Public sector finances returned to the black in line with the usual seasonal pattern in January. At £17.62 billion, the surplus on overall public sector net borrowing (PSNB) was more than double that seen at the start of 2023 (£8.46 billion) and the largest on record, albeit still slightly short of the market consensus. The December deficit was also revised a little smaller to £6.45 billion. Excluding public sector banks (PSNB-X), the excess stood at £16.69 billion, up from £7.54 billion a year ago.

Total receipts rose £4 billion on the year, largely because of gains in corporation tax and income tax inflows as well as an increase in national insurance contributions. At the same time, spending fell £5.2 billion, mainly a reflection of a significant fall in interest payments and the closure of energy support schemes. As a result, net debt was 96.5 percent of GDP, down from 98.2 percent in December but up from 94.7 percent in January 2023. However, it was 0.2 percentage points less than forecast by the Office for Budgetary Stability (OBR).

The January data put the cumulative PSNB-X so far in the current financial year at £96.6 billion. This was £9.2 billion less than expected by the OBR and leaves the government with some, but not much, room for some fiscal manoeuvre. To this end, today's update will be the last available before the 6 March Budget when Chancellor Jeremy Hunt will outline his spending and tax plans for what he will hope will be the current government's next parliamentary term. The UK RPI now stands at 5, indicating that overall economic activity is performing broadly in line with expectations. However, at 23, the RPI-P shows the real economy running slightly ahead of forecasts, a point noted by a number of BoE officials yesterday.

Public sector finances are seasonally very strong in January. Last month, overall net borrowing (PSNB) is seen posting an £18.5 billion surplus after a £6.85 billion deficit in December. Excluding public sector banks, the black ink is put at £17.6 billion.

The public sector net borrowing requirement (PSNB) is the difference between the sector's receipts and expenditure and so provides a simple measure of government fiscal policy. In response to the global economic crisis in 2008/09 the UK government introduced a number of measures designed to show the underlying state of public sector finances by omitting temporary distortions caused by financial interventions. It bases its fiscal policy on these measures. To this end, the underlying gauge of government borrowing watched most closely by financial markets is the PSNB-X which takes overall net borrowing (PSNB) but excludes public sector banks.

Changes in public sector finances can be used to determine the thrust of the government's fiscal policy. Generally speaking when the government has a rising deficit (or falling surplus) it is loosening its fiscal stance with a view to boosting economic activity. When its deficit is falling (or surplus rising), fiscal policy is being tightened in order to slow economic growth. However, sometimes changes in government financial positions can be due to factors outside of the government's control and do not signal an explicit shift in policy. This means that great care is needed in interpreting the data.