Market report: Surplus surprise masks ongoing spending pressures

Although revenues were stronger than expected, spending shows no sign of being reined in; January retail sales surprised to the upside – although weak employment data suggest the improvement may prove fragile

John Wyn Evans, Head of Market Analysis, at Rathbones, one of the UK’s leading wealth and asset management groups, says:

“The government achieved a £30.4bn surplus in January as self-assessment tax payments for the 2024/25 tax year poured in. This was £16bn higher than in 2025 and also above the OBR’s forecast of £24.1bn. The freezing of income tax thresholds played some part in this bonanza, as did a bumper haul of Capital Gains Tax receipts. The latter reflect asset sales made as long ago as the autumn of 2024 when investors were concerned that the Chancellor would raise the CGT rate to a much more punitive level.

“That surge is unlikely to be repeatable. For the tax year so far, the cumulative borrowing of £112.1bn is now comfortably (£14.6bn) below last year’s figure and on track to undershoot the OBR’s £138bn target.

“Even so, the Chancellor would be ill-advised to get carried away with this data. There are two sides to a balanced fiscal position. Although revenues were stronger than expected, spending shows no sign of being reined in, with public sector wage growth, for example, being a constant thorn in the side of the Bank of England’s Monetary Policy Committee as it debates monetary policy.

“Having said that. at least the interest bill on existing debt was lower than forecast as bond yields and index-linked payments were not as high as in the OBRs model. We continue to monitor the political situation for signs of a leadership change in the Labour Party, with a shift to the left being a risk factor for the public finances, and consequently the Gilts market and the pound.

Retail sales

“Separately, January’s month-on-month increase of 1.8% in retail sales pointed to a more positive start to the year than expected, with sales volumes now at their highest level since August 2022. Online jewellery sales were reported as one unusual area of strength, perhaps owing to the surge in the price of gold and silver. Sports supplements also sold well as New Year health regimes kicked in. Even so, the recent weak employment data suggest that we should not get too carried with this piece of good news, either. GDP growth forecasts for 2026 are huddled around 1%.

“The initial market reaction was to mark the pound a little higher on the basis of the more solid footing of the finances and the somewhat lower probability of an early interest rate cut, but those moves faded as traders digested the fine details. Gilts are performing a little better than European peers this morning, with the 10-year yield down 2 basis points at 4.34%, testing the lower level of its range over the last year or so.

“The next big diary entry is the Chancellor’s Spring Statement on 3rd March, accompanied by the OBR’s current outlook. This is not supposed to resemble a Budget and, on current evidence, Ms Reeves will not need to make any changes in terms of maintaining her fiscal headroom. Households, businesses and investors would welcome a non-event.”