A Gloomy Greeting for Better-Than-Expected UK Data

Editors’ Note: MarketMinder Europe is politically agnostic, preferring no party nor any politician. We assess developments for their potential economic and market implications only.

Sentiment is often difficult to measure, based on our research, but now and then we find there is an easy way to check: How do headlines react to good news? Friday gave us a good opportunity to check the mood in the UK, after the Office for National Statistics announced a record-high monthly budget surplus for January.^[i] And it seems that, despite resilient gross domestic product (GDP, a government-produced measure of economic output) growth and continued stock market outperformance, UK sentiment remains pretty gloomy.^[ii] To us, the wall of worry still looks high—a plus for stocks.

So far, the UK is having a pretty good year on the economic and market front. We now know GDP grew a bit in Q4, rebuking widespread warnings we observed over a potential contraction.^[iii] Retail sales and purchasing managers’ indexes hint at the economy gaining steam early this year.^[iv] And through Friday’s close, UK stocks are outperforming Europe and the world year to date.^[v] Reality, quietly, seems to be beating expectations.

And all this is happening against a backdrop of austerity gloom. When Chancellor of the Exchequer Rachel Reeves announced some modest tax hikes in last autumn’s Budget, commentators we follow across the political spectrum warned that might not be the end of it.^[vi] It seemed every uptick in long-term interest rates sparked speculation that higher debt financing costs would eat up all of Reeves’s Budget buffer, necessitating more tax hikes to satisfy balanced Budget rules.^[vii] Accordingly, commentators we follow have watched monthly fiscal results closely.

Thus, you may think January’s bumper surplus would cause a universal sigh of relief. The £30.4 billion haul was over twice January 2025’s and a big reversal from December’s -£11.6 billion deficit.^[viii] Even accounting for seasonal skew (January is always a big month for self-assessed income tax payments, based on our research), it was a big result, much bigger than forecast, theoretically giving Reeves a lot more Budget headroom than anticipated. To us, that would seemingly reduce austerity and deficit jitters, clearing some of the uncertainty hanging over markets.

But that isn’t the reaction we saw in commentary we covered. Instead, on both sides of the political divide, we saw abundant scepticism. In outlets we follow whose editorial boards tend to lean more to the free-market end of the spectrum, headlines warned Reeves would soon come under political pressure from Labour Party backbenchers to dial up spending, ensuring future deficit troubles and even worse austerity.^[ix] And outlets we cover whose editors’ views tend to favour more government activity warned the big surplus is a false positive, inflated solely by people racing to lock in capital gains ahead of a potential hike.^[x] Nothing to get excited about according to these sources, and nothing to prevent more fiscal pain this autumn.

As we find typical, there are probably kernels of truth in both views. We have seen plenty of lobbying for higher spending, especially with Prime Minister Keir Starmer eyeing higher defence outlays.^[xi] Other departments are angling to get involved.^[xii] Yet the Treasury seems adamant in putting this to bed. The ever-verbose unnamed sources told The Telegraph just last week that Reeves “is opposing virtually all demands for changes to tax and spending in her upcoming Spring Statement” and sticking to her pledges to have just one budget-type “fiscal event” per year.^[xiii] Whilst we have seen many doubt her and Starmer’s longevity in their current roles, the rumoured challengers have been openly advocating for fiscal probity lately.^[xiv] So whilst we don’t doubt there is pressure to loosen the purse strings, pressure isn’t policy.

And it is also true that capital gains tax revenues contributed to the surplus, which probably was indeed the result of panic selling a while back.^[xv] Capital gains taxes paid this January would have been on gains incurred between 6 April 2024 and 5 April 2025. This coincides with broad speculation we saw that October 2024’s Budget would include a stiff capital gains tax hike, including numerous reports of people selling in advance, just in case, to lock in lower rates.^[xvi] That proved prescient as Reeves hiked capital gains tax rates effective 30 October 2024, and now His Majesty’s Treasury is reaping the fruit of that strategic selling.^[xvii]

So in that sense, it is probably a one-off. We find that, with capital gains tax hikes, there is typically extra selling in the run-up to the hike and less in the aftermath. The hike pulls forward activity. But it generally isn’t a permanent pothole. Heck, we observed another round of capital gains tax hike rumours last summer, with another wave of selling if fund flows and anecdotal reports are any indication.^[xviii] This time, the alarm didn’t come true, but it might still boost Treasury coffers in January 2027 all the same.

But our research finds tax revenues usually arrive in large, irregular amounts, and there are other forces helping the UK’s finances. 10-year Gilt yields are down over the past year.^[xix] 30-year yields are down significantly from last summer’s freakout.^[xx] Bank of England rate cuts have helped pull down shorter-term rates.^[xxi] And with inflation easing, the interest burden on inflation-linked UK Gilts is easing.^[xxii] Monthly UK interest costs fell by -£5 billion in January.^[xxiii] On a rolling 12-month basis, interest costs are now down for four straight months both in absolute terms and relative to tax revenue, which is what matters most for debt affordability.^[xxiv] The sharp summer uptick that spurred speculation amongst commentators we follow has largely reversed.

Exhibit 1: UK Debt Interest Is Easing Again

Source: Office for National Statistics, as of 23/2/2026. Public sector interest and current receipts, rolling 12-month, April 1997 – January 2026.

So it looks to us like the gloom is unwarranted. Britain’s public finances aren’t in perfect shape, but decades of research tells us perfect doesn’t exist. We find markets care most about reality relative to expectations, and things look overall better than expected. In our view, that is all stocks need to keep climbing the wall of worry.