Government finances in surplus but pressure builds on Reeves

The UK government's fiscal surplus fell short of official forecasts, placing greater pressure on the Chancellor of the Exchequer's tax and spending plans. The government surplus for January – the difference between government spending and tax revenue – was £15.4 billion, the highest level on record for over three decades. However, this figure was significantly lower than the £20.5 billion forecast by the UK's official forecasting body, further complicating the fiscal outlook.

This shortfall has reignited speculation that Chancellor Rachel Reeves may have to cut public spending or raise taxes further next month to meet the rules she has set for the economy. The UK government reaffirmed on Friday that its so-called fiscal rules were "non-negotiable." The Chancellor has set out two main rules that she believes will bring stability to the UK economy: day-to-day government spending will be paid for by tax revenue, not borrowing; and by the end of this parliament in 2029/30, debt as a proportion of national income will be falling.

On March 26, the Office for Budget Responsibility (OBR) will publish its latest outlook for the UK economy and public finances, detailing the room for maneuver the Chancellor has with her fiscal rules. At the same time, Reeves will announce her spring forecast. Last October, the watchdog said she had £9.9 billion of headroom to meet her rules after her first budget. However, weaker economic growth and higher borrowing costs have eroded that headroom, leading to speculation that Reeves will have to take action if she wants to avoid breaking the rules.

Cara Pacitti, a senior economist at the Resolution Foundation think tank, said the recent economic data "may leave the Chancellor in the unenviable position of needing to raise taxes or cut spending to meet her fiscal rules." The Chancellor has previously ruled out increasing borrowing or raising taxes again, suggesting that spending cuts may be the more likely option. Government departments will submit a line-by-line breakdown of their spending to the Treasury in the coming days, along with suggestions for where savings can be made.

Most wealthy countries' governments set themselves fiscal rules designed to maintain credibility in financial markets. Following the release of the government's fiscal figures, Chief Secretary to the Treasury Darren Jones reiterated that the government's fiscal rules were "non-negotiable." Shadow Chancellor Mel Stride said the figures "expose the true cost of Labour's reckless economic policies." The Institute for Fiscal Studies (IFS) warned that government revenue figures from a single month can be revised and do not have a meaningful impact on the overall fiscal outlook. But the independent think tank added that the data suggests borrowing in January was much higher than planned last March.

The Office for National Statistics (ONS) said that total borrowing between April and January of this fiscal year was £118.2 billion. This is £11.6 billion more than the same period last year and £12.8 billion higher than the OBR's forecast. Isabel Stockton, a senior research economist at the IFS, stated, "The combination of additional borrowing in the short term with a commitment to fiscal tightening in the future means that whether it will be sufficient to meet her 'non-negotiable' fiscal rules without further tax rises or even tighter spending plans remains to be seen."

Liz Martins, senior UK economist at HSBC, said on the BBC's "Today" program that the higher borrowing was "a bit concerning," adding that "if we are off track now, the OBR may judge that this is going to persist... then the government may need to make further changes to its spending and tax policies." Governments tend to collect more tax in January than at other times of the year due to the number of self-assessment tax returns received that month. While last month's £15.4 billion was a record figure for a surplus, it was lower than expected because tax revenues were lower than expected, suggesting a weaker UK economy.

The OBR said the gap was mainly due to lower-than-expected self-assessment tax receipts and upward revisions to debt interest payments year-to-date. The ONS added that spending on public services, welfare, and debt interest were all higher than last year. A separate set of ONS data showed that UK retail sales rebounded in January, driven mainly by strong food sales. But Hannah Finselbach, senior statistician at the ONS, said there were "depressed sales for clothing stores and household goods, with consumers cutting back due to affordability concerns." She said that sales in stores have fallen over the past three months and are below pre-pandemic levels.