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Rachel Reeves given smaller than expected £15bn tax boost to UK finances
Rachel Reeves given smaller than expected £15bn tax boost to UK finances
The latest data reveals that in January 2025, the UK Treasury recorded its highest surplus since records began in 1993. This was driven by increased revenues from self-assessment income tax filings and capital gains tax, resulting in a tax boost of approximately £15.4 billion.
However, despite this record-breaking surplus, which reversed the public finance deficit of £17.8 billion seen in December, the figure still fell short of expectations set by City economists and the Office for Budget Responsibility (OBR). Both had projected a surplus of £20 billion.
The OBR, the government’s independent forecasting body, noted that while self-assessment income rebounded strongly, it has remained below expected levels since the onset of COVID-19 in 2019, leading to only modest growth for the Treasury. Revenues from corporate tax and capital gains tax also fell short of forecasts.
Analysts believe that Chancellor Rachel Reeves will need a more substantial fiscal boost to adhere to the government’s financial rules, which cap annual deficits and debt levels by the end of the parliamentary term.
Reeves is expected to revise some fiscal measures during the Spring Budget Statement on March 26. This could include increasing spending on public services and defense to align with European support for Ukraine, while also managing rising borrowing costs on international financial markets.
Last week, Reeves stated that the UK must find funds to support higher defense spending, potentially through savings in other areas of the government budget. However, many Labour backbenchers are concerned that this could lead to delays in planned investments to improve public services and make welfare applications more difficult.
According to the Office for National Statistics, government borrowing for the fiscal year from April 2024 to January 2025 reached £118.2 billion, £11.6 billion higher than the same period last year. This marks the fourth-highest borrowing figure for this period since monthly records began in 1993.
Meanwhile, interest payments on debt in January alone totaled £6.5 billion, the second-highest monthly figure in 27 years.
PwC economist Nabil Taleb commented, “This reflects the fiscal challenges the government is facing. Rising debt servicing costs as a share of total revenue will make public finances more vulnerable to future economic shocks.”
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UK wages continue to outpace inflation
According to data from the Office for National Statistics (ONS), annual wage growth (excluding bonuses) in the UK reached 5.9% from October to December 2024, up from the previous figure of 5.6%. Wage growth in the private sector stood at 6.2%, while the public sector lagged behind at 4.7%.
After adjusting for inflation, real wages increased by 3.4% year-on-year during the same period, remaining above the latest inflation rate of 3%. Meanwhile, the unemployment rate held steady at 4.4%. However, the ONS cautioned that low response rates to employment surveys suggest these figures should be interpreted with caution.
A Gradual Slowdown Expected
Yael Selfin, Chief Economist at KPMG UK, predicted a “steady decline in wage growth” over the coming months.
Some economists argue that the slight uptick in private-sector wages—which the Bank of England closely monitors when setting interest rates—is unlikely to shift policymakers away from their current strategy of “gradually” reducing borrowing costs. Earlier this month, the Bank of England lowered interest rates from 4.75% to 4.5%.
Pantheon Macroeconomics also noted that recent wage growth data suggests policymakers will remain cautious about cutting rates too quickly.
Challenges Ahead for Businesses
With employer national insurance contributions set to rise in April, along with increases in the minimum wage and a reduction in business tax relief, many companies have warned of potential layoffs and price hikes for goods and services. These factors could also dampen future wage increases and curb business investment.
Jane Gratton, Deputy Director of Public Policy at the British Chambers of Commerce, noted, “The latest employment data shows that businesses’ willingness to hire has significantly weakened.”
The Treasury has reiterated that its budget measures aim to provide businesses with stability and support for investment and growth. However, concerns remain that spending cuts by businesses could hinder economic growth—a key priority for the government in its efforts to raise living standards.
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Four banks fined $132 million for sharing UK bond market information
The UK’s Competition and Markets Authority (CMA) issued fines last week against four major banks, warning that their traders had exchanged sensitive information regarding UK government bonds between 2009 and 2013. The total fines amount to £104.5 million.
The banks fined include:
- Citi
- HSBC
- Morgan Stanley
- Royal Bank of Canada (RBC)
In May 2023, the CMA determined that these banks, along with Deutsche Bank, had violated competition laws during their transactions. However, Deutsche Bank was granted immunity from fines as it voluntarily reported the misconduct to the CMA.
Collusion Through Private Chats
The investigation revealed that traders from the banks engaged in one-on-one conversations via Bloomberg chatrooms after the global financial crisis, sharing competitively sensitive information related to the pricing of UK government bonds, known as gilts, as well as asset swaps.
Juliette Enser, Executive Director of Enforcement at the CMA, stated: “These significant fines reflect the CMA’s commitment to tackling breaches of competition law and deterring anti-competitive behavior.”
She also noted that the banks had since taken extensive measures to prevent similar violations in the future, which helped them avoid even harsher penalties.
Breakdown of Fines
- Royal Bank of Canada (RBC) received the largest fine: £34.2 million
- Morgan Stanley: £29.7 million
- HSBC: £23.4 million
All three banks cooperated with the investigation after the CMA issued its statement of objections, earning a 10% reduction in their fines.
