Chancellor George Osborne's deficit reduction plans have been dealt a blow after official figures revealed a shock rise in borrowing in July.
Public sector net borrowing, excluding financial interventions such as bank bailouts, came in at £600 million in July, compared with a surplus of £2.8 billion in the same month last year, dashing the City's expectations of a surplus of £2.5 billion.
July is normally a strong month for tax income for the Treasury, but total receipts fell 0.8%, driven by a drop in corporation tax, while Government spending increased 5.1%. In a further blow to the Chancellor, net borrowing for April to June was revised up by £1.4 billion.
That means borrowing so far this year, excluding a one-off boost after assets from the Royal Mail's pension fund was transferred to the Treasury, is £44.9 billion, £9.3 billion higher than a year ago.
The Government wants to trim borrowing in 2012/13 to £120 billion, excluding the one-off £28 billion boost from the transfer of the Royal Mail pension fund. That compares with a figure of £125 billion last year, following a £700 downward revision on Tuesday.
Vicky Redwood, UK economist at Capital Economics, said: "July's UK public finances figures continue the deterioration seen over the past few months. At this rate, borrowing for 2012/13 overall will massively overshoot the Office for Budget Responsibility's forecast of £120 billion excluding Royal Mail effects by over £35 billion. And with the recovery falling well short of the OBR's expectations, we think that the Government will struggle to cut borrowing at all next year either."
Mr Osborne is in the process of rolling out billions of pounds of spending cuts and hundreds of thousands of public sector job losses in a bid to slash the budget deficit. But the plans have been hit by the UK's return to recession, which is hurting tax revenues, while high levels of unemployment are increasing the burden on the state.
Social benefit payments rose 6.2% to £16 billion in the month while a fall in corporation tax drove a 6% fall in taxes on income and wealth, although this was largely impacted by the closure of the Elgin gas field in the North Sea following a leak.
A Treasury spokesman said: "Tax receipts are coming in below forecast but this is mostly explained by the weakness in corporation tax, especially from North Sea oil production. The Government's fiscal mandate deliberately allows the automatic stabilisers to operate in response to weakness in the global economy, but it is still too early in the financial year to draw firm conclusions about the year as a whole."
Shadow Treasury chief secretary Rachel Reeves said of Mr Osborne: "This is a damning indictment of a Chancellor who promised to secure the recovery and get the deficit down. His failed plan has delivered the exact opposite - a double-dip recession which is leading to soaring borrowing." But Treasury Minister Chloe Smith told the BBC: "There is no opportunity here to set out to deliberately borrow more. What these figures really show is the importance of sticking to the plan that has won Britain international credibility."