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  Title	Reeves may use stealth taxes to fund defence, City warns
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  Published Date	Feb. 21, 2025, 5:43 p.m.
  Summary	Unlock stock picks and a broker-level newsfeed that powers Wall Street. Upgrade Now Reeves may use stealth taxes to fund defence, City warns Chris Price Fri, Feb 21, 2025, 12:43 PM 36 min read In This
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  Content	Unlock stock picks and a broker-level newsfeed that powers Wall Street. Upgrade Now Reeves may use stealth taxes to fund defence, City warns Chris Price Fri, Feb 21, 2025, 12:43 PM 36 min read In This Article: ^FTSE -0.04% COMP -8.18% NWG +1.69% ^HSI +3.99% ^DJI -1.69% Rachel Reeves could use stealth taxes to meet demands for defence spending, says Deutsche Bank - Stefan Rousseau/Pool via REUTERS British workers could face another £10bn stealth tax raid to shore up the public finances and pay for more defence spending, a top economist has warned, as Europe risks losing American military backing. Sanjay Raja, economist at Deutsche Bank, estimates Rachel Reeves would need to spend an extra £15bn to push the defence budget to 2.5pc of GDP, from just over 2pc now. Between £5bn and £10bn could come from squeezing other departments including justice, local government and the environment. “It’s also possible that Chancellor Reeves opts to raise stealth taxes, via an extension of the fiscal drag to pay for a bigger defence budget,” said Mr Raja. “This would give the Chancellor something like £8bn to £10bn per year in tax revenues, rebuilding the Treasury’s buffer against its fiscal rules whilst also addressing its defence spending ambitions.” That suggests extending the Conservatives’ freeze on income tax thresholds which has forced more workers into paying income tax, and into higher tax brackets, even if their earnings have not kept up with inflation. The freeze is currently set to end in April 2028. Another option is to borrow more for military kit, as this counts as investment spending, which is allowed under Ms Reeves’s fiscal rules. Ed Balls, formerly a Labour shadow chancellor, said Ms Reeves should look at abandoning the borrowing rules for defence. “There is a case for the UK Treasury saying that, for a fixed period, we’re going to carve the uplift in defence spending outside the fiscal rules,” he said in his podcast with George Osborne. “I think that is much more credible than a massive tax rise, and I think it is much more credible than undeliverable public spending cuts the markets won’t believe in.” After this morning’s public finances figures, which showed disappointing tax receipts in January, Darren Jones, chief secretary to the Treasury, called the rules “non-negotiable”. “We will never play fast and loose with the public finances,” he said. Read the latest updates below. 05:43 PM GMT Signing off... Thanks for joining us today here on our live blog on the UK economy. You can keep up to date with all the latest from The Telegraph on business and economics here . 05:37 PM GMT Thousands of farms shutting as industry braces for inheritance tax raid Thousands of farms are already disappearing as the industry braces for Rachel Reeves’s inheritance tax raid to take effect in April. Twice as many agricultural businesses are closing down as are opening, according to analysis of Office for National Statistics (ONS) data by Cynergy Bank, as the gulf between company deaths and births widens. Story Continues In the final months of 2024, 1,370 businesses in agriculture, forestry and fishing shut their doors for good. Only 670 new companies were founded in the industry, less than half as many. Over the past three years a total of 16,905 have closed in the industry, with 9,055 opening, leaving a net loss of 7,850 businesses. Nick Fahy, the chief executive of Cynergy Bank, said it showed “a sobering picture of the UK business environment”. Read the full story... 05:13 PM GMT Reeves’s Budget had ‘chilling impact on confidence, hiring and investment’ Rachel Reeves’s tax-rising Budget has had “a chilling impact on confidence, hiring and investment”, a leading economist has said. Julian Jessop, an economics fellow at the Institute of Economic Affairs, said: “This week’s economic data has added to evidence that the UK is heading for a bout of stagflation; private sector activity has stalled, inflation is picking up again, and job insecurity is rising too. Even if this bout is mild by past standards, the economy is performing well below the numbers baked into last October’s Budget. “This partly reflects a more challenging international environment – the EU’s major economies are also struggling with weak growth and higher inflation. But the turnround in the UK since last summer has been much sharper and this is undoubtedly due to the fallout from the Budget. “The increases in tax and other business costs have had a chilling impact on confidence, hiring and investment. Firms are also worried about the additional burdens from tighter employment regulations and the rush to decarbonise the grid. “Higher inflation will undermine two of the foundations of any recovery in consumer spending, by eating into the gains in real incomes and dampening hopes of further reductions in interest rates. The Bank of England is now unlikely to cut again until May. “In the meantime, the economy has to weather another fiscal statement and a tight spending review. Further tax increases are not yet inevitable, because there are many moving parts in the OBR’s forecasts, but they are increasingly likely as revenues fall short and borrowings costs remain higher for longer.” Rachel Reeves’s Budget heaped costs onto businesses - Ian Forsyth/Reuters 04:58 PM GMT Stocks struggle amid uncertainty Shares fell on Wall Street, edged higher in Europe and were flat in London amid uncertainty across both sides of the Atlantic. The FTSE 100 was essentially unchanged, while the FTSE 250 fell less than 0.1pc. It came on a day where new figures said that employers were cutting staff sharply ahead of a major rise in National Insurance contributions. The pan-European Stoxx 600 rose 0.5pc. In the US, the S&P 500 is down 0.6pc, the Nasdaq is down 0.8pc and the Dow Jones is down 0.9pc. Joshua Wein, of Hennessy Funds in Chapel Hill, North Carolina, said: “The sell-off in the last couple of days has really been about the uncertainty with the pace of change in the government. “We all knew there would be spending cuts and layoffs of employees, but the pace at which that is happening has given the market a new type of uncertainty that we haven’t seen before.” In Europe, shares have been volatile this week ahead of Germany’s election on Sunday. 04:34 PM GMT Car finance crisis is scaring away US investors, claims FTSE chief US investors are shunning Britain because of the growing car finance scandal, the boss of one of the UK’s biggest investment companies has warned. Louis Goss reports: Andy Briggs, the chief executive of Phoenix Group , said concerns about what the mis-selling scandal could mean for other industries was scaring away overseas cash. Read the full story... 04:23 PM GMT UK in ‘stagflationary situation’, says NatWest The UK is suffering from stagflation and the Bank of England faces a “policy dilemma”, NatWest has said. A closely watched survey of businesses - the purchasing managers’ index - suggested today that firms are cutting staff almost as sharply as at height of the global financial crisis in 2008. Meanwhile, data showed retail sales volumes rose in January for the first time since last August, but another survey showed that weak consumer confidence improved only slightly. Ross Walker, head of global economics at NatWest Markets, said: “It all confirms this policy dilemma for the Bank of England and the stagflationary situation that the UK finds itself in.” Rob Wood, chief UK economist at Pantheon Macroeconomics, said the Bank of England might take some comfort from signs in the PMI that services firms were absorbing some of their higher costs rather than passing them on via higher prices, but history suggested they would try to rebuild their margins soon. “All told, the Monetary Policy Committee will have to be cautious as the employment balance looks too catastrophic to be plausible while price balances look too plausible to be ignored given the strong labour cost pressures coming down the line,” Wood said in a note to clients. 03:59 PM GMT UK challenger bank turns overseas for flotation A British challenger bank which aims to help “professionals, entrepreneurs and ambitious savers grow” has told investors it plans a flotation in New York. Sky News reported that it has said it is targeting a listing on the Nasdaq by the end of 2027. It reportedly told investors it is considering a secondary listing on a Middle Eastern or Indian exchange in 2028. A listing of a UK bank in New York would be a further setback for the London Stock Exchange, which is well-known as a destination for banking stocks, such as HSBC, Barclays and Asia-focused Standard Chartered. Ian Rand, chief executive of Monument Bank, told Sky: “We will explore all options for listing and make the final decision at the appropriate time.” The Telegraph has approached Monument for comment. 03:52 PM GMT Time Out hit after economic uncertainty hinders deals Time Out has blamed elections in the UK and US for causing revenues to drop. It said that its ability to strike advertising deals had been hit because of economic uncertainty. Time Out magazine saw a one-fifth plunge in revenue to just £14.4m, driving it to a £600,000 loss during the period. Its broader group brought in slightly less than the same period in 2023, about £50.9m. Once a revered print magazine showcasing things to do and places to eat in cities around the world, Time Out stopped printing physical copies in 2022. The media group still publishes food, culture and travel articles online, but its parent company now makes most of its money from food markets, which saw two new openings in Barcelona and Bahrain. The company as a whole, which is listed on the London Stock Exchange, lost £2.6n, worse than the same period in 2023 when it only lost about £100,000. 03:34 PM GMT National debt nears £2.8 trillion Britain’s national debt stands at nearly £2.78 trillion, according to the Office for National Statistics, which is estimated to be equivalent to 95.3pc of GDP. Yet one of the key things causing headaches for the Chancellor is not so much the size of the debt, but how much it costs. Debt interest payments were still £400m above forecasts by the Office for Budget Responsibility (OBR) in January, despite falling from £9bn in December to £6.5bn. The overall interest payable on central government debt decreased by £1.3bn to £73.8bn. It changes largely because the interest payable on index-linked gilts rises and falls with the Retail Prices Index (RPI). This week, the wisely-used consumer prices index measure of inflation rose faster than expected from 2.5pc in December to 3pc last month. Mercifully for the Chancellor, RPI, which is no longer considered a national statistic, rose at a slower pace, from 3.5pc to 3.6pc in January. With those thoughts, I will hand you over for the rest of the day to my ever-ready colleague Alex Singleton . 03:05 PM GMT Trump tariffs hit confidence in US private sector Britain’s economy is not the only economy showing signs of weakness. US private sector activity expanded at its slowest pace in 17 months, a closely watched survey showed as confidence was hit by Donald Trump’s tariffs policies. The S&P Global Flash US PMI showed output growth faltered as the optimism about the American economy slumped to its lowest since December 2022, barring September last year in the run-up to the US election. Chris Williamson, chief business economist at S&P Global, said: “The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices. “Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. “Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. “Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.” Donald Trump indicated this week he could impose fresh 25pc tariffs on the car industry - REUTERS/Kent Nishimura 02:35 PM GMT US stocks mixed at the opening bell Wall Street’s main indexes are mirroring the lacklustre day for Britain’s stock markets. The Dow Jones Industrial Average fell 356.5 points, or 0.8pc, at the open to 43,820.13 and the benchmark S&P 500 fell 3.4 points, or 0.1pc, to 6,114.1​. On the flip-side, the Nasdaq Composite rose 44.3 points, or 0.2pc, to 20006.693 at the opening bell. In London, the FTSE 100 was last down 0.1pc at 8,651.18 amid mixed economic figures showing rising retail sales but weakening public finances. The midcap FTSE 250 was up 0.4pc to 20,684.60. 02:29 PM GMT Reeves may use stealth taxes to fund defence, City warns British workers could face another £10bn stealth tax raid to shore up the public finances and pay for more defence spending, a top economist has warned, as Europe risks losing American military backing. Sanjay Raja, economist at Deutsche Bank, estimates Rachel Reeves would need to spend an extra £15bn to push the defence budget to 2.5pc of GDP, from just over 2pc now. Between £5bn and £10bn could come from squeezing other departments including justice, local government and the environment. “It’s also possible that Chancellor Reeves opts to raise stealth taxes, via an extension of the fiscal drag to pay for a bigger defence budget,” said Mr Raja. “This would give the Chancellor something like £8bn to £10bn per year in tax revenues, rebuilding the Treasury’s buffer against its fiscal rules whilst also addressing its defence spending ambitions.” That suggests extending the Conservatives’ freeze on income tax thresholds which has forced more workers into paying income tax, and into higher tax brackets, even if their earnings have not kept up with inflation. The freeze is currently set to end in April 2028. Another option is to borrow more for military kit, as this counts as investment spending, which is allowed under Ms Reeves’s fiscal rules. Ed Balls, formerly a Labour shadow chancellor, said Ms Reeves should look at abandoning the borrowing rules for defence. “There is a case for the UK Treasury saying that, for a fixed period, we’re going to carve the uplift in defence spending outside the fiscal rules,” he said in his podcast with George Osborne. “I think that is much more credible than a massive tax rise, and I think it is much more credible than undeliverable public spending cuts the markets won’t believe in.” After this morning’s public finances figures, which showed disappointing tax receipts in January, Darren Jones, chief secretary to the Treasury, called the rules “non-negotiable”. “We will never play fast and loose with the public finances,” he said. 02:19 PM GMT Reeves to ‘struggle’ to hit OBR borrowing forecast, say economists Rachel Reeves will struggle to keep the Britain’s deficit within the OBR’s official target this year after a weaker than expected surplus in the public finances last month. The Treasury made a record surplus in January of £15.4bn but this was still less than the £20.3bn surplus that economists had expected. Investec chief UK economist Philip Shaw said the figures showed “progress on Budget consolidation remains disappointing”. He said it would be difficult to keep the deficit below this year’s £131.3bn target set by the OBR, adding there would be a “higher starting point” for the OBR’s five-year projection delivered in March. This would, in turn, likely lead to higher government borrowing costs as bond market yields rise. He said: “Bearing in mind that inflation prospects have deteriorated since October’s Budget and that the yield curve is higher, the watchdog seems set to raise its forecasts of interest payments.” 01:45 PM GMT ‘The Reeves and Starmer death spiral has started’ Rachel Reeves should be sacked as Chancellor as she has shown that she “can’t manage the economy”, according to Telegraph readers. Here is a selection of views on why a “Reeves and Starmer death spiral” has begun in the wake of the latest economic figures, and you can join the debate here : 01:26 PM GMT Reeves’s fiscal rules ‘increasingly challenging’ as debt interest costs surge The Government’s debt interest payments reached £6.5bn in January, official figures show, which was the second highest January figure since monthly records began 27 years ago. Nabil Taleb, economist at PwC UK, said the surge “reflects the fiscal challenge the Chancellor faces” as she tries to balance the public finances. He said: “Higher debt servicing costs as a share of total revenues will leave the public finances more exposed to future economic shocks. “There’s no respite for Reeves. Borrowing costs remain under pressure as inflation proves stickier than expected, potentially slowing the Bank of England’s rate cuts and keeping debt servicing costs elevated. “At the same time, Labour’s commitment to increased defence spending adds further fiscal strain. So far, Reeves has held the line on Labour’s pledges, but with limited fiscal headroom, holding that line will become increasingly challenging.” 12:54 PM GMT Money markets suggest later interest rate cuts this year Traders have pushed back bets on interest rate cuts later this year as figures show businesses preparing for a surge in wage costs. Money markets indicate that the Bank of England will still drop borrowing costs twice more this year, but that a second quarter of a percentage point reduction will happen in December, rather than November. It comes as companies said input cost inflation accelerated for the fourth month running in February, mainly linked to higher salary payments and the impact of suppliers seeking to pass on forthcoming increases in employers’ National Insurance. Meanwhile, overall private sector output slowed down, according to the S&P Global UK PMIs. Thomas Pugh, economist at RSM UK, said the combination of weak growth and rising inflation “is a nightmare trade-off” for the Bank of England. He said policymakers will not want high interest rates to weigh on growth, but also needs to bear down on inflation. He added: “We continue to expect three additional 25bps rate cuts this year.” 12:17 PM GMT Bank stocks push FTSE 100 higher despite economic woes The FTSE 100 was higher after a surge in banking stocks offset the gloom around Britain’s economy. London’s benchmark stock index was up 0.1pc as Standard Chartered surged to a decade-high after reporting a jump in annual profit. However, the FTSE 100 was still on track for a weekly fall after three consecutive weeks of gain amid figures showing a weakening British economy and the risk of more tax rises. Bank stocks were up 1.3pc as Standard Chartered shares rose 3.6pc after announcing a $1.5bn (£1.2bn) share buyback and an 18pc rise in annual profit. NatWest led gains with a rise of 3.7pc. Meanwhile, retail stocks were up 1.2pc after official figures showed sales volumes rose more than expected in January following a gloomy run-up to Christmas. The midcap FTSE 250 index jumped 0.7pc but was still set for a weekly loss. Ferrexpo shares jumped 13.5pc, the biggest rise among midcap stocks, a day after the London-based iron ore pellets producer tumbled 30.4pc on Ukraine’s move to nationalise itss Poltava mining and processing plant. 11:49 AM GMT Britain’s private sector growth slumps since Budget Britain’s private sector activity has slumped since Rachel Reeves’s Budget and is close to the near stagnation in the eurozone, economists have said. Julian Jessop of the Institute of Economic Affairs highlighted how output from UK businesses has dropped to the weak levels seen on the Continent in the period since the Chancellor’s October fiscal event. Closely watched composite PMI figures - signalling the health of the private sector - have been weaker in the eurozone compared to Britain since July 2023, Mr Jessop said: “Nonetheless, the gap has narrowed sharply since last summer and especially since Rachel Reeves’ first Budget.” The Chancellor has faced criticism over her decision to hike National Insurance contributions for businesses by £25bn, as well as raising the national minimum wage. Matthew Ryan, an analyst at Ebury, added: “We are not overly optimistic on the outlook for Britain’s economy, not least due to the negative ramifications of the government’s business tax raid, which looks likely to push up consumer prices and ramp up job cuts in the coming months.” 11:29 AM GMT Treasury left short of cash by £6bn MoD deal The Budget watchdog said the Treasury’s soaring borrowing could partly be blamed on the Ministry of Defence’s decision to buy back military homes from a private equity tycoon for £6bn . The forecaster said the purchase of the properties from Annington Homes, a company controlled by billionaire Guy Hands, had meant the Treasury required £10.9bn more cash so far this year than estimated in October. The deal in December ended a bitter battle between the Government and Mr Hands over control of the homes. The OBR said the payment “has been made earlier in the fiscal year than expected”. Defence Secretary John Healey during a visit to see military housing which is in disrepair, near RAF Northolt - Stefan Rousseau/PA Wire 11:09 AM GMT Lower than expected tax receipts pushed up borrowing, says OBR The Government’s official Budget forecaster said lower-than-expected tax receipts in January pushed Treasury borrowing further above its forecast. The latest ONS figures show public sector borrowing is £12.8bn higher than the OBR forecast it would be back in October. The OBR said: The year-to-date shortfall against forecast is driven by lower-than-expected receipts, particularly self-assessed tax receipts and corporation tax, and to a lesser extent by higher borrowing by local authorities. 10:52 AM GMT Pound drops as companies cut jobs The value of the pound has fallen after a closely watched survey showed companies are cutting jobs at the second-fastest pace since 2009. Sterling was down 0.1pc against the dollar to $1.265 as PMI data showed firms are axing roles ahead of increases to National Insurance contributions and the minimum wage pressures due to come into effect in April. The pound was up versus the US currency earlier after official figures showed a stronger-than-expected rise in retail sales in January. Kyle Chapman, an analyst at Ballinger Group, said: “The fact that one in three respondents’ companies had linked lower staffing levels directly to the October budget suggests that this is not going to improve in the near term.” Sterling was up 0.1pc against the euro, which is worth 82.8p, after Europe’s own PMI data showed the Continent’s economy is languishing close to stagnation. Harry Woolman, analyst at Validus Risk Management, said the euro faces more pressure from the German election this weekend. He said: “Any outcome short of a clear-cut coalition on Sunday could pressure the euro further; however, recent weak data has prompted minimal reaction so far.” 10:26 AM GMT Companies ‘cutting employment to cope with higher taxes’ Elias Hilmer of Capital Economics said the latest PMIs figures point to businesses “cutting employment to cope with higher taxes”. The composite PMI’s employment balance slumped from 45.3 in January to 43.5 in February, reaching its lowest level - excluding the pandemic - since the global financial crisis. Mr Hilmer said: “This suggests that rising employment costs continue to weigh on firms’ hiring intentions.” He added: “Today’s data release won’t alleviate the Bank of England’s concerns about the weakness of activity and given that underlying price pressures remain strong, this should reinforce the Bank of England’s gradual approach to interest rate cuts.” 10:02 AM GMT Eurozone nears stagnation amid French downturn Much like Britain, business activity in the eurozone grew again at a very slow pace in February. The HCOB Flash Eurozone purchasing managers’ index (PMI) registered a figure of 50.2, unchanged from January and a number close to stagnation. Britain’s figure edged down from 50.6 to 50.5 this month. Any reading above 50 indicates growth, while a figure below 50 shows contraction. “Economic output in the eurozone is barely moving at all,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. However, the picture is far from consistent across Europe’s major economies. Germany, the eurozone’s largest economy, recorded a second consecutive monthly rise in output, while France posted a marked and accelerated reduction in business activity. 09:45 AM GMT Jobs cut at fastest rate since global financial crisis outside pandemic Britain’s private sector companies cut jobs at the fastest pace outside the pandemic since the global financial crisis, a closely watched survey showed as Rachel Reeves scrambles to secure growth to balance the public finances. The S&P Global Flash UK PMI showed the sharpest decline in private sector employment since November 2020 as bosses tried to offset the Chancellor’s £25bn hike in National Insurance contributions and the uplift to the minimum wage from April. Excluding the pandemic, employment suffered the steepest drop since 2009. Chris Williamson, chief business economist at S&P Global, said: “One in three companies reporting lower staffing levels directly linked the reduction to policies announced in last October’s Budget.” Overall, Britain’s private sector growth slowed slightly in February as wage pressures contributed to the fastest increase in average cost burdens for 21 months. Mr Williamson added: “Firms’ costs are meanwhile rising at a rate not witnessed since May 2023, the rate of inflation having now accelerated for four straight months, putting further upward pressure on selling prices for both goods and services. “The survey data point to a further rise in inflation beyond the latest uptick to 3pc.” 09:26 AM GMT Borrowing costs edge up as Treasury overshoots forecasts The cost of government borrowing has edged higher today after official figures showed the Treasury is on track to miss the OBR’s forecasts this year. The yield on 10-year UK gilts - a benchmark of government debt costs - inched higher to 4.61pc despite yields falling across most other major European sovereign bonds. The 10-year bond yield has surged by 72 basis points from 3.89pc over the last six months. 09:14 AM GMT Stride: Britain seeing true cost of Labour’s reckless economic policies Shadow chancellor Mel Stride said the latest borrowing figures “expose the true cost of Labour’s reckless economic policies”. He said: “Instead of reining in spending, the Labour Chancellor has piled billions onto the national debt by maxing out the national credit card. “Under Labour, Britain is stuck in a vicious cycle of higher debt, rising inflation, and increasing taxes. “Millions are paying the price of this economic mismanagement.” Shadow chancellor Mel Stride millions are paying the price for the Government’s ‘economic mismanagement’ - Andrew Crowley 09:04 AM GMT Chancellor in ‘unenviable position’ of raising taxes or cutting spending The left-leaning Resolution Foundation think tank has warned Rachel Reeves she will need to raise taxes or cut public spending in March. Senior economist Cara Pacitti said: January tax receipts usually boost the public finances as people rush to file their tax returns. 08:48 AM GMT Analysis: Disappointing tax receipts to raise alarm bells in Treasury Fears are growing that the Chancellor will raise taxes again as soon as March against a backdrop of weak growth and demands for higher defence spending. Rachel Reeves announced the biggest tax increases in history in October, with the £40bn raid leading to warnings of job losses and higher prices. While the Chancellor’s main fiscal rule excludes borrowing for investment, disappointing tax receipts are likely to raise alarm bells in the Treasury amid concerns that the OBR could mark down tax receipts in future years. The Treasury the shortfall was “driven by lower-than-expected receipts, particularly self-assessed tax receipts and corporation tax, and to a lesser extent by higher borrowing by local authorities.” While capital gains and self-assessment receipts typically paid by higher earners hit their highest since 1999, they were still £4bn lower than expected by the OBR. An upward revision to the amount of debt interest to £73.8bn also keeps payments on course to surpass £100bn this year. Central government spending has hit almost £1 trillion so far this year. The Office for National Statistics (ONS) said “pay rises and inflation increased running costs” drove an increase in spending, while “inflation-linked increases in many benefits” pushed up the welfare bill. 08:29 AM GMT Treasury borrowing ‘will only get worse from here’ The Chancellor has been warned all her fiscal headroom has gone as Treasury borrowing soared past official estimates. Elliott Jordan-Doak of Pantheon Macroeconomics said the pressure on the public finances “is seemingly relentless” as the Treasury missed analyst expectations by £5.1bn, which was the largest discrepancy of the fiscal year so far. He said “it will only get worse from here” after the ONS made upward revisions to borrowing in the early months of the financial year, adding to the cumulative overshoot compared to the Budget forecasts. As a result, he predicted tax increases will be announced in the Autumn Budget. He said: “The Chancellor will have to cut back planned spending growth next month when the OBR delivers its updated fiscal forecasts.” He added: “We will go through the figures with a fine toothcomb now we have the latest borrowing data, but it appears that all the Chancellor’s headroom has gone. “We expect the Chancellor to respond by cutting planned non-defence government spending growth. But we think those cuts will be back-loaded after 2025, preserving the boost to public services spending this year.” 08:04 AM GMT UK stocks mixed as Treasury borrowing soars The FTSE 100 fell at the open as soaring public sector borrowing raised concerns that Rachel Reeves will need to put up taxes. The UK’s blue-chip index was down 0.1pc to 8,658.76 but the midcap FTSE 250 gained 0.2pc to 20,656.75. 07:59 AM GMT Retail sales bounce back in January Separate figures from the ONS show that retail sales bounced back more strongly than expected at the start of the year. Retail sales rose by a much stronger-than-expected 1.7pc in January, the biggest increase since May last year. The gain in sales volumes was bigger than the 0.5pc estimated by analysts and follows a shock 0.6pc decline in the run-up to Christmas. The month-on-month sales increase was the first since August. The pound rose 0.1pc against the dollar to $1.267 after the figures, near its highest level in two months. Rob Wood, chief UK economist at Pantheon Macroeconomics said: “Strong real wage growth helped retail sales rebound after pre-Budget worries led to a wobble in October.” 07:50 AM GMT Inheritance tax receipts surge as consultation ends The Government’s inheritance tax receipts have risen to £7bn so far this financial year, HMRC figures show, as a consultation on changes to the levy on grieving families ends today. Inheritance tax receipts were £700m higher than the over the same period last year. Labour’s pensions inheritance tax raid will hit 150,000 families with higher death duty bills, figures show. Rachel Reeves’s decision to apply inheritance tax to pension wealth from April 2027 will drag 31,200 families into paying the levy for the first time by 2030, according to data obtained through a Freedom of Information request . Some 121,500 families that already pay inheritance tax will also see their bills rise as a result of the change. Alastair Black of investment manager Abrdn said: “IHT receipts ended the year on the up again, showing no signs of losing steam after 2024’s record-breaking climb. “And they’re set to keep rising with the plans to bring pensions into IHT from April 2027 – the government’s consultation on which closes today. “Expanding the scope to include pensions could cause real worry for families who have been relying on these to pass on wealth. “While April 27 seems a long way away there is a lot to be worked through so we hope we don’t have to wait to long to get clarity on next steps from HMRC. “Further, this consultation has highlighted exactly how complex IHT is so we hope the Government will take the opportunity to rethink the IHT system. Simplifying some of its elements could give families and advisers much-needed clarity and reassurance.” 07:33 AM GMT Chancellor will have to raise taxes or cut spending, say economists The Chancellor will have to put up taxes or cut public spending in March, according to economists as the rise in Treasury borrowing so far this financial year underlines the “difficult choices” she faces. Although the public sector finances showed a surplus of £15.4bn in January, it was smaller than the OBR’s forecast of £20.5bn. The current budget surplus of £24.6bn, which is what the Chancellor’s fiscal mandate is couched against, was also less than the £30.4bn the OBR had forecasted as a result of weaker than expected tax receipts. Alex Kerr of Capital Economics said: “While there is increasing pressure on the government to commit to higher defence spending, the OBR is likely to conclude that the Chancellor’s headroom against her fiscal rules has been wiped out and she will probably need to tighten fiscal policy as a result.” He added: “Even before the ratcheting up of pressure on European governments to increase defence spending, the Chancellor’s options ahead of the fiscal update next month were bleak. “Higher market interest rate expectations and gilt yields than at the time of October’s Budget alone suggest the Chancellor’s headroom against her fiscal mandate has been whittled down from £9.9bn to £2.8bn. “Combined with the recent weakness of productivity and GDP growth, it may have been wiped out completely. “So in order to meet her fiscal rules, the Chancellor will need to raise taxes and/or cut spending in the fiscal update on 26th March.” The Chancellor faces decisions after the ONS released the latest figures on borrowing by the Treasury - Jordan Pettitt - WPA Pool/Getty Image 07:23 AM GMT Treasury minister: We’re going through every pound spent, line by line As Treasury borrowing surged above official forecasts, Chief Secretary to the Treasury Darren Jones said: This government is committed to delivering economic stability and meeting our non-negotiable fiscal rules. 07:19 AM GMT Borrowing so far this year the fourth highest on record As tax receipts were weaker than expected, ONS deputy director for public sector finances Jessica Barnaby said: While the public finances are often in surplus in January, this year saw the biggest monthly surplus on record, with high January self-assessment receipts bolstering income. 07:14 AM GMT Tax receipts weaker than expected in blow to Reeves The Treasury’s tax receipts were weaker than official forecasts in a blow to Rachel Reeves’s hopes to meet her fiscal rules and avoid further tax rises. The Treasury usually operates a surplus in January as a result of self-assessed tax receipts. Last month combined self-assessed income and Capital Gains Tax receipts were provisionally estimated at £36.2bn. This was £3.8 billion more than a year earlier, and the highest January receipts since monthly records began in 1999. However, self-assessment income tax was £25.9bn, which was about £3bn less than the OBR predicted it would be in October. Capital gains tax receipts were also weaker than the official forecaster’s estimates, coming in £1.1bn less than the £11.4bn the OBR had pencilled in. 07:14 AM GMT Britain at risk of tax rises as Treasury borrowing surges Rachel Reeves could be forced to put up taxes or cut public spending after official figures showed Treasury borrowing surged past official estimates. Public sector borrowing excluding banks was £12.8bn more than the Office for Budget Responsibility (OBR) said it would be in the 10 months to January, according to the Office for National Statistics (ONS). The Treasury has borrowed £118.2bn so far this financial year, compared to OBR estimates that it would be £105.4bn. It comes as the public purse recorded a surplus in January of £15.4bn as a result of self-assessment tax receipts, which was the highest January surplus since monthly records began in 1993. However, it was less than the £20.3bn surplus that economists had expected. Rachel Reeves has faced pressure since the turn of the year to either announce fresh tax rises or cuts to public spending in her March fiscal statement. The cost of government borrowing was sent higher in bond markets earlier this year as investors signalled their concerns about her ability to meet her fiscal rules and balance the public finances. 07:06 AM GMT Good morning Thanks for joining me. The Treasury has borrowed more than official forecasts so far this year in a fresh sign that Rachel Reeves could be forced to put up taxes again. The Office for National Statistics revealed that public sector borrowing excluding banks hit £118.2bn in the 10 months to January, which was £12.8bn higher than the Office for Budget Responsibility forecast it would be. 5 things to start your day Regional electricity pricing will wreck Miliband’s net zero plans, says wind farm chief | Regional electricity pricing will wreck Miliband’s net zero plans, says wind farm chief Defence chiefs recruit diversity tsar ‘with spiritual edge’ | Hiring comes amid pressure on Starmer to raise military spending to face Russian threats HP ‘uses fake queues to force callers to fix their own printers’ | Customers phoning electronics company helplines face compulsory wait or ‘self-solve’ I would never invest in Starmer’s ‘backwards’ Britain, says major Trump ally | James Fishback’s ‘anti-woke’ fund excludes companies with DEI hiring from its portfolio Ambrose Evans-Pritchard: Trump’s embrace of Putin is a Molotov-Ribbentrop crisis for Europe | The new regime in Washington is testing pro-American sympathies to breaking point What happened overnight Asian shares surged to a three-month peak as buyers returned to previously unloved Chinese stocks thanks to optimism over artificial intelligence. Gold hovered near a record high and was set to extend its gains for an eighth consecutive week. The precious metal was helped by safe-haven flows due to concerns over Donald Trump’s tariff threats and amid contentious talks as the US president pushes for a quick deal to end the Russia-Ukraine war. MSCI’s broadest index of Asia-Pacific shares outside Japan jumped more than 1pc to its highest since November 8 on Friday, putting the index on track for a sixth straight week of gains - the longest such winning streak in over two years. The move came as a result of a surge in Hong Kong- and China-listed stocks, which saw the Hang Seng Index scale a three-year peak and push the CSI300 index 1pc higher. Hong Kong’s tech shares advanced 4.7pc, while the Shanghai Composite Index rose 0.7pc. Chinese stocks have been on a tear in recent days, driven by DeepSeek’s AI breakthrough that reignited investor interest in China’s technology capabilities. While the Hang Seng Tech Index has gained nearly 30pc for the year thus far, the S&P 500 is up just 4pc over the same period. On Wall Street, the Dow Jones Industrial Average fell 1pc to 44,176.65, the S&P 500 fell 0.4pc to 6,117.52 and the Nasdaq Composite fell 0.5pc to 19,962.36. In the bond market, the yield on benchmark 10-year US Treasury notes fell to 4.511pc from 4.520pc late on Wednesday. Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more. View Comments Terms and Privacy Policy Your Privacy Choices More Info Recommended Stories
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