THE pace of fiscal consolidation is expected to improve as the Philippines reins in government spending, Oxford Economics said.

In a research briefing, Oxford Economics said it “expects lower spending to contribute to improving fiscal balance.”

The budget deficit narrowed 14.51% to P270.9 billion in the first quarter, as spending slipped and revenues rose.

In March, the budget shortfall widened by 12.04% to P210.3 billion.

This year, the government has set a budget deficit ceiling of P1.499 trillion, equivalent to 6.1% of gross domestic product (GDP).

Oxford Economics said that the pace of fiscal consolidation will also depend on economic conditions.

“Although most economies are making efforts to bring down government debt levels, they will not find it easy against the current background of higher interest rates and slowing growth,” it said.

The Bangko Sentral ng Pilipinas (BSP) on Thursday paused its tightening cycle, keeping its key rate at 6.25%. It had hiked borrowing costs by 425 basis points since May 2022.

Inflation stood at 6.6% in April, bringing the four-month average to 7.9%. This was still above the BSP’s 6% full-year forecast and 2-4% target range.

The economy grew by 6.4% in the first quarter, its slowest growth rate in two years.

Oxford Economics also noted the need to bring down debt levels.

Outstanding government debt stood at a record P13.86 trillion at the end of March, bringing the latest debt-to-GDP ratio to 61%.

This is higher than the 60.9% seen at the end of December and the 60% threshold considered manageable by multilateral lenders for developing economies.

Citing the International Monetary Fund, Oxford Economics said that the effectiveness of fiscal consolidation in reducing debt will also depend on economic growth and inflation.

“Higher growth can boost nominal GDP, which in turn lowers the fiscal debt to GDP ratio. More generally, higher economic growth means higher government revenue, which itself reduces the fiscal deficit,” it said.

“High inflation also has the same impact on nominal terms, but its effect on the fiscal situation largely depends on where inflation is coming from. If it is driven by higher demand and therefore higher GDP, then it could help the fiscal balance. But if it’s from supply-push inflation, as has been the case over the last year or so, then the impact is unlikely to be clear-cut, as an increase in costs generally has adverse effects on economies,” it added. — Luisa Maria Jacinta C. Jocson