Soaring interest payments, especially for debts that piled up to fight the Covid-19 pandemic, may slow down fiscal consolidation or budget-deficit reduction in the Philippines, according to the think tank Oxford Economics.
"Because government deficits have ballooned quickly in the last few years, a larger proportion of government spending is being allocated to interest payments. It appears that Indonesia and the Philippines have been the most affected" in Asia-Pacific, Oxford Economics assistant economist Adam Ahmad Samdin said in a Nov. 6 report.
Documents on the proposed 2025 budget showed that the Philippine government is setting aside a record P2.05 trillion next year to repay debts, of which over P848 billion will service interest slapped on borrowings.
From this year's total debt-payments program of P2.03 trillion, P763.4 billion shall be for interest payments.
According to the latest mid-year report of the Cabinet-level Development Budget Coordination Committee (DBCC), the interest-payments program for 2024 was jacked up from P670.5 billion originally, or an additional P93 billion, "due to the larger deficit requirement and higher financing costs amid elevated interest rates and foreign exchange volatility."
As of end-September 2024, interest payments jumped 26.8 percent year-on-year to P583.3 billion, although a bit smaller than the P583.4 billion allocated for the nine-month period.
Historical Bureau of the Treasury (BTr) data showed that from annual interest payments of over P200 billion to P300 billion pre-pandemic until 2020, yearly servicing of interest climbed to P429.4 billion in 2021, P502.9 billion in 2022, and P628.3 billion in 2023.
Interest payments' share to gross domestic product (GDP) hence rose from 1.8 percent of GDP in 2019 to 2.1 percent in 2020, 2.2 percent in 2021, 2.3 percent in 2022, and 2.6 percent in 2023, BTr data showed.
The ballooning debt coupled with more-than-usual expenditures during the pandemic had bloated the budget deficit, such that the Marcos Jr. administration is embarking on a fiscal consolidation program aimed at narrowing the gap to 3.7 percent of GDP in 2028 when President Ferdinand Marcos Jr. steps down from office.
However, based on the DBCC's own projections, interest payments will continue to increase to P977.7 billion in 2026, P1.06 trillion in 2027, and P1.13 trillion in 2028.
Across Asia-Pacific, Samdin said "post-pandemic progress on fiscal consolidation will likely be slow, given that revenues aren't likely to surge nor expenditures cut significantly."
"Changes to tax policy are generally useful for government revenue growth, but we think that boosts from this channel will only be temporary given that tax changes tend to be unpopular," Samdin added.
According to Samdin, "changes to tax policy in the Philippines, India, Vietnam, and Malaysia should also help support government revenues."
Here in the Philippines, pending tax reform measures in Congress include slapping excise tax on single-use plastics, hiking the motor vehicle user's charge (MVUC), mining fiscal rationalization, and the Capital Market Efficiency Promotion Act (CMEPA) carved out of the previous Duterte administration's Passive Income and Financial Intermediary Taxation Act (PIFITA) proposal.
But the Department of Finance (DOF) had expressed alarm about its estimates showing that CMEPA would cost the government a total of P140.1-billion foregone tax revenues in the next four years, a reversal of the up to P10.8-billion incremental revenue gains from PIFITA.