Targeted tax incentives and less borrowings may help Philippines avert ‘growth recession’ — CPBRD

By Kenneth Christiane L. Basilio, Reporter

THE PHILIPPINE government should boost industrial output through targeted tax incentives while cutting reliance on borrowing, allowing the private sector to drive economic activity and support a slowing economy that showed signs of a “growth recession” last year, a congressional think tank said.

The Congressional Policy and Budget Research Department (CPBRD) said Philippine job data point to a recession based on an economic indicator that flags a looming slowdown when the three‑month average unemployment rate climbs half-a-percentage point above its past-year low.

“The burgeoning unemployment problem is likely related to the demonstrably hamstrung industrial sector,” the 24-page report, authored by David Joseph Emmanuel Barua Yap, Jr., Ma. Kristina P. Ortiz and Krishna Margaret U. Mirida, said.

The think tank said employment data breached the Sahm rule for five months from July to November 2025, while seasonally adjusted job figures from 2023 to 2025 showed the threshold was crossed for nine months from February to October 2025.

Seasonally adjusted job data from 2021 to 2025 showed that the Sahm rule was breached only in November 2025, it added.

“All outcomes indicate substantial labor market stress, with employment contracting by 1.76 million workers on average during Sahm — signal months in which the labor force declined or stagnated, and youth unemployment peaking at 3.2 percentage points year on year,” the CPBRD said.

“Viewed in conjunction with the appreciable slowdown of the Philippine economy in the third quarter, evidence suggests that the Philippines entered a ‘growth recession’ in the latter half of 2025,” it added, referring to the revised 3.9% gross domestic product (GDP) growth in the third quarter.

While a formal recession is defined as two consecutive quarters of contraction, recent economic data have raised concerns over a “growth recession,” where GDP growth remains positive amid rising unemployment and underemployment.

Philippine GDP grew by 4.4% in 2025, slowing from 5.7% in 2024, and below the Development Budget Coordination Committee’s 5.5%-6.5% goal. In the fourth quarter, GDP expanded by a weaker-than-expected 3% in a period usually buoyed by holiday spending.

Unemployment rose to 4.4% year on year in November despite the holiday hiring season, translating to 2.25 million jobless Filipinos, defying the usual trend of job gains during the period.

“The numbers constitute evidence that the Philippines may have been in a recession for most of 2025,” the CPBRD said.

The findings underscore mounting pressure on the government to push through reforms aimed at averting a full-blown recession. Policymakers should boost industrial activity by cutting tax and regulatory burdens, while continuing the state’s fiscal consolidation effort, the CPBRD said.

“Given the established linkages across industrial sector performance, quality employment generation, and income generation, the government is enjoined to pursue policies that would unleash the productive potential of Philippine industries,” it said.

Targeted tax exemptions, such as rebates or cuts for “high employment multiplier” industries like manufacturing, logistics and energy sectors, should be implemented to boost job creation and support the development of a sustainable industrial base, the think tank said.

“The cumulative burden of regulatory compliance costs and taxes spanning multiple agencies constrains firm productivity, expansion and job generation potential,” the CPBRD said.

Policymakers should also improve zoning by clustering industrial sites through a public infrastructure program in the suburbs, while cutting tariffs on goods that could enhance worker and production productivity to help spur economic growth, it added.

The CPBRD said the government should also establish a “robust dialogue mechanism” between the private sector and policymakers to ensure industrial policy remains responsive to evolving business needs.

There should also be a review of the wage-setting mechanism to ensure the current system remains effective and responsive to the job market, it added.

Policymakers should also rein in spending and avoid stimulus programs, the think tank said, warning that such measures could backfire and worsen the country’s debt position.

“Insisting upon yet another expansion in government spending to accommodate a stimulus program would inevitably lead to higher debt servicing requirements, an even larger debt overhang, and a heightened risk of a default,” it said.

The Philippines’ outstanding debt climbed to a record P17.71 trillion in 2025, exceeding the projected year-end level of P17.36 trillion by 2% and rising by 10.32% from P16.05 trillion a year earlier.

This brought the outstanding debt as a share of gross domestic product (GDP) to 63.2% as of end-2025, up from 60.7% a year earlier, the Bureau of the Treasury said.

This marks the highest annual debt-to-GDP ratio in two decades, surpassing the 65.7% recorded in 2005. It also exceeds the 60% threshold that multilateral lenders consider manageable for developing economies, as well as the government’s end-2025 projection of 61.3% under its updated medium-term fiscal framework.

“At best, a stimulus program would be exchanging one crisis for another,” the CPBRD said. “At worst, it would compound the ongoing economic slowdown with a debt crisis.”

“Instead, the government is advised to aggressively pursue fiscal consolidation, improve public expenditure efficiency, and prioritize investment over consumption,” it added.

Meanwhile, the slowdown in growth could be largely attributed to the Philippines’ inability to attract investments, coupled with government underspending that has weighed on economic growth.

“This reflects deeper structural constraints such as weak private investment, uneven public spending, governance concerns, and external headwinds that have dampened confidence and productivity,” John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said in a Viber message. “Industry reforms that strengthen ease of doing business, infrastructure delivery, digitalization, and the overall investment climate are therefore critical.”

IBON Foundation Executive Director Jose Enrique “Sonny” A. Africa said policymakers should look beyond tax breaks to spur industrial activity, stressing the need for broad and ambitious reforms to usher in a golden age of industrial development.

“The government really has to have much more ambition and industrial vision for the country,” he said in a Viber message.

“This includes trade protection, regulation of foreign investment to build domestic capacity, promoting indigenous science and technology, strategic coordination of credit and finance, tax and other fiscal incentives, public investment in infrastructure, and expanding mass purchasing power,” he added.

The government should also look at letting local officials handle industrial development policies, Leonardo A. Lanzona, an economics professor at the Ateneo de Manila University, said.

“In this way, the industrial policy will be more in tune with the needs and resources of their communities,” he said in a Facebook Messenger chat.