Fears that Rachel Reeves will have to hike taxes or cut spending grew amid warnings that woes on the High Street were starting to hit the public finances.
Britain notched up a record Government borrowing surplus in January, according to official figures, of £15.4 billion, the highest figure since 1993.
But this was still £5.1 billion less of a surplus, which means more borrowing, than forecast by the Office for Budget Responsibility.
The Labour Government has also still borrowed £12.8 billion more than the Budget watchdog forecast for the 10 months to January.
Cara Pacitti, senior economist at the Resolution Foundation, said: “January tax receipts usually boost the public finances as people rush to file their tax returns.
“But, despite the largest monthly surplus on record, broader tax receipts for the financial year so far were £4.6 billion lower than expected last month with worrying signs that bad news on the economy is starting to affect the public finances.
“There are signs that weaker-than-expected growth and higher inflation and borrowing costs could leave the Chancellor in the unenviable position of needing to raise taxes or cut spending to meet her fiscal rules at the OBR’s 26 March forecast.”
Isabel Stockton, senior research economist at the Institute for Fiscal Studies, added: “This extra borrowing in the short term is coupled with the promise of fiscal restraint in future.
“But it remains to be seen whether this will be enough to meet her ‘non-negotiable’ fiscal rules without further tax rises or even tighter spending plans.”
Ms Reeves has been heavily criticised for her autumn Budget of £40 billion of tax rises, £30 billion more borrowing and £70 billion more public spending to revive Britain’s broken public services including the ailing NHS.
Bosses have stressed that a £25 billion hike in employers’ National Insurance contributions is a “job tax” which, together with a rise in the National Living Wage to £12.21, is forcing them to reduce their workforce.
Retailers had a surprisingly good month in January, as sales volumes jumped 1.7%, according to official figures, driven up by a sharp uptick in food sales.
Chief Secretary to the Treasury Darren Jones said the Government is “committed to delivering economic stability and meeting our non-negotiable fiscal rules,” which will be made even harder by extra spending on defence.
He added: “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.”
But Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “Pressures to raise defence spending are intense and the Government will surely have to go further than a minimal upgrade to 2.5% of GDP.
“Accordingly, we think the Chancellor will have to follow up spending curbs announced next month with tax increases in the Autumn Budget.”
The ONS said spending on public services, benefits and debt interest all increased since January 2024.
Shadow Chancellor Mel Stride slammed Ms Reeves, saying: “The latest borrowing figures expose the true cost of Labour’s reckless economic policies.”
