The budget deficit shrank last year to P62.2 billion , the lowest in nine years and the third year in a row that the shortfall was smaller than target, Finance Secretary Margarito Teves said.

He said the deficit was equivalent to 1.04 percent of GDP, close to half of the 2.1 percent program, and almost two-thirds narrower than last year’s 2.7 percent ratio.

Teves said the government is on track with its fiscal consolidation program, with the budget balanced by next year.

Teves said the P63-billion deficit target, or 0.9 percent of GDP, for the year stays. He said the government expects to spend more this year with a new budget, after operating in the last three years under reenacted budget.

Budget Secretary Rolando Andaya said any excess collections of the Bureaus of Internal Revenue and Customs this year will used for "pump priming."

"We have to spend before balancing the budget. We don’t want a hollow balanced budget," Andaya said, stressing that the government’s priority is infrastructure spending.

In December, the deficit stood at P3.9 billion, the lowest in five years, Total revenues for the month stood at P96.3 billion while expenditures amounted to P100.2 billion.

Total revenues last year stood at P978.7 billion, P4.6 billion more than the target and 20 percent higher than a year ago.

The revenue effort was 16.3 percent of GDP, Teves said,

Expenditures, meanwhile, reached P1.04 trillion, P58.1 billion lower than program but 8.1 percent higher than the previous year.

The BIR collected P651.9 billion last year, P23.4 billion short of the P675.4-billion target but 20 percent more than a year ago. Meanwhile, the BIR earned P198.2 billion, exceeding by P2.2 billion the P196-billion target and 33 percent higher than the previous year.

The Bureau of Treasury more than made up for the BIR shortfall, collecting P73.9 billion last year from fees, charges and dividend payments against the P51.9 billion target.

"With the lower deficit and better fiscal performance of other public sector entities such as the GOCCs, GFIs, LGUs and social security institutions, the consolidated public sector financial position is expected to be better than the P128-billion program deficit this year," Teves said.

The broader public sector posted a P8.9-billion surplus as of the third quarter.

Teves said the lower deficit also makes the government at pace with attaining a debt-to-GDP ratio of 40.7 percent by 2010.

The ration stood at 67.2 percent as of end-September, declining from 71.8 percent in end-December 2005.

"As we strengthen our macroeconomic fundamentals, we hope to graduate to compact status under the Millennium Challenge Account to avail of higher levels of grant for our anti-corruption programs, and improve our credit rating," Teves said.

While widely expected, the smaller deficit was welcomed by investors. The peso, which ended 2006 near six-year highs, was quoted around 48.76 per US dollar, stronger than its close on Wednesday at 48.955.

The government spent P58 billion less than expected after Congress failed to pass the 2006 funding bill and agencies were forced to shelve big-ticket spending, especially on infrastructure projects.

The government’s fiscal performance was helped by additional revenues from a two-step reform in a sales tax that was imposed fully last February.

"There was the lack of (approval of the) budget to some extent but they significantly overachieved in terms of reducing the budget deficit," said Bill Belchere, regional economist at Macquarie Bank.

This year, government revenue is likely to get a boost from privatization proceeds.

The government is in the middle of a deal worth more than $500 million to sell a 6.3 percent stake in the country’s most valuable firm, PLDT.

But economists, multilateral lending agencies and rating firms have said the Philippines needs to show sustained improvements in tax collections to prove that it has turned the corner on years of budget deficits.

They also say it needs to increase spending in crucial sectors such as infrastructure and social services to boost growth.

"I think the focus should not be on narrowing the deficit," said Frances Cheung, an economist at Standard Chartered Bank in Hong Kong.

"I think more effort should be on debt consolidation and also to boost revenues, rather than just focus on the deficit numbers."