A rise in self-assessment and capital gains tax receipts gave the UK’s public finances a smaller than expected £15.4bn lift in January.
The surplus is still the highest since records began in 1993 and a reversal of December’s slump, when the public finances slid to a £17.8bn deficit.
In a blow to the chancellor, however, last month’s figure came in below the predictions of City economists and the government’s independent forecaster, the Office for Budget Responsibility (OBR), who had expected a surplus of £20bn.
The OBR said a strong rebound in self-assessment receipts, which declined during the coronavirus pandemic, failed to materialise, leaving the Treasury with only a modest gain. Income from corporation tax and capitals gains tax was also below its own predictions.
Rachel Reeves needs a more substantial boost to the public finances to stay within the government’s fiscal rules, which put limits on the annual deficit and the level of debt by the end of the parliament.
Reeves is due to make her spring statement to the House of Commons on 26 March, when she is likely to revise some spending plans to stay within the budget constraints.
Demands for extra spending on public services and the need to increase defence spending to join European efforts to support Ukraine are being considered at the Treasury while the bill for borrowing on international financial markets has increased.
A rise in the interest rate on government borrowing last month proved short-lived but the cost of monthly debt payments remains elevated.
Reeves said on Thursday that the UK would need to find funds to support higher military spending, but this would have to be found from savings elsewhere in the government budget plans.
Responding to the January finances figures, the chief secretary to the Treasury, Darren Jones, said they highlighted the need to examine “every pound spent, line by line”, which he said was being done for the first time in 17 years, “ensuring every penny delivers on the country’s priorities in our plan for change”.
There are fears among Labour backbench MPs that many of the initiatives to improve public services with extra investment will be shelved and welfare claimants will have a tougher time.
Business surveys have shown a sharp deterioration in the outlook for the UK economy this year, leading the Bank of England to halve its 2025 growth forecast to 0.75%.
S&P Global’s latest barometer of UK businesses showed the trend continuing after private sector activity improved only modestly this month and job losses accelerated. S&P Global said companies blamed the prospect of higher employment taxes for the job cuts.
This survey was in contrast to others, notably the GfK consumer confidence report and a poll by the recruiters body, the CIPD, which revealed a rebound in hiring intentions and household spending in February.
Separate Office for National Statistics (ONS) figures on retail sales volumes out on Friday also showed an improvement in the new year, rising 1.7% on the previous month when seasonally adjusted and beating City expectations of a 0.5% increase.
Food stores accounted for much of the increase, after sales had suffered a decline in each of the four previous months. That offset the lost sales reported by clothing retailers and household goods stores, the ONS said.
The public finances worsened after borrowing in the financial year from April 2024 to January was £118.2bn, up £11.6bn on the same period in the last financial year and the fourth-highest financial year-to-January borrowing since monthly records began in 1993, the ONS said.
Debt interest payments reached £6.5bn in January alone, the second highest January figure since monthly records began 27 years ago, the ONS said.
Nabil Taleb, an economist at the accountants PwC, said higher debt payments against a backdrop of weak economic growth reflected the fiscal challenge the chancellor faced. “Higher debt servicing costs as a share of total revenues will leave the public finances more exposed to future economic shocks,” he said.
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.”
The ONS said that taken together, self-assessed income and capital gains tax receipts were provisionally estimated at £36.2bn in January 2025, £3.8bn more than a year earlier, and the highest January receipts since monthly records began in 1999, although 10.1% lower than OBR forecasts.
The chancellor usually enjoys a spending surplus in the first month of the year, which coincides with the deadline for self-assessment returns. The boost usually extends into February, when HMRC counts the millions of tax returns filed at the last minute.
