UK government finances showed a large surplus last month after a surge in tax receipts but the figure missed official forecasts, putting further pressure on the chancellor before next month’s spring statement.
Official figures revealed that in January the UK earned £15.4bn more than it borrowed, marking the highest surplus for the month in more than 30 years.
However, this result missed expectations, with economists forecasting £21bn and the Office for Budget Responsibility (OBR) estimating £20.5bn.
The interest payable on central government debt stood at £6.5bn in January 2025, a £2bn increase from the same month last year, driven by high interest rates. This marks the second-highest January debt servicing cost since records began in 1997, trailing only January 2023's record bill.
The smaller-than-expected surplus has fuelled speculation that chancellor Rachel Reeves may have to either cut public spending or raise taxes further to meet her self-imposed fiscal targets.
Alex Kerr, an economist at the consultants Capital Economics, said January’s figures “will do nothing to reduce the chancellor’s challenges. Even before the ratcheting up of pressure on European governments to increase defence spending, the chancellor’s options ahead of the fiscal update next month were bleak.”
Reeves is due to present her spring statement to the House of Commons on 26 March, where she is expected to revise spending plans to remain within budgetary constraints.
Matt Swannell, chief economic advisor to the EY ITEM Club, said: “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.”
Reeves’ first budget last year left her with just £9.9bn in headroom to meet a goal of balancing day-to-day spending and tax revenues by the 2029-30 financial year. This was despite announcing Britain’s largest tax hikes in decades. Since then, global borrowing costs have risen, and UK business sentiment and growth prospects have wavered, compounded by the uncertainty created by a £40bn tax rise and the trade tariffs introduced by US president Donald Trump.
Nabil Taleb, economist at PwC UK, said: “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.”
A budget surplus often occurs at the start of the calendar year because self-assessed income and capital gains tax are due at the end of January. The ONS said receipts from these taxes of £36.2bn in January 2025 were £3.8bn more than a year earlier and the highest for January since monthly records began in 1999.
The Office for National Statistics (ONS) reported that borrowing for the financial year to January 2025 was £118.2bn — £11.8bn higher than the same period in 2023-24, and above the £105.4bn forecasted by the OBR in October.
Public sector net debt excluding public sector banks totalled 95.3% of annual gross domestic product in January, hovering around levels last seen in the early 1960s, the ONS said.
Darren Jones, chief secretary to the Treasury, said: “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.”
Fiscal rules are often self-imposed by governments to maintain credibility with financial markets. Speculation is growing that, if Reeves wants to avoid breaking her own fiscal framework, she may be forced to announce cuts in public spending or further tax rises.
However, the UK fiscal outlook could improve before the OBR’s final report in late March, this could still lead to the need for tax hikes or significant spending cuts.
Meanwhile, the UK’s income from inheritance tax is on track to reach a record this financial year, having risen by approximately 10%. HMRC data reveals that inheritance tax receipts for the period from April 2024 to January 2025 reached £7bn — £700m higher than the same period last year.
Helen Morrissey, pensions columnist at Yahoo Finance UK and head of retirement analysis at Hargreaves Lansdown, said: “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.”
Separate ONS figures showed a stronger recovery in retail sales than had been expected in January on the back of strong wage growth.
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