Business & Economy

‘Bad news continues’ for Rachel Reeves as UK’s January budget surplus misses forecasts – business live | Business

By skynews

Posted on 21/02/2025

‘Bad news continues’ for Rachel Reeves as UK’s January budget surplus misses forecasts – business live | Business

Bad news continues for Chancellor, says Capital Economics

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.

Key events

Britain’s income from inheritance tax is on track to hit a record this financial year, having risen around 10%.

Inheritance Tax receipts for April 2024 to January 2025 are now £7.0bn, new data from HMRC shows, which is £700m higher than the same period last year.

A chart showing HMRC tax receipts Photograph: HMRC

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says:

“The inheritance tax creep crawls ever higher, hitting £7bn so far this tax year. This puts it well on track to surpass the £7.5bn record that it hit a year earlier.

With government plans to include pensions in the net for inheritance tax from 2027 and thresholds remaining frozen, the tax take is only going to get higher.

Following the smaller than expected budget surplus in January, it will “probably be touch and go as to whether the Government’s fiscal rules will be met” when the OBR updates its projections at the end of March.

So says Matt Swannell, chief economic advisor to the EY ITEM Club, who explains:

“The public sector was in surplus by £15.4bn in January. However, a surplus in January is commonplace as tax receipts get an annual boost from self-assessed tax payments. And while on the surface this looks a positive reading, it is a smaller January surplus than the £20.5bn the OBR had expected in its October forecast. Combined with previous forecast misses over the last few months, borrowing across the current fiscal year is now running £12.8bn ahead of the OBR’s Autumn Budget projections.

“Even without the borrowing overshoot, the Government only had about £10bn in fiscal headroom. Although market interest rates have fallen since their mid-January highs, the OBR’s updated forecasts at the end of March will likely show that the Government is expected to make higher debt interest payments. This will reduce the Chancellor’s margin for error, but potential changes to the OBR’s growth and inflation projections will probably determine whether the fiscal rules are met.

Retail sales across Great Britain bounce back in January

In other economic news, retail sales rebounded surprisingly strongly last month.

The Office for National Statistics reports that retail sales volumes across Great Britain rose by 1.7% in January.

This follows a fall of 0.6% in December – which has been revised down from the first estimate of a 0.3% fall.

Perhaps unexpectedly, the ONS reports that food stores sales volumes rose by 5.6% compared with December (when, surely, people were stocking up for Christmas?!).

It says:

This is the largest rise since March 2020, putting index levels at their highest since June 2023. This follows four consecutive falls on the month, ending in December 2024 when index levels were their lowest since April 2013.

Supermarkets, specialist food stores like butchers and bakers, and alcohol and tobacco stores all rose over the month. Retailers suggested that the increase was because of more people eating at home in January.

[Part of the challenge with this data is that it’s seasonally adjusted…]

Nabil Taleb, economist at PwC UK, agrees that “there’s no respite” for Rachel Reeves.

Taleb explains:

Borrowing costs remain under pressure as inflation proves stickier than expected, potentially slowing the Bank of England’s rate cuts and keeping debt servicing costs elevated.

At the same time, Labour’s commitment to increased defence spending adds further fiscal strain. So far, Reeves has held the line on Labour’s pledges, but with limited fiscal headroom, holding that line will become increasingly challenging.”

Bad news continues for Chancellor, says Capital Economics

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.

Interest payable on central government debt hit £6.5bn

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.

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.”

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.”

UK tax receipts weaker than expected

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.

Introduction: UK posts record January budget surplus

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.