Do the latest OBR figures mean Rachel Reeves is doing something right?

Borrowing is down, and tax receipts are up, so could it be that the fortunes of the beleaguered chancellor are finally improving? Sean O’Grady takes a look

In a rare welcome surprise for the chancellor, the latest monthly figures on government borrowing actually show a trend towards a substantial improvement, both in relation to recent performance and against the forecasts of the Office for Budget Responsibility (OBR). Thus, in the 10 months of the fiscal year to January, the government borrowed £112.1bn, against an expectation of £120.4bn. That’s still very high, but heading in the right direction. Trebles all round, then, at the Treasury?

Why is borrowing coming down?

Taxes. The extremely unpopular tax rises implemented by Rachel Reeves since she came to office may have wrought all sorts of damage in the economy, but they have clearly helped to fix the public finances. January is obviously the most important time for tax receipts, with most self-assessment returns completed by the deadline on the 31st.

We now know that combined self-assessed income and capital gains tax receipts are estimated at £46.4bn in January 2026, £10.5bn more than in January 2025. As a result, the surplus of taxes over spending in January stood at £30bn, more than double the figure for the same month last year, and a £6bn improvement on the OBR’s forecast from November. Encouragingly, much of that is also down to significantly lower debt interest spending in January, thanks to gently declining interest rates.

Will the good news keep coming?

That depends. Provided the economy doesn’t falter from its admittedly feeble growth rate and interest rates continue to edge downwards, things will get better. There is always the risk of some external shock destabilising the UK or the world economy – a war between America and Iran being the obvious current danger, especially with regard to oil prices. Protectionist tendencies in the EU also present a clear threat.

We will get a much clearer idea of the outlook for the economy when a no doubt chirpy Reeves delivers her spring statement on 3 March. This is designed to be a low-key affair, as the OBR now only “marks” Reeves’s “homework” once a year, with the Budget in the autumn, but if they were going to deliver a verdict this time round on her “fiscal headroom”, it would likely be very positive. Fears of another tax raid should be allayed.

What do the experts think?

One key index is the way in which Ben Zaranka, associate director of the Institute for Fiscal Studies (IFS), discussed the figures on BBC Radio 4’s Today programme. The IFS is institutionally gloomy, albeit it has a good deal to be gloomy about, but on this occasion, Zaranka could scarcely conceal his excitement about the numbers.

Market reaction was more restrained, but also supportive. It doesn’t feel like the financial crisis that’s been eagerly predicted by Nigel Farage and others will destroy the Labour government this year (the 50th anniversary of the great IMF crisis of 1976).

Any more good news?

It makes it even more likely that the Bank of England will shave another quarter percentage point off Bank rate in March, which will be good for mortgage holders, businesses and investment; inflation is widely expected to return to the official target of 2 per cent later this year.

Looking further ahead, if Reeves starts to consistently outperform the OBR forecasts, she might just find herself with some welcome fiscal room for manoeuvre as the next general election approaches in 2028-29 – so some tax cuts to “reward” the voters for their forbearance. AI might provide an unexpected boost as well, just as previous technological revolutions have – but with much disruption along the way.

And the snags?

It’s all relative. Broadly speaking, the national debt is at its highest level in relation to the national income for more than 60 years, and the annual current deficit – spending over tax receipts allowing – is predicted to persist for a few more years.

Private-sector investment and productivity growth is sluggish by comparison with our G7 neighbours, and inflation higher – with “homegrown” wage growth and service sector costs proving “sticky”. Some economists still feel the UK is stuck in a “doom loop” – low growth leading to weak public finances leading to tax hikes leading to low growth, and so on. Others blame the continuing drag on trade and investment caused by Brexit.

Fixing the public finances, as the coalition government discovered more than a decade ago, is a necessary (but not alone sufficient) condition for raising the trend rate of growth, and with it the living standards of the British people.