OECD says Philippines must confront fiscal gap, reduce tax perks

The Philippines must step up efforts to reduce its persistent budget deficits and consider paring back fiscal incentives to help it sustain its economic momentum, according to the Organisation for Economic Co-operation & Development.

The government must also enforce reforms to boost investments and job creation, as well as improve its climate resilience, the OECD said in its inaugural Economic Survey of the Philippines launched on Thursday.

Over the past decade and a half, the Southeast Asian nation has been one of the world’s fastest-growing emerging market economies, with per capita income more than doubling since 2010 and poverty rate halved, it said.

“The Philippines now faces significant headwinds to sustain strong growth and further enhance living standards,” the OECD said, citing slowing population growth, increasing climate risks, and disruptions in global trade.

“Fiscal policy should remain prudent to prepare for future shocks and rising expenditure pressures, including from infrastructure investment, social protection and the climate transition,” the group said.

The OECD urged faster fiscal consolidation with budget deficits still elevated. The Philippines’ public debt stood at 62.2% of gross domestic product in 2025, above several Southeast Asian peers and a sharp increase from sub-40% before the pandemic.

The government can phase out value-added tax (VAT) exemptions for senior citizens and education, and opt for targeted cash transfers, according to the OECD. Corporate tax holidays can also be cut back, while expenditure-based incentives can encourage more investment.

With core inflation staying below the mid-point of the 2%-4% inflation target and GDP likely growing below trend in the short-term, there is room to further reduce the central bank’s policy rate, the OECD said.

It forecasts Philippine GDP to expand 5.1% in 2026 before picking up to 5.8% in 2027. Growth had slowed to 4.4% last year as a massive corruption scandal around flood-control infrastructure stalled government spending and dampened consumer and business confidence.

The OECD made reference to the graft scandal in its report, saying while the government has allotted funding for climate adaptation and flood management, “there is only limited scrutiny of the actual implementation of these projects.”

“Part of so-called ‘climate’ spending has been mishandled as a conduit for rent-seeking and political favor-trading, rather than a credible investment in adaptation,” it added.

The archipelagic nation faces increasing heat waves, floods and typhoons, so the government will have to prioritize adaptation in disaster-prone regions, the OECD said. — Bloomberg