MANILA, Philippines  -Philippine President Benigno Aquino III will set out his political agenda for the next 12 months when he delivers his first State-of-the-Nation Address on Monday.

Aquino promised during the May election campaign to eliminate corruption and expand the economy. He is expected to outline to Congress plans for a 14 percent increase in budget spending in 2001.

Here are some of the policy challenges Aquino will face in his six-year term:

Budget deficit

The Philippines, Asia's largest sovereign issuer of offshore debt, is expected to post a second successive record budget deficit in nominal terms this year, largely due to its failure to substantially lift revenues despite a sales tax reform in 2005.

The administration of Gloria Macapagal Arroyo ended 2009 with a budget deficit of 3.9 percent of GDP, or 298.5 billion pesos ($6.4 billion), a record in peso terms, and it forecast a deficit of 3.6 percent of GDP or around 300 billion pesos this year.

Aquino's government has revised the 2010 deficit forecast up to 325 billion pesos, 3.9 percent of GDP. His team wants to cut it to 3.3 percent of GDP next year and 2 percent in three years.

His finance secretary, Cesar Purisima, said the deficit needs to be cut, but does not have to eliminated.

While the deficit is comparatively far smaller than those of major economies, a narrow tax base and chronic evasion and corruption limit the government's ability to lift revenues and spend more on social services and infrastructure upgrades.

Aquino has said he will improve collection by enforcing tax laws, but markets are waiting to see if he raises tax rates to support state spending. The cost of funding the deficit hampers the government's ability to improve poor infrastructure.

Corruption

Aquino has vowed to run after smugglers and tax evaders but that campaign is unlikely to raise state revenues immediately. He also promised clean and honest government, punishment for corrupt officials and a better investment environment.

The finance department has started charging tax cheats and smugglers as well as corrupt staff at the two main revenue agencies, Bureau of Internal Revenue and Bureau of Customs.

The president has set up a "Truth Commission" to investigate allegations of corruption, poll fraud and rights abuses by the Arroyo administration.

Arroyo was hounded during 9 ½ years in office by a string of controversies, including that her family and political allies benefitted from government deals. She denies any wrongdoing.

The Philippines has a reputation for endemic corruption at all levels of government, a barrier to attracting investment. Transparency International's 2009 Corruption Perceptions Index put the Philippines at 139th out of 180 countries -- a marginal improvement from 141st the previous year.

Security

Aquino will need to address peace and security issues across the archipelago of 7,100 islands, particularly in the south. He plans to double defence spending to 2 percent of GDP, but that may not be enough to quell twin insurgencies.

Security difficulties are a major impediment to foreign investment and development of resource-rich Mindanao island.

Negotiations with the Moro Islamic Liberation Front, the largest Muslim rebel group, are bogged down by issues such as territory, wealth and power-sharing, although a shaky ceasefire was re-established in mid-2009.

Maoist-led guerrillas have waged a decades-long insurgency, and peace talks stalled under Arroyo. They have expressed a willingness to talk to the Aquino administration.

The smaller, but deadlier, Abu Sayyaf group still presents a problem despite tactical successes by U.S.-backed Filipino troops, and they are not interested in talks.

Military and police intelligence reports say Islamist militants from Indonesia and Malaysia continue to cross to Mindanao to train, gain battle experience and avoid capture.

An Indonesian militant identified as Sanusi, a potential successor to Southeast Asian militant leader Dulmatin, killed in Jakarta this year, is believed to have been hiding on Mindanao since 2007.