Government finances in surplus but miss forecasts

Government finances showed a large surplus last month after a surge in tax receipts but the figure missed official forecasts, increasing pressure on Chancellor Rachel Reeves to meet her own fiscal rules.

The surplus – the difference between what the government spends and the tax it takes in – was £15.4bn in January, which is the highest level for the month since records began more than three decades ago.

However, the Office for Budget Responsibility (OBR), which monitors the government’s spending plans and performance, had predicted that the surplus would be higher at £20.5bn.

The smaller figure has added to growing speculation that Reeves will either have to cut public spending or raise taxes further to meet her self-imposed rules for the economy.

The OBR will release its latest outlook for the UK economy and public finances on 26 March, when it will detail what headroom the chancellor has. At the same time, Reeves will announce her Spring Forecast.

Last October, the watchdog said she had £9.9bn in headroom.

However, weak economic growth and higher borrowing costs have weighed on that wriggle room.

“In order to meet her fiscal rules, the chancellor will need to raise taxes and/or cut spending,” said Alex Kerr, UK economist at Capital Economics, who added that the chancellor’s headroom had been “wiped out”.

He said Reeves’s options ahead of her Spring Forecast were already “bleak” before the “ratcheting up of pressure on European governments to increase defence spending” amid uncertainty over the outcome of the war in Ukraine.

Fiscal rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets.

There has been speculation that if the chancellor wants to avoid breaking her own, cuts in public spending or further tax rises could be announced.

Nabil Taleb, economist at PwC UK, said Reeves had “held the line on Labour’s pledges” to date, but warned “holding that line will become increasingly challenging”.

The difficult decisions faced by Reeves come as UK economic growth has proved anaemic and inflation – which measures the rate prices rise at – has risen putting pressure on household budgets.

Following the latest government finance figures, Darren Jones, chief secretary to the Treasury, reiterated that the government fiscal rules were “non-negotiable”.

The government tends to take more in tax than it spends January compared with other times of the year due to the amount it receives in self-assessed taxes in the month.

Despite last month’s £15.4bn being a record figure for a surplus, it undershot forecasts due to lower than expected tax receipts, suggesting weakness in the UK economy.

The Office for National Statistics (ONS) said borrowing in the financial year to January 2025 was £118.2bn, some £11.6bn more than at the same point in the last year.