BMI: Philippines budget deficit to narrow in 2026

MANILA, Philippines — The Philippines’ budget deficit is expected to narrow marginally next year despite higher revenue collections, as state spending continues to outpace income, according to BMI Country Risk & Industry Research.

BMI projected the country’s fiscal shortfall to reach 5.4 percent of gross domestic product (GDP) in 2026, slightly down from its 5.5 percent forecast for 2025.

The projection is wider than the government’s 5.3 percent deficit target for next year.

The proposed P6.793-trillion national budget for 2026 is equivalent to about 22 percent of GDP and up by 7.4 percent from this year. If passed, the plan will lift state outlays by 9.6 percent to P6.9 trillion, with infrastructure, education and defense remaining top priorities.

According to BMI, the Philippines has consistently underestimated both revenues and expenditures, but the latter by a larger degree.

“We think it will overshoot its 2026 deficit target by 0.1 percentage point,” it said.

Revenue collections are expected to improve to 17.2 percent of GDP, higher than the government’s 16.2 percent projection and up from 16.7 percent last year, partly boosted by asset sales and new taxes such as the digital value-added tax.

Still, BMI warned that these gains are unlikely to be sustained given weak efforts to expand the tax base.

On the spending side, education and defense are both set to see double-digit increases of around 14 percent next year. The education budget, at P1.224 trillion or four percent of GDP, meets the United Nations Educational, Scientific and Cultural Organization (UNESCO) benchmark, but still falls short in addressing the country’s classroom shortage.

Only P28 billion, or 0.1 percent of GDP, was earmarked for new classrooms, far below the Department of Education’s estimated need of 1.4 percent of GDP.

Meanwhile, defense spending continues to rise amid tensions in the West Philippine Sea. Even with consecutive double-digit hikes, however, the military budget remains below international benchmarks, at just 1.4 percent of GDP.

BMI flagged other weaknesses in the 2026 spending plan, including the lack of a clear strategy to address risks from artificial intelligence to the labor market and economy.

Funding for digital infrastructure remains low at 0.1 percent of GDP, while the budget for the Technical Education and Skills Development Authority has been trimmed slightly.

“The risks to our deficit forecast are tilted to the downside. For starters, we expect the economy to grow by 5.2 percent in 2026, lower than the government’s six to seven percent projection,” BMI said.

The Fitch Group unit also flagged possible trade tensions should the United States impose retaliatory tariffs against countries implementing digital taxes.