Global debt watcher Fitch Ratings said the Philippines’ lackluster economic growth, which has hit record lows, is making it harder for the government to narrow its budget deficits, putting economic recovery ahead of fiscal consolidation.

Fitch said in an Aug. 20 commentary that the country’s proposed record budget of P7.2 trillion signals sluggish progress towards fiscal consolidation “weaker growth complicates the government's ability to reduce deficits”.

Domestic economic growth significantly slowed to a post-pandemic low of 2.3 percent in the second quarter of 2026, bringing the first-half growth performance to 2.6 percent—way below the government’s lowered growth target of 3.5 percent to 4.5 percent.

As of midyear, the national government’s (NG) fiscal deficit reached ₱786.8 billion, wider than the ₱765.5 billion shortfall recorded during the same period in 2025, as state spending outpaced revenue growth.

“While the upward revisions to deficits relative to our earlier assumptions are small, medium-term debt stabilisation and the evolution of the ‘BBB’ sovereign rating will depend increasingly on how sharply growth and investment recover from subdued levels,” Fitch said.

This slower output growth is already feeding directly into the state’s fiscal assumptions. Budget documents showed that President Marcos’ economic managers raised their fiscal deficit projections for 2026, 2027, and 2028 to 5.4 percent, 5.1 percent, and 4.8 percent of gross domestic product (GDP), respectively, from their previous assumptions of 5.3 percent, 4.8 percent, and 4.3 percent.

“Repeated upward revisions to medium-term deficit targets suggest the government continues to prioritise supporting growth over a faster pace of consolidation,” Fitch noted. This leaves risks tilted to a gradual deficit reduction over the medium term, with the 2030 deficit seen standing at 3.5 percent of GDP from the previously planned 3.1 percent.

Supporting these deficit revisions are massive shifts in revenue effort and spending plans, where the government lowered its medium-term revenue expectations to average around 15.5 percent of GDP, down from 16.7 percent assumed in the current year’s framework.

To compensate for the revenue shortfall, the government is cutting infrastructure spending plans to four percent of GDP, more than one percentage point (ppt) lower than the current budget projections of 5.1 percent.

However, scaling back public infrastructure could further weigh on the country's medium-term growth potential.

Domestic economic weakness is already seeping through both the public and private sectors. Gross fixed capital formation contracted eight percent quarter-on-quarter in the second quarter, reflecting global energy-price shocks and “public infrastructure disbursements which are still subdued following last year’s corruption investigations into flood-control projects.”

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. earlier said the central bank had projected second-quarter economic growth to pick up faster at 3.2 percent than the actual reading. He said the mismatch between the BSP’ higher assumption and the actual print “makes a difference in the way we decide on monetary policy.”

As a result, the government also lowered its growth assumption, now projecting GDP growth of five to six percent over the medium term, down from six to seven percent in the current year’s budget and 6.5 to eight percent two years ago.

Fitch noted that medium-term debt stabilization and the future of the 'BBB' sovereign rating—which was handed a negative outlook in April—will increasingly hinge on how sharply growth and investment recover from their currently subdued levels.