23 March 2026: Public finance data shows borrowing falling faster than expected

Friday’s data on public finances is particularly significant, given the substantial effect of January’s self-assessment returns on overall revenues and borrowing for the year.

Income tax receipts had been somewhat disappointing throughout 2025, falling short of forecasts despite inflation and wage growth exceeding expectations.

However, the data indicates that self-assessment revenues in January were nearly £2 billion (6%) above forecast. The government’s plan to run a current budget surplus from 2028-29 onwards depends on substantial reductions in borrowing over the coming years. These reductions will be much easier to achieve if tax revenues continue to perform strongly.

The government normally runs a surplus in January, raising more than it spends. The latest figures show that the surplus in January was £30 billion. This is more than double the figure for the same month last year, and a £6 billion improvement on the OBR’s forecast from November.

Much of the difference comes from much lower debt interest payments in January; the government spent £2.3 billion on debt interest last month, about £4 billion less than the OBR's forecast.

Government borrowing is expected to be lower this year than last year, as the Chancellor takes further steps towards her target of a current budget surplus by 2029-30. Cumulative borrowing over the first ten months of this year is £15 billion lower than last year, meaning that borrowing is coming down even faster than expected.

These figures will be revised and revised again, and so we should not place too much weight on figures from any single month. All the same, the numbers do provide important insights into the state of the economy and public finances, and point to issues that could affect the Office for Budget Responsibility’s forecast in a couple of weeks.

Looking ahead, economists estimate that the 'Trumpflation' shock from the Iran war could force the Chancellor to find a £20 billion shortfall in public finances.

Higher inflation caused by soaring oil and gas prices will lead to larger public-sector pay settlements, increased welfare spending, and higher borrowing costs for the government.

With the vital Strait of Hormuz still closed and the conflict showing no signs of easing, Reeves faces mounting pressure to devise an energy bills bailout for struggling households when the cap is revised again in July.

However, questions have been raised about how she can secure the funds to support families amidst rising costs.

Despite Reeves having increased the tax burden to a record high since taking office at No. 11 Downing Street, figures released last week showed the public sector recorded the highest February borrowing outside of Covid, far surpassing analyst expectations.

The IFS told the Sunday Telegraph that rising inflation could significantly impact public-sector pay, potentially increasing expenditure by £4 billion.

It is difficult to understand why the Prime Minister sends junior ministers to face difficult questions on TV. Yesterday, the Communities Minister faced questions regarding Iran’s ability to launch missiles that could reach several European Capitals.

He simply stonewalled as much as he could, frustrating the interviewer and, no doubt, the viewers. It remains unclear if Iran has such a capability despite having launched a strike on Diego Garcia over the weekend. It fell short, but no one knows by how much.

Sterling saw a strong performance last week, as it became apparent that the war is not going exactly as planned for the U.S. The U.S. economy may experience far more negative consequences from the conflict than Trump had imagined.

The pound rallied to a high of 1.3467, and even though it dropped back to close at 1.3341, it was still significantly higher on the week.

At the Federal Reserve’s most recent policy meeting, held last week, the Central Bank maintained its benchmark interest rate despite ongoing pressure from the President to lower rates.

Fed Chair Jerome Powell made it clear that pressure from the White House would not influence the Fed’s approach. He stated that the Bank must continue to focus on inflation, employment, and the broader economy, not on political interference.

Powell has also refused to resign as Chair of the Federal Reserve. “I have no intention of leaving the board until the investigation is fully concluded, with transparency and finality,” Powell said. AP News reported that the Federal Reserve decided to keep interest rates steady because inflation is currently inadequately controlled.

The wider economy continues to face uncertainty. Powell mentioned that the Fed is closely monitoring prices, especially since tariffs and higher energy costs could exacerbate inflation.

“Let me say we’re well aware of the performance of inflation over the past few years and how a series of shocks have disrupted the progress we’ve made over time. That happened most recently with tariffs, and now there will be some effects on inflation going forward,” Powell said.

This stance put him directly at odds with President Donald Trump, who has been openly demanding lower borrowing costs for months. Trump argued that rates should come down now and attacked Powell personally, calling him incompetent and stubborn during remarks to reporters.

“He is under investigation because he is building a building, for hundreds of millions of dollars more than it’s supposed to cost.

Now, I know it’s gross incompetence, because I happen to think he’s grossly incompetent,” Donald Trump told CNN. He continued, “Today, certainly, he should be lowering interest rates, alright, certainly, who would not lower them? But he’s stubborn, and he’s got Trump Derangement Syndrome.”

Federal Reserve Governor Christopher Waller said on Friday he had been prepared to dissent in favour of a rate cut following the February jobs report, but growing inflation concerns changed his stance.

Speaking to CNBC, Waller said the inflation picture has worsened because the Strait of Hormuz remains closed two weeks after its initial closure.

The Fed Governor noted that there are reasons to believe the breakeven payroll number could be very low, adding that, while he understands the math, he cannot reconcile it emotionally.

Waller said the closure of Hormuz suggested more inflation pressure ahead, and that oil prices can bleed through to core inflation at some point.

The Fed official emphasised that exercising caution now does not mean the Central Bank will stay put for the rest of the year. He said he does not know where the situation will go, but caution is warranted.

Waller added he would advocate for rate cuts again later in the year if labour market conditions weaken.

It comes down to what is considered the most harmful to the economy: high and rising inflation or negative monthly job growth. This is the very definition of stagflation, and the Fed will need to face up to it over the next two quarters.

The dollar index weakened significantly last week, even as its safe-haven status briefly allowed it to break the 100 barrier early in the week. It reached a high of 100.47, then dropped to a low of 98.98, before recovering as the Fed left rates unchanged, closing at 99.50.

The European Central Bank is ready to respond swiftly to signs that inflation expectations are exceeding 2% due to the war in Iran, according to Bundesbank President Joachim Nagel and ECB President Christine Lagarde.

While monetary policy cannot prevent energy shocks from causing short-term deviations from the target, the ECB must act if actual price increases have ripple effects that could influence the medium-term trend, the Governing Council Member said in a speech in Goslar, Germany.

He raised nearly a dozen questions, including how long the fighting in the Middle East will last and how it will affect inflation and economic growth, highlighting the great uncertainty officials face in developing a response.

Earlier on Friday, he said the ECB could consider raising interest rates as soon as next month.

We must remain vigilant,” Nagel said a day after the ECB left rates at 2%.

“Since the medium-term implications for inflation can’t yet be reliably assessed, a wait-and-see approach is appropriate.

We can react quickly if necessary,” President Christine Lagarde confirmed. The ECB is “well positioned and well equipped” to handle the fallout of the war, which has sent energy costs soaring and threatens to rattle global supply chains.

New projections indicate faster inflation and weaker growth, although these will be affected by the war in Iran and rising energy prices.

The baseline scenario sees inflation rise to 3.1% by the end of Q2, while the most severe scenario sees it rise to 6.3% before falling back to target by 2028.

Although Lagarde did not specify whether a rate increase is imminent, policymakers are prepared to hike rates in April if inflation deviates significantly above target.

"We’ve seen during the war in Ukraine that sharp increases in energy prices can lead to broad-based gains in inflation,” Nagel said.

“The likelihood of this happening increases the more energy prices rise, and the longer they remain at elevated levels." The ECB is starting “from a position of strength” and is “equipped and prepared to act quickly and decisively if necessary,” he added.

Discussing Germany’s economy, Nagel said the Bundesbank expects spending on defence and infrastructure to boost growth, urging the government to do “everything in our power to seize the opportunities for economic growth that are within our control.”

“The goal is clear: to put the German economy back on a solid growth path through reforms and forward-looking investments in infrastructure,” he said. “Political leaders have already set some things in motion. Now it’s time to implement the reforms thoroughly and effectively.”

Consumer confidence data for March will be published later this afternoon. This is likely to have taken a significant hit from rising energy prices and the expectation that the war in Iran will be longer-lasting than first expected.

The Euro reacted positively to hawkish comments from the ECB on interest rates. It rallied to a high of 1.1616 and closed at 1.1572.

Have a great day!