The Early Exit Bonus

The ONS published January's public sector finances this week alongside retail sales data. The headline is a record monthly surplus. Underneath, it's a CGT windfall, strong tax receipts, and lower debt costs – but consumers aren't feeling it.

January surplus: £30.4bn

The highest monthly surplus since records began in 1993. January is always a surplus month – the 31 January self-assessment deadline floods the Treasury with tax receipts. But this January beat the OBR's forecast by £6.3bn. The reason is which factors drove it – a one-off CGT surge, solid underlying receipts, and lower debt costs as inflation fell.

A CGT windfall and strong receipts underneath

The October 2024 Budget raised CGT rates from 30 October 2024 – the lower rate from 10% to 18%, the higher rate from 20% to 24%. Taxpayers responded predictably: they sold assets before the new rates applied. Those disposals during 2024-25 now show up in January 2026 self-assessment returns as a 69% surge in CGT receipts. Total taxes and NICs were up 13.8% year-on-year in January, but strip out the CGT spike and the underlying growth is closer to 8%. That's still strong. Frozen thresholds are amplifying the tax take – every pay rise pushes more income into higher bands – but real wage growth and rising corporate profits are driving it too.

Falling debt interest is doing the heavy lifting on borrowing

As inflation fell from 4.0% to 3.0% over 2025, the interest bill on roughly £600bn of inflation-linked government bonds has come down sharply. The BoE's bond-buying programme costs have also fallen. Year-to-date borrowing is £13bn lower than last year – debt interest savings account for a large share of that improvement. This is a direct dividend from falling inflation.

The surplus isn't showing up in the shops

January retail sales bounced 2.0% month-on-month, but that's seasonal noise after December's peak. The 3-month rolling trend – the better measure of where things are heading – is –0.1% for volumes. Food spending is resilient (+2.8% year-on-year). Discretionary spending is not: household goods –1.5%, non-food stores –0.3%.

This is consistent with what we covered last week: real pay fell 0.4% in December, unemployment is at 5.2%, and the labour market is softening. Consumers are protecting essentials and delaying big-ticket purchases.

What the table shows: The CGT line tells the story – a 69% surge driven by taxpayers responding to a rate change, not a booming economy. But look at PAYE and corporation tax: both up 8%+ against wage growth of ~4%. Frozen thresholds explain part of the gap – more of every pay rise lands in a higher tax band – but real wage growth and rising profits are doing real work too.

The surplus is real, but the biggest driver won't repeat. CGT spike is a one-off – revenue brought forward, not created. Debt interest savings should continue as inflation falls toward 2% by mid-2026. But strip out those two factors and the underlying tax base is still growing solidly – PAYE, self-assessment, and corporation tax are all up well above inflation. The OBR forecast year-end borrowing at £127.5bn; the current pace suggests it could undershoot. The economy isn't booming, but the fiscal position is genuinely improving.

GDP is barely growing, real pay is falling, and now the retail trend has gone flat. Q4 GDP was 0.1%. Real pay fell 0.4% in December. The consumer is not collapsing – food spending is holding – but discretionary demand is weak. The question is what unlocks it: the UK household savings ratio is 9.5% – well above pre-pandemic norms (~6-8%), and falling inflation combined with a stronger pound could start to make pay packets feel like they stretch further. But that shift hasn't happened yet.

Frozen tax thresholds are eating pay rises and that may be keeping wage pressure alive. Frozen income tax and NICs thresholds mean the Treasury takes a bigger slice of every pay rise. Someone who got a 4% raise may have kept less than half of it. The result: even as inflation falls, employees keep pushing for higher wages because their take-home pay is barely moving. For businesses, that's wage pressure driven by the tax system, not the economy.

The US economy grew just 1.4% annualised in Q4 – half the 2.8% forecast. The government shutdown knocked ~1 percentage point off, but even at 2.4% it still would have missed — consumer spending halved its contribution. UK Q4 growth was 1.0% year-on-year. The shutdown effect may reverse, but the UK isn't as far behind the US as it looks — a smaller deficit (4.5% vs >6%), inflation heading toward ~2% from April (vs 3% in the US), and room for the BoE to cut rates that the Fed doesn't have.