Chancellor Rachel Reeves is facing growing pressure to either increase taxes or reduce public spending as new official figures reveal that government borrowing is proving more costly than anticipated, while tax revenues are falling short of expectations. Despite the Office for National Statistics (ONS) reporting the largest budget surplus since records began in 1993, the data paints a complex picture of the UK’s financial health. In January, the public sector generated a surplus of £15.4 billion, meaning it collected more in taxes and other income than it spent. However, this surplus comes alongside a worrying trend: government borrowing has risen by £11.6 billion compared to the previous year, marking the fourth-highest level on record. For the fiscal year as a whole, borrowing has exceeded the Office for Budget Responsibility’s (OBR) forecast of £105.4 billion, reaching £118.2 billion. These figures are particularly concerning given that January is typically a strong month for tax collection due to self-assessed returns, yet both tax revenues and the surplus fell below what economists had predicted.
The latest data on public sector finances is the first to be released since January, when financial markets experienced significant jitters. During that time, the pound weakened, and the costs of borrowing for both 10- and 30-year government bonds skyrocketed. This spike in borrowing costs has raised concerns that Chancellor Reeves may be forced to either abandon her self-imposed fiscal rules or implement measures to raise taxes or cut spending. Her fiscal rules include a commitment to reduce government debt and balance the budget by 2030, goals that are now under threat. The surge in borrowing costs, driven in part by higher inflation and expectations of prolonged interest rate hikes, has eroded the chancellor’s so-called “fiscal headroom,” the financial space she has to make spending decisions while staying within her rules. Experts warn that without intervention, the situation could deteriorate further, leaving Reeves with difficult decisions to make in the coming months.
Economists and research firms are already sounding the alarm, predicting that the chancellor will have no choice but to take action to stabilize the nation’s finances. Elliott Jordan-Doak, a senior UK economist at Pantheon Macro, has stated, “It will only get worse from here,” suggesting that the government’s fiscal headroom has been entirely wiped out. His firm expects that spending cuts will be announced soon, followed by potential tax increases in the autumn. Similarly, Alex Kerr, a UK economist atCapital, agrees that Reeves will need to raise taxes and/or cut spending in her fiscal update on 26 March to meet her fiscal rules. These warnings underscore the gravity of the situation and the tough choices ahead for the chancellor.
In response to the data, Darren Jones, Reeves’s deputy, emphasized the government’s commitment to economic stability and its fiscal rules. He stated, “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.” Jones highlighted that the government is taking a meticulous approach to reviewing public spending, scrutinizing every pound allocated to ensure it aligns with the nation’s priorities as part of its “plan for change.” This focus on financial discipline reflects the government’s determination to maintain credibility and stability in the face of economic challenges.
However, the pressure on Reeves is only intensifying as the UK’s financial situation becomes increasingly precarious. With borrowing costs at decades-long highs and tax revenues underperforming, the chancellor must decide whether to increase taxes, reduce spending, or potentially revise her fiscal rules. Each option carries significant political and economic risks. Raising taxes could weigh on households and businesses already grappling with high inflation, while cutting spending might impact key public services and welfare programs. On the other hand, easing her fiscal rules could undermine confidence in the government’s ability to manage the economy responsibly.
As the March 26 fiscal update approaches, all eyes will be on Chancellor Reeves and her strategy to address the growing financial pressures. The coming weeks will be critical in determining whether the government can restore stability to the public finances, maintain its fiscal rules, and balance the competing demands of taxpayers, public services, and economic growth. The decisions made now will have far-reaching consequences for the UK’s economy and the lives of its citizens.
