The country’s economic growth is expected to remain subdued this year as a tighter ₱6.793-trillion national budget limits fiscal support, even as overall government spending rises, according to London-based think tank Capital Economics.

In a Jan. 9 report, Capital Economics senior Asia economist Gareth Leather and chief Asia economist Mark Williams projected Philippine gross domestic product (GDP) growth of 4.5 percent in 2026, before rising to five percent in 2027—both below already downscaled government targets.

Capital Economics expects full-year 2025 growth at four percent, falling short of the government’s 5.5- to 6.5-percent goal. The downscaled target for 2025 has already been conceded as out of reach by Balisacan, the country’s chief economist, last December. GDP performance for 2025, including fourth-quarter data, will be reported on Jan. 29.

Balisacan had said the Philippines could still rank among Asia’s fastest-growing economies in 2025, even if full-year growth slips to just below five percent. “The emerging growth scenario for 2025 is something like 4.8 to five percent,” he had said, after the first three quarters averaged five percent.

Capital Economics highlighted that President Ferdinand R. Marcos Jr. approved the 2026 budget last week amid ongoing corruption concerns. The Department of Public Works and Highways (DPWH), at the center of flood control graft allegations, saw its allocation halved.

“That means the drag from lower infrastructure spending will persist,” the think tank said. The latest Department of Budget and Management (DBM) data showed that government infrastructure spending plunged by 40.1 percent to ₱65.9 billion in October last year from ₱110 billion a year ago on the back of persistent delays in project payments stemming from a continued squeeze on public infra expenditures in the aftermath of the corruption scandal.

The think tank also noted that Marcos vetoed nearly 40 percent of unprogrammed appropriations (UAs), referring to funds that had been approved but remained unallocated and were often seen as vulnerable to corruption. Since UAs are not covered by regular budget financing, they can only be funded by excess or new tax and non-tax revenues, as well as foreign loans for specific projects and programs.

Despite cuts to the DPWH budget, total government spending is still expected to rise by around seven percent this year, as reductions in infrastructure are offset by higher allocations for education, social welfare, and health.

However, Capital Economics warned that “fiscal policy is unlikely to provide much support to the economy as the government attempts to rein in the budget deficit,” referring to the Marcos Jr. administration’s plan to narrow the Covid-19-induced yawning fiscal gap through its medium-term fiscal framework (MTFF). For 2026, the government had programmed a smaller budget deficit equivalent to 5.3 percent of GDP from a projected 5.5 percent in 2025, the think tank noted.

As for inflation, Capital Economics forecast a headline rate of 2.3 percent in 2026 and three percent in 2027, keeping it within the government’s target of two- to four-percent annual price increases deemed manageable and conducive to economic growth.

Capital Economics also projected that the Bangko Sentral ng Pilipinas (BSP) will cut its policy rate by 25 basis points (bps) in the first quarter of 2026, with the rate expected to remain at four percent through the end of 2026 and 2027. “Alongside subdued inflation... we remain comfortable with our view that the central bank will deliver a couple more interest rate cuts,” the think tank said. The key interest rate currently stands at 4.5 percent.

The Philippine Statistics Authority (PSA) reported last week that full-year inflation for 2025 settled at 1.7 percent, marking a nine-year low, despite ticking up slightly to 1.8 percent in December. “We are targeting just two- to four-percent inflation, but I think we will achieve less than that,” Balisacan had noted, adding that interest rates have been declining and that the BSP has indicated it will continue its rate-cutting trend.