One-off budget boost for UK doesn’t change our outlook on Gilts

News of governments achieving their budgetary objectives or borrowing less than market forecasts has been a rarity in the last few decades. The UK Public Sector Finances report, published by the Office for National Statistics (ONS) on Friday, bucked this sorry trend by showing that UK government finances outperformed the Office for Budget Responsibility’s (OBR) projections on virtually every metric in January 2026.

There is strong seasonality in tax inflows in January as self-assessed income and capital gains taxes are paid during the month, which usually results in a surplus for the government’s coffers. It is therefore quite an important month in the calendar; it is difficult to make up for a poor tax collection in January in the rest of the tax year. In analysing the data, we think it’s important for investors to understand the trends, how they look vis-à-vis the OBR’s forecasts, and how sustainable some of them might be.

January’s surplus of £30.4bn was more than double that of January 2025, mainly because of an increase in tax collections. Although there were higher income taxes and VAT receipts, the largest contributor was capital gains taxes. Inflows from this item in January totalled £17bn, compared to just £10bn in January 2025. One likely driver was taxpayers taking the opportunity to sell some assets before capital gains tax rates went up, which occurred in the middle of the tax year to April 2025. Consequently, we can treat this boost as a one-off.

On the expenses side of the equation there was also some good news at first glance. Central government expenses declined modestly by 0.7% compared to January 2025. Perhaps counterintuitively, the main subcomponent responsible for this positive surprise was debt interest payments, which came in £5bn below the figure for January 2025. The explanation is that the government has a relatively large stock of inflation-linked bonds, whose coupons and principal adjust according to the Retail Price Index (RPI). As the RPI declined between October and November 2025, and the adjustment to coupons and principal operates with a small lag, debt interest payable declined in January 2026. Unfortunately, unless RPI inflation embarks on a deflationary trend, we can treat these gains as a one-off too. Other expenses, such as spending in goods and services, net social benefits and payments to local governments, were all slightly higher than January 2025. There was a small decline in grants paid to the rest of the world, but this was a drop in the ocean in the grand scheme of things.

Comparing results to the OBR’s forecasts is also important. The OBR is of course aware of January’s seasonality, RPI movements and October 2024’s increase in capital gains taxes, which means its estimates reflect these and other developments. Nevertheless, we do note that central government receipts were marginally higher and expenses modestly lower than the OBR projected. Taking all these together, for the financial year starting April 2025, through January 2026 government revenue is almost in line with the OBR’s projections while expenditures are somewhat lower. Public sector net borrowing was expected to be £120.4bn at this stage, while the actual number is £112.1bn.

At the margin, we see these figures as a net positive for Gilts as issuance needs are lower than expected. However, with our medium-term investor hat on, most of these surprises are unlikely to be repeated in the future. In addition, outperforming fairly weak OBR projections is akin to being 2-0 down at halftime when the bookmakers were projecting 4-0. The OBR already expects the UK deficit to be 4.5% in the current fiscal year, with projected declines after that looking quite optimistic in our view. Even with those projected declines, the UK’s debt-to-GDP ratio is expected to remain close to 100% until the end of the decade.

We tend to think that the performance of Gilts in the next quarter or so will mostly be down to May’s local elections, and the fate of Keir Starmer’s prime ministership. If markets start pricing in a change in prime minister for a more fiscally lax option, we could see Gilts sell off and the curve steepen. Therefore, despite the long-awaited good news on government finances, we remain relatively cautious on Gilts as a risk-off asset.