Chancellor Rachel Reeves is coming under increased pressure to raise taxes or cut public spending as official figures show government borrowing was more expensive than expected, and tax revenue fell below expectations.
The greatest budget surplus since records began in 1993 was reported by the Office for National Statistics (ONS) in January.
It means the public sector took in more taxes and other income than it spent, leading to a surplus of £15.4bn.
But the figures showed borrowing was £11.6bn more than a year earlier and the fourth-highest on record.
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For the year as a whole, borrowing is ahead of the independent forecaster the Office for Budget Responsibility (OBR)’s expected £105.4bn level, having come in at £118.2bn.
January is always a big month for tax takes as self-assessed returns come in, but the tax revenue and the surplus were below economist forecasts.
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It was the first data release on public sector finances since January market jitters.
Last month the pound weakened and 10 and 30-year borrowing costs soared, causing concern Ms Reeves would break her self-imposed fiscal rules – to bring down government debt and balance the budget by 2030 – or have to up
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Government borrowing costs surged in the month, resulting in decades-high interest rates on long-term state debt, known as bonds.
Higher inflation and an expectation of higher interest rates for longer in part caused the spike and raised fears the chancellor would have eroded her so-called fiscal headroom – money she could spend while still adhering to her rules.
What does it mean for tax cuts and spending?
“It will only get worse from here”, said Pantheon Macro’s senior UK economist, Elliott Jordan-Doak.
The economic research firm said it expects the chancellor’s headroom has been wiped out and spending cuts will follow with tax rises coming in the autumn.
Another economics research firm reached a similar conclusion: “In order to meet her fiscal rules, the chancellor will need to raise taxes and/or cut spending in the fiscal update on 26 March”, Capital’s UK economist Alex Kerr said.
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Responding to the data, Ms Reeves’s deputy Darren Jones 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.”
