Britain's public finances veered further off track in July after a shortfall in corporation tax revenues and higher spending, putting the government's deficit goals in doubt and raising the prospect of more austerity on top of the planned spending cuts.
After nine months of recession, the unexpected deficit underscored the lack of scope for Chancellor George Osborne to give a meaningful boost to the economy - which looked at increased risk of prolonged weakness on Tuesday as manufacturers reported a slump in orders.
The high deficit also casts doubt over the Conservative-led coalition's plan to defend Britain's top triple-A credit rating and hold down borrowing costs, and Osborne may soon face the unpleasant choice of more austerity or missing his goal to close the budget gap within five years.
The public sector finances excluding financial sector interventions - the government's preferred measure - showed a deficit of 557 million pounds, compared with a 2.8-billion-pound surplus in July 2011, the Office for National Statistics said on Tuesday.
Economists said borrowing could overshoot the planned 92 billion pounds for this fiscal year by more than 30 billion, if the public finances keep deteriorating at the current rate.
The coalition government of Conservatives and Lib Dems aims to cut the budget deficit to 5.8% of gross domestic product this year from 8.2% of GDP in the 2011/12 fiscal year, helped in part by a one-off boost from the transfer of Royal Mail pension assets to the public sector.
For the year to date, public sector net borrowing - excluding financial sector interventions, the Royal Mail boost and other one-offs - totaled 47.2 billion pounds, up 11.6 billion from 2011.
Including the Royal Mail transfer, borrowing for the fiscal year to date totals 16.9 billion pounds compared with 35.6 billion between April and July 2011.
The coalition has made the reduction of Britain's record deficit the corner stone of its policies, but calls to soften the austerity drive have been growing due to the weak economy.
The recent Olympics have lifted Britons' spirits and may have made the country some money, but the economy remains stifled by business and consumer fears about the raging euro-zone debt crisis.
A survey from the Confederation of British Industry showed that this month manufacturers recorded the worst decline in orders since December.
The finance ministry said that while it would continue to allow automatic stabilizers - mostly benefit payments and a lower tax take - to support the economy, Tuesday's figures showed there was no scope for deficit-financed spending.
The government had originally planned to eliminate the structural budget deficit by 2015 with a tough programme of spending cuts and tax rises.
But the weak economy has forced it to extend the planned fiscal consolidation by another two years and Prime Minister David Cameron has warned austerity could last until 2020.
Last month, the International Monetary Fund said Britain could need to cut taxes or boost investment spending to support growth if the economy has not picked up by early next year.
However, the IMF also predicted that Chancellor Osborne was likely to miss his secondary goal to ensure that the debt to GDP ratio starts falling after 2014/15.
So far, Osborne has focused on schemes to lower banks' funding costs to get credit flowing, as well as guarantees to support infrastructure investment without spending taxpayers' money directly. Measures to support house-building are expected next month.
Tuesday's data showed that government receipts in July fell 0.8% on the year, driven by a near 20% drop in corporation tax, while current spending grew 5.1%.
