‘Bad news continues' for Rachel Reeves as UK's January budget surplus misses forecasts

The Guardian

21-02-2025

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Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
A flurry of data this morning will show how the UK economy is faring in early 2025, including the latest borrowing data, retail spending statistics, and a healthcheck on businesses across the country.
And the breaking news is that Britain recorded its highest January budget surplus on record last month – but the windfall is not as large as expected.
The Office for National Statistics has estimated that the public sector was in surplus by £15.4bn in January 2025, as tax receipts exceeded government spending.
That's the highest January surplus since monthly records began in 1993.
This is much better than in December, when borrowing jumped by more than expected.
January is usually a bumper month for tax receipts, as the deadline to file self-assessment tax returns falls at the end of the month.
But unfortunately, January's surplus is £5.1bn smaller than the £20.5bn surplus which the Office for Budget Responsibility had pencilled in for the month. A chart showing the UK public finance Photograph: ONS
The ONS also reports that combined self-assessed income and Capital Gains Tax receipts were provisionally estimated at £36.2bn for January – the highest January receipts since monthly records began in 1999, and £3.8bn more than a year earlier,
So far this financial year, government borrowing has now reached £118.2bn – £11.6bn more than at the same point in the last financial year and the fourth-highest financial year-to-January borrowing since monthly records began in 1993.
In a small fillip for the chancellor, research group GfK has reported this morning that consumer confidence rose a little last month – but it still weaker than a year ago. The agenda 7am GMT: UK public finances for January
7am GMT: Great British retail sales for January
9am GMT: Eurozone flash PMI report for February
9.30am GMT: UK flash PMI report for February
2.45pm GMT: US flash PMI report for February Share Show key events only Please turn on JavaScript to use this feature
City consultancy Capital Economics have a blunt verdict on January's record budget surplus – the 'bad news continues for the chancellor'.
That's because January's budget surplus, of over £15bn, is more than £5bn less than the Office for Budget Responsibility had forecast – which means Rachel Reeves's headroom to keep within her fiscal rules has narrowed.
Alex Kerr, UK economist at Capital Economics, explains:
While January's disappointing public finances figures may not be as bad as they first appear, they continue the run of bad news for the Chancellor in 2025 and underline the difficult choices she faces.
While there is increasing pressure on the government to commit to higher defence spending, the OBR is likely to conclude that the Chancellor's headroom against her fiscal rules has been wiped out and she will probably need to tighten fiscal policy as a result.
Kerr explains that the undershoot was largely driven by disappointing tax receipts, which were £4.6bn below the OBR's forecast (see earlier post), 'reflecting the recent weakness of the economy'.
It's possible, though, that the timing of tax returns is responsible too – meaning receipts in February are stronger than expected.
But, Kerr concludes, the current budget deficit is on track to overshoot the OBR's 2024/25 fiscal year forecast of £55.5bn (2.0% of GDP) by £10.0bn.
He fears that Reeves's options ahead of next month's spring statement are 'bleak', given the additional pressures to increase defence spending, and warns:
Higher market interest rate expectations and gilt yields than at the time of October's Budget alone suggest the Chancellor's headroom against her fiscal mandate has been whittled down from £9.9bn to £2.8bn.
Combined with the recent weakness of productivity and GDP growth, it may have been wiped out completely. So in order to meet her fiscal rules, the Chancellor will need to raise taxes and/or cut spending in the fiscal update on 26th March. Share
The cost of servicing Britain's government debt rose year-on-year last month, taking a bite out of the budget surplus.
The interest payable on central government debt was £6.5bn in January 2025, a £2bn jump compared with January 2024.
That's the second highest January figure since monthly records began in 1997, after the record bill in January 2023.
It's lower than in December, though, when the interest bill hit £9bn.
These figures are driven by changes in the interest rates on index-linked debt, which rises or falls in line with the RPI inflation rate. Share
Darren Jones, chief secretary to the Treasury, has responded to January's public finances data, saying:
'This Government is committed to delivering economic stability and meeting our non-negotiable fiscal rules.
'We will never play fast and loose with the public finances, that's why we're going through every pound spent, line by line, for the first time in 17 years, ensuring every penny delivers on the country's priorities in our plan for change.' Share
The Office for National Statistics' deputy director for public sector finances Jessica Barnaby says:
'While the public finances are often in surplus in January, this year saw the biggest monthly surplus on record, with high January self-assessment receipts bolstering income.
'However, over the financial year to date as a whole, borrowing was still up on last year and was the fourth-highest on record for the year to date.' Share
Although it's a record level, the UK's budget surplus was lower than forecast last month – because self-assessment taxes rose by less than expected.
The Office for National Statistics reports that : Self-assessment income tax receipts rose by £4.2bn year-on-year in January to £25.9bn – a strong figure, but £3bn less than the £28.9bn forecast by the Office for Budget Responsibility.
Self-assessment Capital Gains Tax receipts fell by £300m year-on-year to £10.3bn, and £1.1bn less than the £11.4bn forecast by the OBR. Share
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
A flurry of data this morning will show how the UK economy is faring in early 2025, including the latest borrowing data, retail spending statistics, and a healthcheck on businesses across the country.
And the breaking news is that Britain recorded its highest January budget surplus on record last month – but the windfall is not as large as expected.
The Office for National Statistics has estimated that the public sector was in surplus by £15.4bn in January 2025, as tax receipts exceeded government spending.
That's the highest January surplus since monthly records began in 1993.
This is much better than in December, when borrowing jumped by more than expected.
January is usually a bumper month for tax receipts, as the deadline to file self-assessment tax returns falls at the end of the month.
But unfortunately, January's surplus is £5.1bn smaller than the £20.5bn surplus which the Office for Budget Responsibility had pencilled in for the month. A chart showing the UK public finance Photograph: ONS
The ONS also reports that combined self-assessed income and Capital Gains Tax receipts were provisionally estimated at £36.2bn for January – the highest January receipts since monthly records began in 1999, and £3.8bn more than a year earlier,
So far this financial year, government borrowing has now reached £118.2bn – £11.6bn more than at the same point in the last financial year and the fourth-highest financial year-to-January borrowing since monthly records began in 1993.
In a small fillip for the chancellor, research group GfK has reported this morning that consumer confidence rose a little last month – but it still weaker than a year ago. The agenda 7am GMT: UK public finances for January
7am GMT: Great British retail sales for January
9am GMT: Eurozone flash PMI report for February
9.30am GMT: UK flash PMI report for February
2.45pm GMT: US flash PMI report for February Share