Rising debt costs and other mandatory expenditures are squeezing the Philippine government's fiscal room for next year, contributing to cuts in education, health and other social services even as the proposed national budget grows by 6% to P7.2 trillion, according to a congressional think tank.

Only P2.6 trillion, or 36.2% of the proposed 2027 budget, is considered "allocable" — the portion left for setting national priorities once mandatory obligations are covered — down from 38.9% this year and 43.6% in 2023, the Congressional Policy and Budget Research Department (CPBRD) of the House of Representatives said in its October budget brief.

The agency warned that reductions in key social services could undermine efforts to improve public services, close learning and health gaps, strengthen social protection and raise workforce productivity.

"The decrease in the budgets of key social services might constrain the government's ability to improve access to quality public services, address learning and health gaps exacerbated by recent crises, strengthen social protection systems, and enhance workforce and employability," the CPBRD said.

Debt burden set to cross P1 trillion

The squeeze comes as the debt burden — which includes interest payments and net lending — is set to breach P1 trillion for the first time, rising by 16.8% to P1.14 trillion from this year. Interest payments alone are projected at P1.11 trillion, equivalent to 15.5% of the proposed budget, after National Government debt reached P19.61 trillion as of end-August. For scale, that interest bill alone is just under half the size of the entire social services sector.

Primary expenditures will rise by 4.2% to P6.06 trillion, but their share of the total budget will fall to 84.1% from 85.6% this year and 90.7% in 2020, according to the CPBRD.

"The continued constriction of the budget share of primary expenditures amid consistent expansion in the budget share of debt burden means substantial reductions in spending space within the budget," it said.

Social services take the largest cut

Social services will remain the biggest spending sector at P2.46 trillion, but its allocation will fall by 5.5%, or P143.7 billion, from 2026 even as the overall budget increases by P407 billion. Health spending will decline by P95.7 billion, while education, culture and manpower development will fall by P68.5 billion. Social security, welfare and employment will receive P26.5 billion less.

The proposed subsidy for the Philippine Health Insurance Corp. (PhilHealth) will also drop by P55.3 billion to P74.4 billion following the unwinding of a one-time P60-billion fund restoration.

Mandatory and other nonallocable expenditures will account for P4.6 trillion, or 63.8% of the proposed budget, up from 61.1% in 2026. Automatic appropriations alone are projected at P2.71 trillion, including P1.32 trillion in national tax allotment transfers to local governments and P104.2 billion for the Bangsamoro Autonomous Region in Muslim Mindanao block grant.

Personnel services, net of automatic appropriations, will reach P1.89 trillion. Spending for military and uniformed personnel under personnel services is projected at P643.2 billion, while pension liabilities under the Pension and Gratuity Fund will hit P142.9 billion. Without structural reforms, noncontributory military and uniformed personnel pensions could climb to 1.6% of gross domestic product (GDP) by 2035 from 0.4% in 2025, the CPBRD said, citing World Bank projections.

Infrastructure expands as social outlays shrink

Economic services will expand by 17.8% to P1.83 trillion, driven partly by a 46.4% increase in communications, roads and transport spending to P739 billion. Public spending will rise by 13.8% to P1.47 trillion, with hard infrastructure spending up 43.6% to P867.5 billion — including P434.5 billion for national roads and P193.1 billion for railway systems. Still, the CPBRD noted that overall infrastructure spending will remain below the 5%-of-GDP benchmark for the second straight year.

The Department of Education will receive P976 billion, the largest allocation among departments, followed by the Department of Public Works and Highways with P644 billion. The Department of Transportation's allocation will more than double to P301 billion, largely on higher railway spending.

The proposed budget also earmarks P692.7 billion for climate-related expenditures, 6.8% higher than in 2026 but below the P1.08 trillion recorded in 2025. Mitigation spending, however, will fall to P11.2 billion from P65.8 billion.

The CPBRD argued that the quality and results of climate spending should matter more than the amount tagged for climate programs. "The central question should move beyond 'How much is tagged?' to 'Is the spending genuinely climate-responsive, well-targeted and producing measurable results?'" it said.

Weak execution compounds the squeeze

The fiscal squeeze is compounded by weak spending capacity across government agencies. National Government agencies disbursed less than 75% of their allocations on average from 2021 to 2025, with the overall disbursement rate falling to 65.1% in 2025 from 76.6% in 2022.

Twenty-one of 36 major agencies posted disbursement rates below 75% in 2025. The Department of Information and Communications Technology had the lowest rate at 22.3%, followed by the Public Works department at 35.6%, the Department of Human Settlements and Urban Development at 47.7% and the Transportation department at 50.2%.

"Budgetary increases for infrastructure should be accompanied by reforms aimed at improving project preparation, procurement, contract management, right-of-way acquisition, and inter-agency coordination," the CPBRD said.

It recommended requiring agencies with persistently low use rates — particularly the Public Works, Transportation, Information and Communications Technology and Human Settlements departments — to submit implementation improvement or catch-up plans and regularly report on corrective actions.

The CPBRD also called for measures to address rising debt service and pension costs, including military and uniformed personnel pension reforms, improved revenue mobilization and tax administration, expenditure rationalization and prudent borrowing. It urged Congress to strengthen results-based budgeting and assess whether government programs are producing measurable development outcomes rather than focusing only on their appropriations.

"Future budget reviews should focus not only on the amount allocated to agencies and programs but also on their contribution to national development outcomes," the House think tank said. It added that these measures are needed to improve fiscal discipline and allocative and operational efficiency as mandatory expenditures continue to narrow the government's spending room. With the spending plan still a proposal, how Congress acts on those recommendations is the immediate marker to watch on whether the government's budget space stabilizes or keeps narrowing.

'Regressive tax system'

Jose Enrique A. Africa, executive director of think tank IBON Foundation, said weak revenue generation — rather than debt itself — was the deeper cause of the government's shrinking fiscal space.

"The biggest squeeze on fiscal space is the growing regressiveness of the tax system with decreasing taxes on corporate and personal incomes and over-reliance on consumption taxes on a majority poor, low income and lower middle-class consumers," he said via Viber.

Mr. Africa said cuts in corporate income taxes under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) and CREATE MORE laws result in more than P400 billion in foregone revenues annually, mostly from big companies. Consumption taxes, meanwhile, disproportionately burden lower-income Filipinos who have less capacity to spend, added.

"Debt and debt service are just a proximate problem, and it's oddly often overlooked that the government contracts debt to begin with because of weak revenue generation," Mr. Africa said.

He also criticized spending priorities, saying social services were bearing the brunt of the fiscal squeeze while infrastructure, defense and debt payments remained favored.

"It's also very unfortunate that the government's priorities mean that the fiscal squeeze is put on education, health, housing and social protection while infrastructure, military spending and debt service remain favored," he said. "The people facing such high inflation and joblessness are made to bear the brunt of the government's undeclared austerity program," he added.

This article was first published by BusinessWorld.