The UK economy offered a more optimistic outlook on Friday, buoyed by unexpectedly strong public finance figures, a surge in retail spending, and accelerating business activity, providing Chancellor Rachel Reeves with a potentially more favourable backdrop ahead of her spring statement on March 3, 2026.
The Office for National Statistics reported a record monthly public finances surplus of £30.4bn in January, significantly exceeding the Office for Budget Responsibility’s (OBR) forecast of £24bn. This figure, double the surplus recorded in January 2025, was largely driven by increased self-assessment and capital gains tax receipts, according to the ONS.
Simultaneously, retail sales experienced a substantial 1.8% increase in January – the largest monthly rise in nearly two years. The ONS noted that sales of artwork and antiques, alongside continued strong online jewellery sales, contributed to this growth. Heavy discounting and post-Christmas sales also spurred purchases of furniture and technology over the preceding three months.
Further bolstering the positive trend, a flash poll of UK purchasing managers by S&P Global indicated the fastest rise in business activity since April 2024, with “a robust and accelerated upturn in new function” reported across both manufacturing and service sectors.
Economists cautioned that January’s strong self-assessment tax receipts traditionally flatter public finance numbers, and that the retail sales boost was partly attributable to “unprecedented” demand for jewellery amid soaring gold prices. Yet, the confluence of positive data points offered a welcome shift after a disappointing end to 2025.
“It’s been a hat-trick of fine economics news for once for the UK,” said Sandra Horsfield, senior economist at Investec bank. “We had a disappointing end to last year, but as things look we may be starting 2026 on a much brighter note.”
The improved economic picture is expected to provide Reeves with increased fiscal headroom for her spring statement. Government borrowing is currently running approximately £8bn below the OBR’s full-year forecast, and government borrowing costs have decreased since November. Rob Wood, chief UK economist at Pantheon Macroeconomics, suggested the Chancellor could “probably bank on having a bit more headroom than she had in the autumn budget.”
However, the Treasury has stated that the spring forecast will “not develop an assessment of the government’s performance against the fiscal mandate and will instead provide an interim update on the economy and public finances.”
Despite the positive data, economic uncertainties remain. Plans to raise fuel duty later in 2026 for the first time in 15 years could impact revenue projections, and the economic impact of this change is tough to predict. The Gorton and Denton byelection, scheduled for February 26, also presents a political challenge for the Labour government.
Unemployment figures released Friday also offered a note of caution, rising to a five-year high of 5.2% in the final quarter of 2025, particularly among young people. The S&P Global PMI data also showed continued job losses for the 17th consecutive month in February, as firms responded to rising employment costs.
“One swallow does not make a spring,” said Danni Hewson, head of financial analysis at AJ Bell. “Fundamentally the UK economy remains weak and vulnerable and the high levels of unemployment, particularly amongst the young, hint at a difficult future ahead.”
The Bank of England’s potential interest rate cuts, driven by cooling inflation, are also viewed with caution, as they could reflect an economy still struggling for sustained momentum.
