Moody’s: ProGRESS bill could risk delaying fiscal consolidation

By Katherine K. Chan, Reporter

THE National Government’s proposed tax reforms, if enacted, risk further delaying the country’s fiscal consolidation, especially given its widening budget deficit and record debt-to-gross domestic product (GDP) ratio, Moody’s Ratings said.

Moody’s Ratings Assistant Vice-President for Ratings Young Kim said that net gain from the measures under the Promoting Growth, Revenue, and Equity towards Socio-economic Sustainability (ProGRESS) bill will likely prove marginal.

“The government’s proposed ProGRESS package would raise the personal income tax exemption threshold and ease the burden on micro and small enterprises, offset by higher excises on sweetened beverages, tobacco and alcohol, a new plastics levy, and a 15% minimum tax on large multinationals,” Mr. Kim told BusinessWorld in an e-mailed response to questions.

“While this could bring additional offsetting revenue, it also introduces some uncertainty, as the net gain may prove smaller and the package still needs to pass Congress as proposed,” he added.

The Department of Finance (DoF) is proposing the so-called ProGRESS bill, a comprehensive tax reform package involving a set of tax breaks, new or updated levies on sin products and excise tax, as well as a wealth tax, among others.

Under the proposed bill, the DoF is pushing for new or higher taxes on sweetened beverages, e-cigarettes, flexible plastic products, luxury vehicles, and private aircraft.

This package alone is projected to generate an average revenue of P129.68 billion annually from 2027 to 2030.

It was designed to offset the estimated P81.73-billion annual losses from President Ferdinand R. Marcos, Jr.’s call to raise the threshold for income tax exemptions to P350,000 from P250,000 for low- and middle-income earners and the minimum corporation income tax exemption for micro and small enterprises.

Although the proposed tax relief measures are still pending in Congress, Mr. Kim warned that they could further undermine the country’s already fragile fiscal position.

“The tax relief measures — if enacted without offsetting revenue measures, though it is still too early to assess the full fiscal impact — would erode revenue and further delay the government’s fiscal consolidation,” he said.

In mid-2022, the Marcos administration unveiled the Medium-Term Fiscal Framework 2022-2028, where it targeted an economic growth of 6.5%-8%, a debt-to-GDP ratio of 51.1% and fiscal deficit-to-GDP ratio of 3% by end-2028.

However, Mr. Kim noted that the government’s fiscal consolidation path has been under strain amid the economy’s tepid growth and ballooning debt stock.

“Weaker near-term growth adds to this pressure, as softer economic activity weighs on revenue buoyancy and, in turn, the pace of deficit reduction,” he said.

The country saw its worst economic performance since the pandemic as it grew by 2.3% in the second quarter amid a major investment slump and subdued household consumption.

This was the slowest pace recorded since the 3.8% contraction in the first quarter of 2021, and since the 1.8% growth in the fourth quarter of 2009 outside the pandemic.

“Against this backdrop, the debt-to-GDP, which rose materially during the pandemic, has yet to meaningfully reverse, while debt affordability is weakening, interest payments as a share of revenue are rising as cheaper pandemic-era debt is refinanced at today’s higher yields,” Mr. Kim said.

“Sustained revenue erosion without offsets would therefore weigh on fiscal strength,” he added.

In the second quarter of 2026, the country’s debt-to-GDP ratio rose to 66% from 65.2% in the first quarter. This was the highest ratio in over two decades or since the 71.6% seen at end-2004.

This came as its debt stock swelled to an all-time high of P19.07 trillion at end-June, inching up by 2.8% from P18.55 trillion as of end-May. Year on year, it also rose by 10.41%.

Based on the Philippine Development Plan 2023-2029 Midterm Update released in May, the government expects the country’s debt-to-GDP ratio to settle between 60% and 63% this year. By next year, it could fall to 59%-62% before declining further to 58%-61% by 2028.

Meanwhile, the government’s debt is expected to hit P19.77 trillion by yearend and further increase to a record P21.48 trillion by end next year due to higher principal repayments and continued budget deficit, according to the 2027 Budget of Expenditures and Sources of Financing.

For Mr. Kim, the risks tied to the ProGRESS bill will hinge on whether the government can set measures that would compensate for foregone revenues and its capacity to boost revenue mobilization and spending efficiency. 

“That said, the near-term 2026 measures appear broadly revenue-neutral, reflecting spending reprioritization and a measured approach to support despite weak growth,” he said.

“Ultimately, the key risk is the credibility of the medium-term consolidation path, which will depend on offsetting the proposed tax exemptions, further revenue mobilization and spending efficiency through reforms and digitalization, and management of growing spending pressures tied to physical climate risks,” he added.

As of mid-August, about 40 bills related to the ProGRESS package have been filed under the House of Representatives, with only two measures hurdling committee level, while seven were filed in the Senate.