Spending Better: Advancing Performance-Informed PFM in the Philippines

The Philippines is approaching a historic milestone, upper middle income country status, though repeated domestic and global shocks pose challenges. Realizing AmBisyon Natin 2040 vision—a prosperous, predominantly middle class society, where no one is poor—will require deeper structural reforms to ensure that growth is inclusive, resilient, and sustainable. This is especially important for an archipelago of more than 7,000 islands, with wide variations in socioeconomic development and institutional capacity across national and local governments.

Persistent inequality and poverty
Income inequality and poverty remain significant challenges despite recent progress. Poverty incidence declined from 23.0% in 2015 to 15.5% in 2023, yet remains high compared to regional average. Income distribution also remains uneven, with a large share of households still classified as poor, low income, or economically vulnerable.^[1][2]

Figure 1: Philippines Income-Inequality Context

Sources:
*The World Bank. 2026. Data: Gini Index. 
**The ASEAN Secretariat. 2025. ASEAN Key Figures 2025. 
***D. L. D. Cabalfin et. al. 2026. The Middle Class and Vulnerability to Income Poverty: Implications for Social Protection in the Philippines. Discussion Paper Series No. 2026-01. January 2026. Philippine Institute of Development Studies.

Climate and disaster risks
Poverty and inequality are worsened by repeated crises, particularly natural disasters. The Philippines has been consistently ranked among the world’s most disaster-prone countries, with a large share of its land area and population exposed to typhoons, floods, earthquakes, and other hazards. These risks reflect vulnerability, exposure, and gaps in resilience financing and public investment.^[3] Without stronger preventive and adaptive investments, future disaster losses could place severe strain on public finances while worsening poverty and inequality.

Figure 2: Philippines Disaster Risk Overview

Sources:
* Bündnis Entwicklung Hilft / IFHV. 2025. World Risk Report 2025. Bündnis Entwicklung Hilft. 
** A. Sultanov. 2023. Building Resilience to Natural Disasters and Climate Change: A Model Application. International Monetary Fund. Asia Pacific Department.

Social pressures and rising expectations
High inequality, vulnerability, and repeated shocks create economic and social pressures. Government resources are rightly directed toward social protection, education, health, housing, and disaster response. However, many middle-income households remain vulnerable to falling back into poverty when shocks occur. Income inequality due to persistent lower educational attainment, weak technology adoption, poor public health, higher crime rates, and heavy reliance on subsidies undermine productivity, long term growth, and fiscal sustainability.

Public trust and accountability
Perceived corruption in the country indicates a decline over the past decade, and was among the lowest in the region (ninth out of 11) in 2025. In an environment of tight fiscal space and elevated citizen expectations, public spending is subject to a higher “credibility threshold.” Additionally, a more effective and efficient public spending can also improve tax morale, increasing the citizen’s propensity to pay taxes.

Alongside fiscal and monetary policy, well-designed and well-executed public spending remains one of the most powerful tools for reducing inequality, alleviating poverty, and supporting growth. Improving spending efficiency and reallocating existing resources toward education, health, infrastructure, and social protection can generate significant economic and social returns.^[4]

In this context, governments need stronger performance information to support evidence based budgeting, improve accountability, and help citizens judge whether government commitments translate into real outcomes. Performance-informed (results-based) budgeting provides the institutional framework to connect resources with results.

Figure 3: Performance-Informed Budgeting

Source: Asian Development Bank.

The Philippines has a long history of integrating performance information into budgeting, with major reforms introduced in 2011. While the foundations are strong, further progress requires deeper integration of policies, systems, and practices across the full PFM cycle—from planning to evaluation and from national to local levels.

Figure 4: Key Elements to Strengthen Linkage of Public Spending to Outcomes

Source: Asian Development Bank.

Four key elements can boost the linkage of public spending to outcomes (public needs and priorities), ensuring performance-informed PFM.

Anchoring budgets on clearly defined public needs
Traditional, input focused budgeting is less suited to volatile, uncertain, complex, and ambiguous conditions. Public spending should be grounded in clearly identified societal needs (outcome) and aligned with national and local development plans. In practice, this requires:

• alignment across national, sectoral, and local plans;
• meaningful engagement of citizens, lawmakers, and stakeholders;
• medium-term budgets linked to measurable outcomes;
• well-prepared and appraised programs and projects; and
• fund allocation toward high impact, implementation ready investments.

The bi-directional objectives help ensure that (i) societal needs are clearly identified and translated into relevant, well-prepared, and implementation ready programs and projects; and (ii) financing is directed toward programs and projects that are both ready and demonstrably responsive to identified societal needs.

Treating the budget as a performance contract
Budgets should be seen not only as spending authorizations but as performance contracts and commitments to citizens. Thus, performance assessment must go beyond budget utilization rates and examine whether services are timely, effective, efficient, and of good quality, especially in sectors such as education, health, and social protection. This, in turn, requires robust performance indicators cascading from national goals down to agencies, programs, units, and individuals.

This will address the two key challenges in public spending: the monopolist and the principal agent challenges. Monopolist challenge is inevitable since the government is often the monopoly supplier of public goods and services, with little to no competitive pressure or incentive to keep costs down and provide better quality goods and services. Meanwhile, the principal-agent challenge is the misalignment between the preferences and priorities of government officials and staff, and the needs and priorities of the public or taxpayers.

The performance contract in public expenditure management would shift focus from the inputs (budget utilization rate) to measurable outputs (quality, quantity, and timeliness) and outcome (impact). Budget as performance contract ensures transparency on how purposeful public spending are and guarantees that the government agencies are accountable for measurable results across all levels.

Elevating financial management role as strategic partners
Public sector accountants and financial managers must move beyond compliance and transaction processing toward more strategic roles. Supported by digital tools and integrated information systems, finance professionals can help generate

• insight, through better analysis and evidence;
• oversight, through controls, governance and accountability; and
• foresight, through planning, risk management, and strategic advice.

Shifting audit attention toward performance and results
An effective external audit leads to lower and more effective/efficient/economical/ethical government expenditure and higher government effectiveness.^[5] The correlation between the Supreme Audit Institution’s (SAI’s) role and the government effectiveness is distinct in terms of the type of audits that SAIs deliver. For example, financial and performance audits are correlated to higher governmental effectiveness, while compliance audits correlate with lower government effectiveness.

Although compliance auditing remains important, an excessive focus on procedural compliance can create unnecessary bureaucracy, slow execution, reduce operational efficiency, and discourage innovation. A stronger balance between financial, compliance, and performance auditing can help assess whether programs and institutions are delivering intended results economically, efficiently, and ethically—closing the loop between planning, spending, results, and accountability. This is particularly relevant for flagship spending programs in education, health, infrastructure, and social protection, where citizens expect visible impact.

Strengthening a full cycle, performance-informed public financial management (PFM) system will help the Philippines spend better, rebuild trust, reduce inequality, and support inclusive and resilient growth.

Faced with intersecting challenges—inequality, climate and disaster risk, fiscal constraints, and rising public expectations—the Philippines stands at a pivotal moment. It has already laid important foundations through successive PFM reforms and most recently through its three-phased PFM reform agenda. Now, the country is well positioned to address its own vulnerabilities and to demonstrate how performance-oriented public finance can deliver results in a volatile, uncertain, complex, and ambiguous world.

^[1] ASEAN Secretariat. 2025. How Do ASEAN Member Countries Measure Poverty? Understanding Different Definitions, Standards, and Measurement of Poverty in Southeast Asia. ASEAN Socio-Cultural Community Trend Report No. 18 (2025).

^[2] D. L. D. Cabalfin et. al. 2026. The Middle Class and Vulnerability to Income Poverty: Implications for Social Protection in the Philippines. Discussion Paper Series No. 2026-01. January 2026. Philippine Institute of Development Studies.

^[3] A. Brucal et. al. 2020. Disaster Impacts and Financing: Local Insights from the Philippines. The Centre for Climate Change Economics and Policy and Gratham Research Institute on Climate Change and Environment; and Bündnis Entwicklung Hilft / IFHV. 2025. World Risk Report 2025. Bündnis Entwicklung Hilft.

^[4] E. Dabla-Norris et al. 2025. Spending Smarter to Boost Growth. IMF Blog. 7 October; and J. Beirne, A. H. Le, and D. Park. 2025. To Reduce Inequality, Government Should Spend Strategically. Asian Development Blog. 26 November.

^[5] L. Blume and S. Voigt. 2011. Does Organizational Design of Supreme Audit Institutions Matter? A Cross-Country Assessment. European Journal of Political Economy. 27 (2). pp. 215–229; and C. J. Cordery and D. C. Hay. 2021. Public Sector Audit. 1st ed. Routledge Taylor and Francis Group.

M. J. Kaizeler, M. E. Ravelo, and R. Amos. 2025. Philippines Delivers Landmark PEFA++ with Pioneering Disaster Resilient and Child-Responsive PFM Assessments in Record Time. Public Expenditure and Financial Accountability (PEFA). News Article. 6 November.