Borrowing data offers new year cheer for UK's Reeves, for now

By Andy Bruce

MANCHESTER, England, Jan 22 (Reuters) - Britain's government borrowed less than expected in December, according to data on Thursday that may give finance minister Rachel Reeves reasons for optimism in 2026, even if political risks at home and abroad dog the longer-term outlook.

Public sector net borrowing stood at 11.578 billion pounds ($15.55 billion) in December, the Office for National Statistics said, down 7.1% on a year ago.

Economists polled by Reuters had mostly expected 13.0 billion pounds of public sector net borrowing last month.

Reeves has faced a challenging year-and-a-half in charge of Britain's economy. She was forced to increase taxes again in her November budget to build a larger buffer against her fiscal rules, as she sought to retain the confidence of investors.

"The December figures offer cautious reassurance. Borrowing remains elevated in absolute terms, but the trend is moving in the right direction," said Joe Nellis, economic adviser at MHA, an accountancy and advisory firm.

Some predict Reeves' tough budget stance could be rolled back however, as political pressure on the Labour government - trailing badly in opinion polls - rises through the year.

Government receipts in December stood 8.9% higher than a year ago, the ONS said.

Britain has borrowed 140.4 billion pounds over the first nine months of the 2025/26 financial year, compared with 140.8 billion pounds at the same point last year.

In November, the Office for Budget Responsibility projected borrowing for the entire year of 138.3 billion pounds, which takes into account an expected January surplus.

The forecaster said on Thursday that borrowing was currently running around 4 billion pounds lower than it forecast in November - but is far higher than it anticipated in March, underscoring the uncertainty around such predictions.

DOUBT HANGS OVER BORROWING OUTLOOK

While the latest forecast looks a good bet, Pantheon Macroeconomics economist Elliot Jordan-Doak said political questions surrounding Prime Minister Keir Starmer's Labour government hung over the outlook in the longer term.

"We continue to think (Reeves') package of large, backloaded tax hikes and harsh real-terms spending cuts remains vulnerable to reversal as political pressures mount," he said.

"A messy leadership contest this year - likely triggered by a poor performance for the government at the local elections in May - would also likely trigger a correction in gilts, boosting borrowing costs."

Unstable geopolitics - with the relationship between the U.S. and its historic European allies deteriorating - could also hurt Britain's economy, although Reeves said on Wednesday her plans for the economy would not be buffeted.

She doubled her headroom against the fiscal rules to 22 billion pounds in her last budget, but successive governments have failed to meet their own rules despite having even larger buffers.

For now, the picture differs from January 2025, when gilt yields soared during a global bond sell-off that forced Reeves to reassure investors of her commitment to fiscal discipline.

Gilt auctions held during January 2026 have shown some of the strongest demand for British debt on record.

($1 = 0.7452 pounds)