In the Philippines, lack of fiscal discipline has been a major factor behind the nation’s macroeconomic instability. Since the mid-1980s, in particular, expanding fiscal as well as current account deficit has fuelled concerns over external debt sustainability, and has thus made the Philippines dependent on an International Monetary Fund program and Paris Club debt rescheduling.<br>However, the fiscal consolidation policy initiated by President Arroyo’s administration, aimed at restoring macroeconomic stability, has resulted in significant improvements in fiscal balance and a marked decrease in public sector debt. Improvements in the Philippines’ fiscal position have contributed to containing the impact of the global financial crisis on the nation’s economy, while creating fiscal space for stimulus policy measures to counter the global recession.<br>Yet, to date, fiscal consolidation under the Arroyo administration may not have been fully recognized in spite of its significant effect on the economy of the Philippines. Therefore, it is worthwhile analyzing how the Arroyo administration’s fiscal consolidation policy has contributed to improving the fiscal balance and attaining macroeconomic stability, and then proposing policy initiatives that the Aquino administration, which took office in 2010, needs to implement in order to successfully implement the fiscal consolidation policy.<br>Against this backdrop, this paper makes a comprehensive study of the impact of the fiscal consolidation policy under the Arroyo administration and the challenges that remain to be addressed, with reference to past studies on the issue. To this end, this paper firstly examines how progress in fiscal consolidation under the Arroyo administration has contributed to macroeconomic stability and has led to significant improvements in the Philippines’ sovereign creditworthiness. This paper secondly evaluates the administration’s fiscal consolidation initiatives from revenue and expenditure side and points out that the tax reform policy did not bring about the level of increase in tax revenue expected due to a decrease in tax collection efficiency and the failure to enact key bills. Furthermore, this paper outlines that the fiscal deficit widened significantly in 2009 due to the introduction of a stimulus package to cope with the global recession and measures that undermined tax revenue. This paper undertakes a simulation using the debt sustainability analysis framework to quantify the desirable tax revenue needed for further fiscal consolidation and increased capital spending which is necessary for growth enhancement.<br>Based upon the simulation result, this paper finally presents a medium-term scenario with a goal of increasing tax revenue by approximately 2 percentage points of GDP. To achieve this target, this paper emphasizes that the Aquino administration must present, before anything else, a clear roadmap to fiscal consolidation, together with specific policy measures to increase tax revenue, and implement these measures promptly.