quarters of decline. We interpret this not merely as a result of supply-side adjustments but primarily as a reflection of weakening aggregate demand—a point we have consistently emphasized. 

3. Fiscal Stimulus: Record Q1 Deficit-Financed Spending

Figure 2 

Third, public spending surged in Q1 2025, resulting in a record fiscal deficit for the period. This aggressive expenditure, designed to bolster GDP, was highlighted in last week’s analysis. (Figure 2, upper graph) 

However, this strategy carries risks, including crowding out private sector activity and exacerbating public debt. 

4. Trendlines and Economic Realities: The Shift to a Slower Growth Path 

Using the PSA’s peso-denominated figures, nominal GDP (NGDP) and real GDP (rGDP) reveal a secondary trendline that has guided economic performance since the pandemic recession. (Figure 2, lower visual) 

Seen from this perspective, this second trendline essentially extrapolates to a slowing GDP trajectory. 

With that said, unless the economy regains its primary growth path, this downward trend will persist, operating under the shadow of significant downside risks. 

We are both amused and amazed by the pervasive optimism—or mass delusion—among establishment analysts, who consistently, or rather perpetually, echo official predictions rather than scrutinizing actual data. 

This tendency, aimed at shaping the Overton Window—the range of ideas deemed acceptable in public discourse—reflects a patent disconnect from economic realities. 

III. On GDP: Methodological Skepticism and Political Incentives 

We are not staunch believers in GDP, which we believe is determined and calculated for political purposes. It relies on structural mismatches between the subjectivism of human actions and the objectivism of the empirical analysis underlying it. Consequently, its calculation is based on numerous flawed assumptions. 

In any case, although authorities can manipulate figures to promote their agenda (as neither the CPI nor GDP is subject to audit), economic reality will ultimately prevail 

Despite this, true enough, the Q1 2025 GDP growth rate of 5.4% fell significantly below consensus estimates, validating our cautious outlook. 

IV. The Financialization of the Economy and the Raging Bank Stock Market Bubble! 

The bank-finance sector’s real GDP growth slowed from 8.3% in Q1 2024 to 7.2% in Q1 2025. (Figure 1, upper chart, again) 

Despite this deceleration, its outperformance relative to other sectors boosted its GDP share to a record 11.7%, signaling the deepening "financialization" of the Philippine economy. 

Strikingly, despite this, bank GDP growth substantially slowed over the last five quarters, from Q1 2024 to Q1 2025 (13.1%, 10.2%, 8.7%, 6.5%, and 5%), affirming my analysis. 

The Raging Financial Stock Market Bubble

Figure 3 

Despite this, the PSE’s bank-dominated financial index continues to hit all-time highs (including this Friday or May 9)—more evidence of the disconnect between share prices and fundamentals or a growing sign of a stock market bubble. (Figure 3, topmost diagram) 

Instead of widespread public participation, its less apparent nature stems from rising share prices being driven mainly by the "national team" or the BSP's cartel- network of banks and financial institutions. 

Bear in mind, the free float market cap share of the top three banks has been instrumental in supporting and currently driving the PSEi 30 to its present levels. 

BDO, BPI, and MBT account for 24.2%—up from a low of 12.76% in August 2020—while including CBC, this rises to 25.9% of the PSEi 30 (as of May 9). These four listed banks rank among the top 10 by free float market cap. (Figure 3, middle chart)

The banks’ outperformance coincides with, or bluntly put, stems from, the BSP’s historic rescue efforts and massive subsidies during the pandemic, which have been carried over to this day.

The percentage share of turnover of the top five banks in the financial index has averaged 23% of the main board volume Year-to-date—indicating a heavy buildup of concentration activities or risk. 

In any case, while banks constitute 60% of the sector’s GDP, the outperformance of non-banks and insurance companies buoyed the sector’s GDP. 

V. Slowing Liquidity and Money Supply Trends 

Liquidity conditions eased further in Q1 2025, with the money supply-to-GDP ratio (M2 and M3) continuing its downward trajectory. (Figure 3, lowest image) 

This trend, which accelerated from 2013 to 2018 and spiked during the 2019–2020 pandemic recession with the BSP’s Php 2.3 trillion injection, has significantly influenced CPI through what the mainstream calls "aggregate demand." 

In the current phase of this cycle, since peaking in 2021, this key measure of credit-driven demand has slowed, contributing significantly to the recent CPI slowdown.

VI. Fiscal Surge Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP Composition 

The third indicator reinforcing our analysis is public spending.

Figure 4

Q1 2025 expenditures surged by 22.43%, outpacing revenue growth and resulting in a record Q1 fiscal deficit of Php 478 billion. 

This nominal spending boom translated into a significant GDP contribution, with government spending GDP spiking by 18.7%—the highest since Q2 2020—excluding government construction spending! (Figure 4, topmost graph) 

However, consumer spending GDP, while rising from 4.7% in Q4 2024 to 5.3% in Q1 2025, saw its share of national GDP decline from 74.7% to 74.3%. (Figure 4, second to the highest window) 

In contrast, government GDP’s share rose from 12.3% to 15.9%, reflecting a structural shift. 

These numbers reflect an ongoing trend: they reveal the peak of consumer spending at 80.6% in Q3 2002, which steadily declined to the 2020 range (67–75%), while conversely, since its 8% low in Q4 2005, government GDP has nearly doubled, with its trend accelerating since 2020. 

All these are evidence that there is no such thing as a free lunch, as whatever the government takes from the private sector for its expenditures or consumption comes at the latter’s expense—the crowding-out syndrome in motion. 

VII. The Fiscal Cost of Stimulus Driven GDP: Record Public Debt 

This shift comes at a cost—record Q1 2025 public debt. Public debt soared from Php 16.05 trillion in Q4 2024 to a historic Php 16.68 trillion, a net increase of Php 633 billion, financing the period’s Php 478.8 billion fiscal deficit! 

This quarterly debt increase, the highest since Q3 2022, reflects an upward trend! (Figure 4, second to the lowest chart) 

Furthermore, a weaker US dollar in March tempered debt growth, reducing the foreign exchange (FX) debt share to 31.8%. However, the FX debt share has been rising since its March 2021 trough. (Figure 4, lowest graph) 

Consequently, Q1 2025’s deficit-to-GDP ratio surged to 7.27%, far exceeding the government’s 5.3% target! 

Looking at all this, both macro (CPI, deficit spending) and micro (bank revenues, bank GDP) factors have converged to highlight a significant economic slowdown, yet despite the establishment’s cheerleading, the diminishing returns of artificial growth driven by implicit backstops—BSP easing and fiscal stimulus—will gradually take their toll and heighten risks. 

As it stands, this marks another round for this contrarian analyst. 

VIII. Employment Paradox: Full Employment, Slower GDP—What’s Going On? 

Let us now examine the other critical forces shaping the statistical economy—GDP.

Figure 5 

Not one among the establishment punditry seems to ask: While the Philippine economy nears full employment, instead of a boost, GDP has been declining—what the heck is going on? 

Employment reached 96.1% in March 2025, averaging 96.02% in Q1 2025 and 95.9% over the 25 months since January 2023, according to Philippine Statistics Authority (PSA) data. (Figure 5, topmost visual) 

However, this near-full employment masks structural weaknesses. 

Consumer per capita GDP, which peaked at 8.98% year-on-year in Q2 2021, has decelerated, with Q1 2025’s 4.4% growth—up slightly from 3.84% in Q4 2024—marking the second-slowest pace since the pandemic. 

IX. Labor Force Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation

While the workforce population continues to grow, the labor force participation rate has formed a "rounding top" pattern, indicating a gradual peak and a potential decline. In simpler terms, more people are being counted outside the labor force. (Figure 5, middle diagram) 

Why is this happening? 

A recent Congressional report on functional illiteracy in the education sector provides a critical clue. 

The Manila Times, May 7, 2025: "BETWEEN 2019 and 2024, 18 million students graduated from the country's basic education system despite being functionally illiterate. This was found by the Senate Committee on Basic Education during its April 30, 2025 hearing on the initial results of the 2024 Functional Literacy, Education, and Mass Media Survey (Flemms)." 

Assuming 16.2 million of these graduates remain in the labor force or are employed, while 10% (1.8 million) have joined the "not in the labor force" category (due to migration, mortality, or disengagement), approximately 32% of the labor force or 33% of the employed population is engaged in low-skilled work 

That’s right. Despite near full-employment data from the PSA, a large segment of the workforce is likely in low-skill, low-wage jobs, possibly concentrated in MSMEs or previously informal sectors, often earning at or below the minimum wage. 

This dovetails with Social Weather Stations (SWS) sentiment surveys, which continue to show elevated self-rated poverty (April 2025) and milestone hunger rates in Q1 2025.

In a nutshell, the most vulnerable population segments—those in low-wage, low-skilled jobs—are also the most exposed to inflation. 

These dynamics explain why poverty perceptions remain high despite supposedly strong employment numbers. 

The shrinking labor force could also be a symptom of “grade inflation,” producing a flood of graduates ill-equipped for skilled work. 

A closer look at PSA employment classifications reveals more. From January 2023 to March 2025, full-time employment averaged 67.3%, while part-time work averaged 31.9%. 

This implies a substantial portion of the workforce is underemployed or working in precarious conditions. The near-full employment figures may therefore overstate the true health of the labor market. 

In effect, the PSA’s employment data provides a façade—masking the fragility of both the labor market and broader economy. 

This explains the sluggish per capita consumption and, by extension, the national GDP. 

X. Liquidity as a Mirror of the GDP; Phase Two of BSP’s Easing Cycle 

Following the BSP’s historic rescue of the banking system during the pandemic, money supply metrics—particularly M1—have closely tracked GDP trends. (Figure 5, lowest chart) 

GDP peaked in Q1 2021, following the M1-to-GDP spike from Q3 2019 to Q3 2023. This spike reflected the pre-pandemic bank credit expansion, intensified by the BSP’s Php 2.3 trillion liquidity injection and other pandemic-related rescue measures. 

Since then, both GDP and M1 have slowed in tandem, though M1 has decelerated at a faster rate. 

This matters, because M1—comprising cash in circulation and demand deposits—underpins the transactions that generate GDP. 

Despite the BSP’s initial easing cycle in 2H 2024, liquidity growth continues to decelerate, even as Universal-Commercial bank credit expansion reaches record highs in peso terms (Q1, 2025) 

The lack of liquidity response to the first easing cycle prompted the BSP to implement a second phase: a deeper RRR cut, the doubling of deposit insurance coverage, and a fourth policy rate cut in April. 

However, monetary policy can only do so much in the face of structural issues. 

XI. Salary Loans: A Proxy for Financial Distress?

Figure 6

Wage earners are increasingly relying on salary loans to bridge the gap to offset reduced purchasing power 

While total salary loans (in pesos) have reached all-time highs, the growth rate of these loans has been slowing since Q1 2022—(strikingly) mirroring the trend in headline CPI. (Figure 6, topmost chart) 

However, slowing growth raises questions: Has the banking system reached peak salary loans? 

Has the pool of eligible borrowers maxed out? Are employees hitting credit limits for salary loans? Or are rising non-performing loans (NPLs) forcing lenders to tighten? (Figure 6, middle graph) 

Either way, the data signals distress among middle-income and lower-income workers, who are increasingly stretched and vulnerable.         

XII. CPI Distortions and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope

Headline CPI fell to just 1.4% in April (for 2Q GDP)—driven mainly by sharp food price declines. 

Yet little is said about the regulatory basis for this fall. Both rice and pork prices are subject to quasi-price controls via Maximum Suggested Retail Prices (MSRPs). And even here, compliance—particularly for pork—has been reportedly low. (Figure 6, lowest image)

Figure 7

Core CPI stabilized at 2.2% in April 2025, outperforming headline CPI since the MRSP. This reinforces the headline CPI’s decline due to regulatory maneuvers. The core index’s downtrend since Q2 2023 signals persistent demand weakness. 

However, rising month-on-month (MoM) rates suggest a potential bottom. This pattern mirrors previous episodes (2015, 2019), where food prices fell below Core CPI, acting as a staging point for the next inflation cycle. (Figure 7, topmost and middle charts) 

Regulatory and statistical distortions raise doubts about whether CPI distortions accurately reflect real market conditions. 

Another revealing metric is the spread between the national CPI and the Bottom 30% CPI, where food deflation for the Bottom 30% in April drove the spread sharply negative—reaching its lowest level since 2022—yet, while these numbers suggest that falling food prices for the poor should reduce hunger, the latest SWS survey indicates persistently high hunger rates. (Figure 7, lowest graph) 

Once again, the statistical data points diverge from lived experience. 

XIII. Conclusion: The Politics of Numbers: GDP and the CPI, Faith in the Overton Window 

The government’s CPI reveals numerous distortions, clearly being manipulated downward through regulation and statistical adjustments "benchmark-ism" to justify the BSP’s continued easing cycle, aimed at addressing debt and liquidity dynamics, as well as boosting GDP—which the establishment promotes as a stimulus. 

Yet behind the curated optimism—such as "upper-middle-income status"—lies a more disturbing truth: government statistics increasingly defy both economic logic and market signals. 

Market prices—USD Philippine peso exchange rate and Philippine Treasury yields—offer little support for these narratives. 

And yet, the Overton Window shaped by official optimism persists. 

Analysts, pundits, and policymakers alike remain obsessed with the hope it offers—ignoring hard realities staring them in the face. 

Until these contradictions are resolved, the statistical economy and the real economy will continue to drift further apart. 

Or, confronting these realities is essential to understanding the Philippine economy’s true trajectory. 

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power

  

The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch -- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference—that threatens to impoverish us by further destroying the value of our dollars—Dr. Ron Paul 

In this issue:

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power

I. Public Spending: A Rising Floor, Not a Ceiling

II. Shifting Power Dynamics: The Ascendancy of the Executive Branch

III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era

IV. Revenue Shortfalls: The Weakest Link

V. Crowding Out: Public Revenues at the Expense of the Private Sector

VI. Expenditure Trends: Centralization in Action as LGUs Left Behind

VII. Debt Servicing: A Growing Burden

VIII. Foreign Borrowing: A Risky Trajectory

IX. Savings and Investment Gap: The Twin Deficits

X. Twin Deficit Structure

XI. Mounting FX Fragility and Systemic Risks

XII. Fiscal Strain Reflected in the Banking and Financial System

XIII. Bank Liquidity Drain and Risky Credit Expansion

XIV. Conclusion: A Fragile Political Economy  

Philippine Fiscal Performance in Q1 2025: Record Deficit Amid Centralizing Power 

A record Php 478.8 billion deficit, driven by soaring spending and slowing revenues, exposes deepening fiscal imbalances and a dangerous shift toward centralized power, increasing risks to the Philippines’ economic stability         

Inquirer.net, May 01, 2025: "The Philippine government in March registered its largest budget deficit in 15 months as revenues contracted amid strong growth in spending. The state’s fiscal shortfall had widened by 91.78 percent year-on-year to P375.7 billion in March, according to the latest cash operations report of the Bureau of the Treasury (BTr). This was the biggest budget gap since the P400.96-billion deficit in December 2023. That sent the fiscal gap in the first quarter to P478.8 billion, 75.62 percent bigger than the shortfall recorded a year ago." (bold mine)

The establishment’s talking heads and pundits tend to gloss over unpalatable economic data, but let us fill in the blanks. 

This article dissects the Q1 2025 fiscal performance, highlighting the record deficit, shifting political power dynamics, and underlying economic vulnerabilities.

I. Public Spending: A Rising Floor, Not a Ceiling 

In March, we noted: "This suggests that the monthly average of Php 527 billion represents a floor! We are likely to see months with Php 600-700 billion spending." (Prudent Investor, March 2025) 

The 2025 enacted budget of Php 6.326 trillion translates to an average monthly expenditure of Php 527 billion.

Figure 1

However, public spending in March 2025 soared to Php 654.98 billion—the second-highest on record, surpassed only by December 2023’s Php 661.03 billion. Excluding seasonal December spikes, March 2025 set a new benchmark or a new high for monthly expenditure. (Figure 1, topmost window)

For Q1, public spending hit Php 1.477 trillion, representing 23.35% of the annual budget. This translates to a monthly average of Php 492.33 billion—Php 34.84 billion short of the official target. Nonetheless, Q1 spending ranked as the sixth-largest quarterly expenditure in history.

This aggressive spending pace underscores a pattern observed over the past six years, where the executive branch consistently overshoots the enacted budget. (Figure 1, middle image) 

Based on this path dependency, the Php 527 billion monthly average should indeed be considered a floor, with monthly expenditures likely to hit Php 600–700 billion—or higher—in subsequent months to meet or exceed the annual target.

II. Shifting Power Dynamics: The Ascendancy of the Executive Branch

Beyond the numbers lies a profound political shift. As we highlighted in March:

"More importantly, this repeated breach of the ‘enacted budget’ signals a growing shift of fiscal power from Congress to the executive branch." (Prudent Investor, March 2025) 

The consistent overspending suggests that Congress has implicitly ceded control over the power of the purse to the executive. 

This erosion of legislative oversight effectively consolidates political supremacy in the executive branch, rendering elections a formality in the face of centralized fiscal authority. 

Indeed, the executive’s growing control over the budget illustrates the erosion of democratic checks and balances among the three branches of the Philippine government. 

The widening gap between actual and allocated spending serves as a tangible indicator of this power shift, with the executive branch wielding increasing discretion over national resources. 

III. A Historic Q1 2025 Deficit: Outpacing the Pandemic Era 

The Q1 2025 budget deficit of Php 478.8 billion represents an All-Time high, surpassing even the deficits recorded during the pandemic-induced recession. (Figure 1, lowest diagram) 

It ranks as the sixth-largest quarterly deficit in history and the largest non-seasonal (non-Q4) shortfall. 

Annualized, this deficit projects to Php 1.912 trillion—14.5% above 2021’s record of Php 1.67 trillion! 

This alarming trajectory signals deepening fiscal imbalances, driven by a combination of unrestrained spending growth and the increasing prospect of faltering revenues. 

IV. Revenue Shortfalls: The Weakest Link 

As we observed last December: 

"Briefly, the embedded risks in fiscal health arise from the potential emergence of volatility in revenues versus political path dependency in programmed spending." (Prudent Investor, December 2024)

Figure 2

Q1 2025’s fiscal gap was exacerbated by a 22.4% year-on-year surge in expenditures—the highest since Q2 2020—coupled with a revenue shortfall. (Figure 2, topmost chart) 

March revenues contracted by 3.1%, dragging Q1 revenue growth down to 6.9%, a sharp slowdown from previous quarters. 

Importantly, the shift to quarterly VAT reporting distorts monthly fiscal data, making end-of-quarter figures critical for assessing fiscal health. 

Breaking down the revenue components: 

-Bureau of Internal Revenue (BIR): Collection growth decelerated slightly from 17.2% in 2024 to 16.7% in Q1 2025, reflecting steady but insufficient tax performance to close the spending gap. 

-Bureau of Customs (BoC): Growth improved from 2.4% to 5.7%, potentially driven by frontloaded exports and imports in anticipation of U.S. tariff policies under US President Trump. This trade dynamic may also bolster Q1 2025 GDP figures. 

-Non-Tax Revenues: Non-tax revenues plummeted by 41.21%, contributing only Php 66.7 billion in Q1 2025. The Bureau of the Treasury (BTr) attributes this to delayed GOCC dividend remittances, with only three GOCCs remitting Php 0.027 billion in Q1 2025 compared to 18 GOCCs contributing Php 28.23 billion in Q1 2024. The BTr expects non-tax revenues to recover starting May 2025 as GOCC dividends resume. (BTr, April 2025) (Figure 2, middle graph) 

This drastic reduction in GOCC remittances accounts for the bulk of the non-tax revenue shortfall, pulling the total revenue share down to 6.68%—the lowest since at least 2009. Since 2009, non-tax revenues have averaged a 12.4% share of total revenues, underscoring the severity of the Q1 2025 decline. 

The heavy reliance on non-tax revenues through volatile GOCC dividends exposes a structural vulnerability in fiscal planning. Delays in remittances, whether due to operational inefficiencies or governance issues within GOCCs, amplified the Q1 2025 deficit, forcing the government to draw on cash reserves and increase borrowing to bridge the gap. 

The broader implications are concerning. Tax collections from the BIR and BoC, while still growing, are insufficient to offset aggressive expenditure growth. The dependence on non-tax revenue windfalls introduces heightened unpredictability, as future shortfalls could exacerbate fiscal pressures if GOCCs underperform or remittances are further delayed. 

V. Crowding Out: Public Revenues at the Expense of the Private Sector 

Moreover, potential weaknesses in the economy or tax administration could lead to a substantial deceleration in tax revenue collections from the BIR and BoC, further widening the fiscal gap. 

More critically, this revenue crunch highlights a profound economic trade-off: the government’s growing resource demands, through taxes and non-tax collections, divert funds from the private sector, undermining productivity and long-term growth—a phenomenon known as the crowding-out effect.

Compounding these challenges, the inability or failure of near-record employment rates and unprecedented (Universal-commercial) bank credit expansion to significantly boost revenues signals softening domestic demand. (Figure 2, lowest visual) 

In fact, a chart highlighting the growing gap between public revenues and universal bank lending signals an increasing reliance on credit to drive GDP growth and sustain public coffers.

Figure 3

Declining core CPI, rising real estate vacancies, record-high hunger sentiment, and a decelerating GDP growth trajectory all indicate an economy struggling to convert nominal gains into sustainable fiscal outcomes. (Figure 3, topmost pane) 

If public revenue falters and the fiscal deficit explodes, the government may face heightened borrowing needs and rising interest rates, further straining fiscal health and increasing vulnerability to external economic shocks. 

VI. Expenditure Trends: Centralization in Action as LGUs Left Behind 

The 2019 Mandanas-Garcia Ruling mandated a larger revenue share for Local Government Units (LGUs), yet national government (NG) expenditures have consistently outpaced LGU spending since 2022 under the Marcos administration. 

 In Q1 2025: 

-LGU expenditure growth slowed from 12.6% in 2024 to 11.3%, reducing their share of total spending from 21.5% to 19.6%. 

-NG expenditure growth surged from 5.4% to 25.25%, increasing its share from 60.3% to 61.71%. Key drivers included infrastructure projects (DPWH) and public welfare programs (DSWD) in March. (Figure 3, middle image) 

This divergence reflects a deliberate centralization of resources, concentrating fiscal and political power in the national government while diminishing LGU autonomy. 

The trend aligns with the broader shift of fiscal authority to the executive, further entrenching centralized control. 

VII. Debt Servicing: A Growing Burden 

In the meantime, interest payments, a primary component of debt servicing, reached a record high in Q1 2025. 

While their growth rate slowed from 35.9% in 2024 to 24.9% in 2025, their share of total expenditures rose from 16% to 16.32%. (Figure 3, lowest chart)

Figure 4

Amortization costs plummeted by 87.26%, reducing the total debt servicing burden by 65.3%. (Figure 4, topmost graph)

Mainstream narratives have previously portrayed this as a sign of fiscal improvement—but this is misleading.

The decline in debt servicing is merely a temporary reprieve. With the historic Q1 deficit, future borrowing—and therefore future debt servicing—will inevitably rise.

Moreover, the touted "fiscal consolidation" rests on a flawed assumption: that economically sensitive, variable revenues will increase in lockstep with programmed spending.

The Q1 2025 deficit necessitated a sharp increase in financing, with the Bureau of the Treasury’s borrowing doubling from Php 280.79 billion in 2024 to Php 644.12 billion this year. (Figure 4, second to the highest image)

While the Treasury’s Q1 2025 cash position reached historic highs, it returned to a deficit of Php 325.56 billion in March. This implies the need for increased short-term borrowing to meet immediate cash requirements.

If the deficit trend persists, full-year borrowing targets may need to be revised upward.

As evidence, Public debt surged by Php 319.257 billion month-on-month to a record Php 16.632 trillion in February 2025, marking a historic high. March data, expected next week, may reveal further escalation. (Figure 4, second to the lowest diagram)

This debt increase, driven by robust programmed spending and slowing revenue growth, underscores the deepening fiscal imbalance. 

Yet, the gap between the nominal figures of public debt and government spending continues to widen, reaching unprecedented levels and signaling heightened fiscal risks.

VIII. Foreign Borrowing: A Risky Trajectory

A notable shift in Q1 2025 was the increased reliance on foreign exchange (FX)-denominated share of debt servicing, which surged from 15% to 47.6% on increases in interest and amortization payments. (Figure 4, lowest pane)

This trend suggests a potential roadmap for 2025, with foreign borrowing likely to rise significantly. The implications are multifaceted: (as previously discussed) 

-Higher debt leads to higher debt servicing—and vice versa—in a vicious self-reinforcing feedback loop. 

-Increasing portions of the budget will be diverted toward debt repayment, crowding out other government spending priorities. In this case, crowding out applies not only to the private sector, but also to public expenditures. 

-Revenue gains may yield diminishing returns as debt servicing costs continue to spiral. 

-Inflation risks will heighten, driven by domestic credit expansion, and potential peso depreciation 

-Mounting pressure to raise taxes will emerge to bridge the fiscal gap and sustain government operations. 

IX. Savings and Investment Gap: The Twin Deficits 

The Philippine economic development model continues to rely heavily on a Keynesian-inspired spending paradigm. This framework is a core driver behind the record-breaking savings-investment gap. 

A key policy anchor supporting this model is the BSP’s long-standing easy money regime, which provides cheap financing primarily to the government and elite sectors. This is intended to stimulate spending through a trickle-down mechanism—boosting GDP while funding government projects, including those often criticized as boondoggles. 

However, this approach comes at a significant cost: it depresses domestic savings. 

Fiscal spending is an integral component of this paradigm. 

During the pandemic recession, the government’s role as a "fiscal stabilizer" expanded significantly, shaping GDP performance in the face of private sector weakness. 

However, government spending does not come without consequences. It competes with the private sector for scarce resources and financing, diverting them in the process. The result is structural supply constraints, forcing the economy to import goods to fill domestic shortages created by demand-side excess. 

Furthermore, the BSP’s USD-PHP foreign exchange ‘soft peg’ has the effect of overvaluing the peso and underpricing the dollar. This policy further fuels demand for imports and external financing, reinforcing the external deficit. 

X. Twin Deficit Structure

Figure 5

Unsurprisingly, this credit-fueled, trickle-down model has produced a classic “twin deficit” scenario—wherein fiscal imbalances are mirrored by trade deficits. (Figure 5, topmost visual)

As the budget gap soared to historic levels during the pandemic, the trade deficit also expanded to record levels.

With the current political and economic thrust toward centralization, this dynamic is unlikely to reverse. This reality highlights a structural barrier that undermines potential benefits from global trade shifts, such as those arising from Trump’s protectionist tariff regime.

Under Trump’s regime, the Philippines, with one of the region’s lowest tariff rates, remains structurally unprepared to capitalize, due to policies that prioritize consumption over investment, perpetuating reliance on imports and external financing—as previously discussed. 

Although the trade gap widened by 12.8% year-on-year in Q1 2025—from USD 11.264 billion to USD 12.71 billion—the all-time high in the fiscal deficit points to an even larger trade gap in the quarters ahead. This will only deepen the twin deficit conundrum. 

XI. Mounting FX Fragility and Systemic Risks 

Even with support from external borrowings, the growth of BSP’s net foreign assets has largely vacillated following multiple spikes in 2024. This suggests emerging limitations in the central bank’s ability to manage its FX operations effectively. (Figure 5, middle graph) 

Despite a recent rally in the Philippine peso—driven by broad dollar weakness and BSP interventions—fragilities from growing external liabilities remain as explained last week. 

These vulnerabilities are likely to magnify systemic risks, even as establishment economists—fixated on rigid quantitative models—fail to acknowledge them. 

XII. Fiscal Strain Reflected in the Banking and Financial System 

Fiscal strains are increasingly impacting the banking system, a dynamic the public scarcely recognizes.

The BSP and its cartelized network of financial institutions have engaged in inflationary financing.  Philippine banks have been absorbing a significant share of government securities through Net Claims on Central Government (NCoCG). (Figure 5, lowest chart) 

These claims, representing banks’ holdings of government debt, peaked at Php 5.54 trillion in December 2024 but slipped to Php 5.3 trillion in February 2025, reflecting slight easing. 

Meanwhile, the BSP’s NCoCG, following the historic Php 2.3 trillion liquidity injections in 2020-21, remains elevated, fluctuating between Php 400 billion and Php 900 billion since 2023, underscoring its role in deficit financing.

Figure 6

Although the growth of NCoCG for Other Financial Corporations (OFCs), such as investment firms and insurers, has slowed since Q1 2024, it reached a record Php 2.491 trillion in Q3 2024 before declining to Php 2.456 trillion in Q4 2024. (Figure 6, topmost image) 

Notably, the surge in NCoCG for banks, OFCs, and the BSP began in 2019 and accelerated thereafter, coinciding with the "twin deficits." 

Essentially, the Q1 2025 fiscal deficit of Php 478.8 billion and trade deficit of USD 12.71 billion—highlights the financial sector’s entanglement with fiscal imbalances. 

XIII. Bank Liquidity Drain and Risky Credit Expansion 

Compounding this, the spike in the banking system’s record NCoCG has coincided with the all-time high in Held-to-Maturity (HTM) assets, government bonds held by financial institutions until maturity, which have significantly reduced banks’ liquidity. (Figure 6, middle chart) 

This led to the cash-to-deposits ratio hitting a historic low in February 2025, as banks locked funds in HTM assets to finance the government’s borrowing. (Figure 6, lowest graph) 

In response, the BSP has implemented a series of easing measures: two reductions in the Reserve Requirement Ratio (RRR) within six months, the doubling of deposit insurance in March 2025, and four policy rate cuts in eight months—officially marking the start of an easing cycle—as previously analyzed. 

In parallel, banks have ramped up lending, particularly to risk-sensitive sectors such as consumers, real estate, trade, and utilities. This credit expansion is often rationalized as a strategy to improve capital adequacy ratios in line with Basel standards. However, in practice, it raises sovereign exposure, increases sensitivity to interest rate fluctuations, and thereby amplifies credit, economic, and systemic risks. 

XIV. Conclusion: A Fragile Political Economy 

In sum, the buildup in fiscal risks is no longer confined to the government budget spreadsheets—it permeates into the broader economy and financial markets. 

As we concluded last March: "the establishment may continue to tout the supposed capabilities of the government, but ultimately, the law of diminishing returns will expose the inherent fragility of the political economy. This will likely culminate in a blowout of the twin deficits, a surge in public debt, a sharp devaluation of the Philippine peso, and a spike in inflation, reinforcing the third wave of this cycle—heightening risks of a financial crisis." (Prudent Investor, March 2025) 

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References 

Prudent Investor Newsletter, January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden March 23, 2025, Substack 

Prudent Investor Newsletter, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls March 9, 2025 Substack 

Prudent Investor Newsletter, October’s Historic Php 16.02 Trillion Public Debt: Insights on Spending, Employment, Bank Credit, and (November’s) CPI Trends December 9, 2025 Substack 

Philippine Bureau of Treasury, Q1 Revenue Collections and Expenditures Sustain Growth, April 29, 2025 treasury.gov.ph