Bad news continues for Chancellor, says Capital Economics
City consultancy Capital Economics have a blunt verdict on January’s record budget surplus – the “bad news continues for the chancellor”.
That’s because January’s budget surplus, of over £15bn, is more than £5bn less than the Office for Budget Responsibility had forecast – which means Rachel Reeves’s headroom to keep within her fiscal rules has narrowed.
Alex Kerr, UK economist at Capital Economics, explains:
While January’s disappointing public finances figures may not be as bad as they first appear, they continue the run of bad news for the Chancellor in 2025 and underline the difficult choices she faces.
While there is increasing pressure on the government to commit to higher defence spending, the OBR is likely to conclude that the Chancellor’s headroom against her fiscal rules has been wiped out and she will probably need to tighten fiscal policy as a result.
Kerr explains that the undershoot was largely driven by disappointing tax receipts, which were £4.6bn below the OBR’s forecast (see earlier post), “reflecting the recent weakness of the economy”.
It’s possible, though, that the timing of tax returns is responsible too – meaning receipts in February are stronger than expected.
But, Kerr concludes, the current budget deficit is on track to overshoot the OBR’s 2024/25 fiscal year forecast of £55.5bn (2.0% of GDP) by £10.0bn.
He fears that Reeves’s options ahead of next month’s spring statement are “bleak”, given the additional pressures to increase defence spending, and warns:
Higher market interest rate expectations and gilt yields than at the time of October’s Budget alone suggest the Chancellor’s headroom against her fiscal mandate has been whittled down from £9.9bn to £2.8bn.
Combined with the recent weakness of productivity and GDP growth, it may have been wiped out completely. So in order to meet her fiscal rules, the Chancellor will need to raise taxes and/or cut spending in the fiscal update on 26th March.
Key events
Over in the eurozone, the private sector is barely growing this month.
The latest poll of purchasing managers at companies across the euro area shows a marginal rise in output so far this month.
Data provider S&P Global’s Flash Eurozone Composite PMI Output Index has come in at 50.2, matching January’s reading, and just above the 50-point mark that shows stagnation.
The services sector expanded, but manufacturing continued to contract.
The report shows that new orders continued to fall this month, while companies again lowered their staffing levels amid muted demand. Confidence also dipped and was at a three-month low.
Kalyeena Makortoff
Standard Chartered is looking to offer a new pay package for CEO Bill Winters that would allow the long-standing boss to earn as much as £13.1m in a single year.
Shareholders will be asked to give the green light to a new pay policy at this year’s AGM that will cut Winter’s salary but increase his potential bonus.
The move has been triggered by the UK’s decision to scrap the EU bonus cap which was introduced to limit risk-taking in the wake of the 2008 financial crisis. The cap previously limited payouts to two times a banker’s salary.
Standard Chartered said:
“The new policy represents the most significant change for many years and, as such, we engaged extensively and transparently with our major shareholders throughout the review.”
The offer came as StanChart announced that Winters had been handed a £10.7m pay package for 2024, a 46% jump from a year earlier, thanks to a long-term incentive scheme bonus worth £6.1bn.
Commenting on his new prospective package – and cut salary – Winters told journalists:
“I’ll have to explain to my mother why my salary has been cut by half… but if we perform well, I’ll earn more money. If we perform poorly, I’ll earn quite a bit less than I would have otherwise. That’s exactly as it should be.”
Mel Stride MP, Shadow Chancellor of the Exchequer, has opined on the public finances:
“The latest borrowing figures expose the true cost of Labour’s reckless economic policies.
“Instead of reining in spending, the Labour Chancellor has piled billions onto the national debt by maxing out the national credit card. Under Labour, Britain is stuck in a vicious cycle of higher debt, rising inflation, and increasing taxes. “Millions are paying the price of this economic mismanagement.“
[Reminder: the UK recorded its biggest surplus on record in January, but over the financial year so far, £118.2bn has been borrowed – £11.6bn more than a year earlier]
Banks fined £100m after traders shared sensitive information about UK bonds
Four banks have been fined more than £100m after traders shared sensitive information with each other about UK government debt they were buying and selling.
Citi, HSBC, Morgan Stanley and Royal Bank of Canada will pay fines totalling over £100m, while Deutsche Bank – which blew the whistle on the practice- has immunity.
The information sharing took place between 2009 and 2013, and involved traders sharing details about the buying and selling of UK bonds, known as gilts, and gilt asset swaps.
Announcing the settlement, the Competition and Markets Authority (CMA) says the banks have implemented extensive compliance measures to ensure this behaviour does not happen again.
Juliette Enser, executive director of Competition Enforcement at the CMA, said:
The financial services sector is an integral part of the UK economy, contributing billions every year, and it’s essential that it functions effectively. Only through healthy and competitive markets can we ensure businesses and investors have confidence to invest and grow – for the benefit of all in the UK.
The fines imposed today reflect the CMA’s commitment to dealing with competition law breaches and deterring anti-competitive conduct. The fines would have been substantially higher had the banks not already taken unusually extensive steps to make sure that this doesn’t happen again.
Here are the fines:
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Citi: £17,160,000 – this includes a 35% leniency discount and a 20% reduction for settling in advance of the CMA issuing its Statement of Objections
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HSBC: £23,400,000 – this includes a 10% reduction for settling after the CMA issued its Statement of Objections
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Morgan Stanley: £29,700,000 – this includes a 10% reduction for settling after the CMA issued its Statement of Objections
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Royal Bank of Canada: £34,200,000 – this includes a 10% reduction for settling after the CMA issued its Statement of Objections
In the energy sector, a government-appointed commission has warned that Britain’s electricity distribution network requires more proactive investments to help deliver the country’s net zero emissions target.
In its latest report, the National Infrastructure Commission (NIC) explained that the current regulatory process was too complex and focused on short-term costs, rather than the wider goals of economic growth and decarbonisation,
It says:
“Price controls will need to be reformed to enable proactive investment.”
NIC estimates that investment of £37bn-£50bn could be needed by 2050 to bolster the distribution network, as power demand is set to couble by 2050 as heating, transport and industry increasingly turn to electricity to decarbonise.
Britain’s income from inheritance tax is on track to hit a record this financial year, having risen around 10%.
Inheritance Tax receipts for April 2024 to January 2025 are now £7.0bn, new data from HMRC shows, which is £700m higher than the same period last year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says:
“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.
Following the smaller than expected budget surplus in January, it will “probably be touch and go as to whether the Government’s fiscal rules will be met” when the OBR updates its projections at the end of March.
So says Matt Swannell, chief economic advisor to the EY ITEM Club, who explains:
“The public sector was in surplus by £15.4bn in January. However, a surplus in January is commonplace as tax receipts get an annual boost from self-assessed tax payments. And while on the surface this looks a positive reading, it is a smaller January surplus than the £20.5bn the OBR had expected in its October forecast. Combined with previous forecast misses over the last few months, borrowing across the current fiscal year is now running £12.8bn ahead of the OBR’s Autumn Budget projections.
“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.
Retail sales across Great Britain bounce back in January
In other economic news, retail sales rebounded surprisingly strongly last month.
The Office for National Statistics reports that retail sales volumes across Great Britain rose by 1.7% in January.
This follows a fall of 0.6% in December – which has been revised down from the first estimate of a 0.3% fall.
Perhaps unexpectedly, the ONS reports that food stores sales volumes rose by 5.6% compared with December (when, surely, people were stocking up for Christmas?!).
It says:
This is the largest rise since March 2020, putting index levels at their highest since June 2023. This follows four consecutive falls on the month, ending in December 2024 when index levels were their lowest since April 2013.
Supermarkets, specialist food stores like butchers and bakers, and alcohol and tobacco stores all rose over the month. Retailers suggested that the increase was because of more people eating at home in January.
[Part of the challenge with this data is that it’s seasonally adjusted…]
Nabil Taleb, economist at PwC UK, agrees that “there’s no respite” for Rachel Reeves.
Taleb explains:
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.”
Bad news continues for Chancellor, says Capital Economics
City consultancy Capital Economics have a blunt verdict on January’s record budget surplus – the “bad news continues for the chancellor”.
That’s because January’s budget surplus, of over £15bn, is more than £5bn less than the Office for Budget Responsibility had forecast – which means Rachel Reeves’s headroom to keep within her fiscal rules has narrowed.
Alex Kerr, UK economist at Capital Economics, explains:
While January’s disappointing public finances figures may not be as bad as they first appear, they continue the run of bad news for the Chancellor in 2025 and underline the difficult choices she faces.
While there is increasing pressure on the government to commit to higher defence spending, the OBR is likely to conclude that the Chancellor’s headroom against her fiscal rules has been wiped out and she will probably need to tighten fiscal policy as a result.
Kerr explains that the undershoot was largely driven by disappointing tax receipts, which were £4.6bn below the OBR’s forecast (see earlier post), “reflecting the recent weakness of the economy”.
It’s possible, though, that the timing of tax returns is responsible too – meaning receipts in February are stronger than expected.
But, Kerr concludes, the current budget deficit is on track to overshoot the OBR’s 2024/25 fiscal year forecast of £55.5bn (2.0% of GDP) by £10.0bn.
He fears that Reeves’s options ahead of next month’s spring statement are “bleak”, given the additional pressures to increase defence spending, and warns:
Higher market interest rate expectations and gilt yields than at the time of October’s Budget alone suggest the Chancellor’s headroom against her fiscal mandate has been whittled down from £9.9bn to £2.8bn.
Combined with the recent weakness of productivity and GDP growth, it may have been wiped out completely. So in order to meet her fiscal rules, the Chancellor will need to raise taxes and/or cut spending in the fiscal update on 26th March.
Interest payable on central government debt hit £6.5bn
The cost of servicing Britain’s government debt rose year-on-year last month, taking a bite out of the budget surplus.
The interest payable on central government debt was £6.5bn in January 2025, a £2bn jump compared with January 2024.
That’s the second highest January figure since monthly records began in 1997, after the record bill in January 2023.
It’s lower than in December, though, when the interest bill hit £9bn.
These figures are driven by changes in the interest rates on index-linked debt, which rises or falls in line with the RPI inflation rate.
Darren Jones, chief secretary to the Treasury, has responded to January’s public finances data, saying:
“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.”
The Office for National Statistics’ deputy director for public sector finances Jessica Barnaby says:
“While the public finances are often in surplus in January, this year saw the biggest monthly surplus on record, with high January self-assessment receipts bolstering income.
“However, over the financial year to date as a whole, borrowing was still up on last year and was the fourth-highest on record for the year to date.”
UK tax receipts weaker than expected
Although it’s a record level, the UK’s budget surplus was lower than forecast last month – because self-assessment taxes rose by less than expected.
The Office for National Statistics reports that :
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Self-assessment income tax receipts rose by £4.2bn year-on-year in January to £25.9bn – a strong figure, but £3bn less than the £28.9bn forecast by the Office for Budget Responsibility.
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Self-assessment Capital Gains Tax receipts fell by £300m year-on-year to £10.3bn, and £1.1bn less than the £11.4bn forecast by the OBR.
Introduction: UK posts record January budget surplus
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
A flurry of data this morning will show how the UK economy is faring in early 2025, including the latest borrowing data, retail spending statistics, and a healthcheck on businesses across the country.
And the breaking news is that Britain recorded its highest January budget surplus on record last month – but the windfall is not as large as expected.
The Office for National Statistics has estimated that the public sector was in surplus by £15.4bn in January 2025, as tax receipts exceeded government spending.
That’s the highest January surplus since monthly records began in 1993.
This is much better than in December, when borrowing jumped by more than expected.
January is usually a bumper month for tax receipts, as the deadline to file self-assessment tax returns falls at the end of the month.
But unfortunately, January’s surplus is £5.1bn smaller than the £20.5bn surplus which the Office for Budget Responsibility had pencilled in for the month.
The ONS also reports that combined self-assessed income and Capital Gains Tax receipts were provisionally estimated at £36.2bn for January – the highest January receipts since monthly records began in 1999, and £3.8bn more than a year earlier,
So far this financial year, government borrowing has now reached £118.2bn – £11.6bn more than at the same point in the last financial year and the fourth-highest financial year-to-January borrowing since monthly records began in 1993.
In a small fillip for the chancellor, research group GfK has reported this morning that consumer confidence rose a little last month – but it still weaker than a year ago.
The agenda
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7am GMT: UK public finances for January
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7am GMT: Great British retail sales for January
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9am GMT: Eurozone flash PMI report for February
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9.30am GMT: UK flash PMI report for February
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2.45pm GMT: US flash PMI report for February
