At the crossroads of a fiscal crisis: Why smart taxes (health taxes) are necessary

The Philippines is at risk of a credit rating downgrade. On April 20, Fitch revised its outlook on the Philippines from “stable” to “negative,” citing higher exposure to the global energy shock amid “higher post-pandemic government debt and a gradual and sustained deterioration in its external finance position.”

A credit downgrade would increase the cost of borrowing, dampening investments arising from the increase in the cost of capital. It would weaken overall confidence in the economy.

The possible credit downgrade becomes all the more disconcerting at a time when the Philippines is facing a crisis that is both global (brought about by the war on Iran) and domestic (brought about by internal governance issues).

Our debt position remains elevated following a sharp increase during the pandemic, and has since continued to grow faster than the economy. Outstanding debt grew by about 10.3% in 2025, compared to GDP growth of approximately 5.9%. This gap between debt and economic growth has kept the debt-to-GDP ratio high.

While deficits widened sharply during the pandemic — from 3.4% of GDP in 2019 to a peak of 8.6% in 2021 — they have since declined but remain elevated at around 5.6% in 2025. This suggests that the process of unwinding the deficit to pre-pandemic levels remains off-course, reflecting a structural gap that has yet to be fully addressed.

More broadly, fiscal indicators remain above the government’s medium-term objectives. For instance, earlier fiscal plans projected the debt-to-GDP ratio to fall below 60% by 2025, yet it has instead risen from 62.7% in 2022 to around 64.4% in 2025, highlighting the difficulty of restoring fiscal space despite ongoing consolidation efforts.

But the clearest sign of fiscal strain today is not simply the level of debt, but the growing burden of servicing it. A rising share of government resources is now being absorbed by debt servicing, increasing from around 27% of total revenues prior to the pandemic to about 40% in 2021, and rising further to 47.2% in 2025.

In nominal terms, allocations for debt servicing reached P2.1 trillion in 2025, exceeding the combined budget for health, education, and social protection, which stood at P1.8 trillion. This means that more public resources are being directed toward servicing past obligations than toward key investments in human capital and social protection.

This highlights a fundamental tradeoff: resources devoted to servicing past obligations crowd out the government’s ability to invest in current priorities.

Taken together, these developments suggest that the challenge is not merely cyclical. While the COVID-19 shock required higher borrowing, the failure to unwind fiscal indicators to pre-pandemic levels, together with incomplete fiscal adjustment and rising debt servicing, points to deeper structural fiscal weaknesses.

The growing risk of a credit downgrade underscores the urgent need for credible revenue reforms. Government is at a critical juncture and action (or inaction) spells the difference between a fiscal backslide and increasing capacity to expand support for the most vulnerable.

Our experience during the COVID-19 pandemic showed the importance of sound fiscal policy to sustain expanded spending for crises.

The Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act 10963) implemented in January 2018 broadened the country’s revenue base, and increased collections prior to the pandemic supported expanded spending on infrastructure and social services. Revenue-generating measures like the TRAIN Law strengthened the country’s fiscal buffer, supporting our COVID-19 response, including the funding for cash transfers to poor households.

Bureau of Internal Revenue excise tax collections in 2018 increased by P81 billion, mostly driven by the imposition of the sugar-sweetened beverage tax and the increase in tobacco taxes in TRAIN. Two years into the implementation of TRAIN, the lowest ever debt-to-GDP ratio in the country’s history was recorded (at 39.6%).

Thanks to TRAIN, the Philippines entered the COVID-19 pandemic with a relatively strong fiscal position, showing that fiscal buffers are built through sustained reforms over time, and rebuilding them must begin even during periods of stress.

Government measures intended to mitigate the current crisis are already eroding revenues. According to the Department of Finance, the recent suspension of excise taxes on LPG and kerosene is expected to result in revenue losses of around P4.1 billion over the next three months. Government, too, has set aside P238 billion from the 2026 budget to provide targeted subsidies for the most vulnerable, including transport, agriculture, and fisheries workers.

At the same time, middle-class Filipinos are feeling the burden of the fuel crisis and are asking the government for relief. It is in this context that Senator Bam Aquino and other legislators have filed bills increasing the tax brackets exempted from paying personal income taxes.

Further reliance on borrowing when the debt is already highly elevated is unsustainable. A heavier debt burden would increase future debt servicing costs and further limit the government’s ability to fund priority programs.

Rebalancing therefore requires stronger revenue mobilization. However, increasing taxes during a time of economic strain can impose additional costs on households — particularly the most vulnerable — and may further dampen economic activity. The challenge, therefore, is to identify revenue measures that deliver the greatest benefits while minimizing these tradeoffs. The task is not simply to raise revenues, but to do so wisely.

At a time when fiscal space is severely constrained, increasing health taxes offers a uniquely practical, efficient, and socially beneficial solution. These revenues free up resources elsewhere in the budget and strengthen the government’s ability to meet both current and future needs.

Excise taxes on harmful goods such as tobacco, alcohol, and sugar-sweetened beverages reduce harmful consumption that imposes costs on society, including higher healthcare spending and lost productivity. At the same time, they generate revenues and help ease the economic burden by reducing the incidence of costly health conditions and strengthening the government’s capacity to finance them. These taxes are also widely accepted by the public, and hence are most politically feasible.

The current crisis leaves little room for policy missteps. With fiscal space already tight, relying further on borrowing will only deepen existing pressures.

To be sure, government expenditures must likewise be rationalized. Do away with the inefficiency, the waste, and the corruption. And concentrate resources on providing relief and protection to the people and enabling economic recovery.

The choice is clear: act now to rebuild fiscal resilience through smart, targeted reforms, or face the increasing danger of a deep fiscal crisis and a prolonged economic downturn.

Gage Andal and Pia Rodrigo are researchers for Action for Economic Reforms.