Rachel Reeves faces budgetary pressures after january tax shortfall
British chancellor of the exchequer Rachel Reeves has been dealt another financial blow as January’s tax revenues fell short of expectations. This comes less than two months before she is due to provide an update on whether she is on track to meet her borrowing targets.
Typically, the public finances show a surplus in January when annual tax payments for the previous financial year are settled. However, the Office for National Statistics (ONS) reported that income tax and capital gains tax receipts were below projections.
Despite registering a record surplus of £15.4 billion in January, the figure fell short of the £20.5 billion anticipated by the Office for Budget Responsibility (OBR) and a similar estimate from a Reuters poll.
For the first ten months of the financial year, total borrowing reached £118.2 billion—the fourth-highest on record and significantly above the OBR’s forecast of £105.4 billion. The discrepancy arose due to an upward revision of past debt interest payments and a downward revision of corporation tax receipts, in addition to the lower-than-expected January surplus, according to the ONS.
These figures have intensified concerns among economists that Reeves may struggle to meet her debt reduction commitments when the OBR releases its updated borrowing projections on 26 March.
Matt Swannell, Chief Economic Advisor to the EY ITEM Club, a leading economic forecasting group, warned that Reeves might be forced to introduce additional fiscal tightening measures next month to stay within her budgetary targets.
“If the OBR’s revised forecast shows that the existing fiscal headroom has been eroded, the government may have to introduce further tax hikes or spending cuts in March,” Swannell said.
Reeves’ maiden budget in October had left her with only £9.9 billion of fiscal headroom to achieve her goal of balancing the UK’s day-to-day spending and tax revenues by the 2029-30 financial year. This was despite implementing the country’s most significant tax rises in decades.
Since then, the situation has worsened. Global borrowing costs have risen, and business sentiment within the UK has weakened. These challenges have been compounded by the impact of Reeves’ £40 billion tax increase and further economic uncertainty stemming from trade tariffs imposed by US President Donald Trump.
Following the release of the latest fiscal data, Reeves’ deputy, Chief Secretary to the Treasury Darren Jones, reaffirmed the government’s commitment to “delivering economic stability and adhering to our non-negotiable fiscal rules.”
More Read
However, the data paints a concerning picture. Public sector net debt, excluding public sector banks, stood at 95.3% of annual GDP in january—0.1 percentage points higher than the previous year and near levels last seen in the early 1960s, according to the ONS.
Additionally, public sector net financial liabilities—a broader measure targeted by Reeves that includes illiquid assets—rose to 82.7% of GDP in January, marking a two-percentage-point increase from the previous year.
With the chancellor under growing pressure to demonstrate fiscal prudence, the coming months will be crucial in determining whether the government can maintain its economic stability pledge while avoiding politically damaging austerity measures. The march fiscal update will be a key moment for Reeves and the Labour government, as they seek to balance economic credibility with voter expectations in the run-up to the next general election.
