UK sees record budget surplus alongside rising retail sales and strengthening private sector activity

A wave of unexpectedly strong economic data has bolstered the UK’s fiscal and growth outlook, providing Chancellor Rachel Reeves with a substantial pre-spring statement boost. The Office for National Statistics reported a record monthly budget surplus of £30.4 billion for January, more than double the £14.5 billion recorded a year earlier and the highest since monthly records began in 1993.

This surplus, which significantly exceeded the Office for Budget Responsibility’s forecast of around £24 billion, was driven by a sharp rise in tax receipts. Combined self-assessed income and capital gains tax revenues surged to £46.4 billion, a £10.5 billion increase on January 2025 and the highest January total on record. The ONS noted that capital gains tax receipts alone saw a £17.0 billion surge, attributed by analysts to taxpayers seeking to benefit from lower rates ahead of an anticipated rise.

ONS chief economist Grant Fitzner stated that revenue was strongly up on the same time last year, while spending was little changed due to lower debt interest payments largely offsetting higher costs on public services and benefits. Falling inflation reduced the interest bill on index-linked government debt to £1.5 billion, down from £6.5 billion in January 2025.

Retail momentum and sector details

Separate ONS data revealed a robust recovery in consumer spending, with retail sales volumes jumping 1.8% in January compared to December, smashing forecasts of 0.2% growth. This was the largest monthly rise since May 2024, leaving sales at their highest level since August 2022. On an annual basis, sales were 4.5% higher.

The ONS reported that growth was partly driven by strong performances from mail-order retailers, boosted by sales of sports supplements and unprecedented demand reported by online jewellers. Sales of artwork and antiques also contributed, while motor fuel, tech retailers, and furniture stores performed well over the latest three-month period. However, over the quarter, sales were only up 0.1% due to a weak November.

Grant Fitzner noted that retail sales rose slightly in the latest three months as sales continued to pick up in the new year following a weak November.

Business activity accelerates

Further positive signs came from the private sector, where S&P Global’s flash UK Composite Purchasing Managers’ Index rose to 53.9 in February, a 22-month high and up from January’s 53.7, indicating faster growth. Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey data suggested GDP could rise by just over 0.3% in the first quarter if the performance is sustained.

He explained that a robust upturn in new work was led by the service sector, with manufacturing reporting a surge in export orders of a magnitude not seen since the pandemic. However, employment decreased for the 17th successive month, with companies focused on boosting productivity to cut costs.

The positive momentum extended to the Eurozone, where S&P Global reported business activity accelerated faster than forecast in February, with its composite PMI rising to 51.9 from 51.3 as manufacturing swung back to growth for the first time since October.

Markets and fiscal implications

The data buoyed financial markets, with the FTSE 100 share index gaining 38 points to 10,665. Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said the market was supported by the significant reduction in public borrowing and the surge in January retail sales. UK government bond prices also strengthened, pushing the yield on five-year gilts to 3.765%, its lowest since September 2024.

Economists underscored the implications for public finances. With ten months of the financial year complete, borrowing stands at £112.1 billion, which is £8.3 billion less than the OBR’s November forecast. Martin Beck, chief economist at WPI Strategy, said the deficit is on course to undershoot the OBR’s full-year forecast of £138.3 billion by around £10 billion, a positive for fiscal credibility. Current borrowing, relevant to one of the Chancellor’s fiscal rules, also came in below expectations.

Nick Ridpath, research economist at the Institute for Fiscal Studies, said the strong self-assessment revenues, which were almost £2 billion higher than forecast, were important given their outsized impact on yearly borrowing. He noted that the government’s plan to run a current budget surplus from 2028-29 onwards will be far easier if tax revenues continue strongly.

Simon French, chief economist at Panmure Liberum, said the data reinforces a recovery in economic momentum since the November Budget. Paul Dales, chief UK economist at Capital Economics, added that it gives the chancellor something positive to point to in her fiscal statement on 3 March, though he cautioned that the capital gains tax surge was not sustainable and that borrowing has failed to come down much this year.

Broader fiscal picture and inheritance tax

Despite the surplus, the UK’s net debt-to-GDP ratio was provisionally estimated at 92.9% at the end of January, unchanged from a year ago. In other tax news, HMRC data showed Inheritance Tax receipts for April 2025 to January 2026 were £7.1 billion, £100 million more than the same period last year.

Isaac Stell, investment manager at Wealth Club, argued that frozen allowances and new rules bringing pensions into scope mean more ordinary families are being pulled into the inheritance tax net. He said HMRC investigations have increased, with over 14,000 bereaved families investigated for potentially underpaid tax since 2022-23, creating situations where middle-class families are increasingly caught off guard.