Britain last month posted a record budget deficit for August as interest payments on index-linked gilts shot up because of higher inflation than a year ago, official data showed.
The Office for Nationals Statistics (ONS) said public sector net borrowing came in at £15.302bn, well above analysts' forecasts for a reading of £12.5bn and some £1.8bn up on the year.
Analysts described the figures as disappointing, though a pick-up in receipts over the last few months and higher than expected revenue from a tax on bank bonuses means the budget deficit for the fiscal year so far is running well below its level of a year ago.
Sterling and UK government bond prices were little changed after the data.
"There are some positive revisions to back data, so overall it does not look like the public finances will be blown off course for the year as a whole," said Philip Shaw, economist at Investec.
Still, with the budget deficit running at more than 11 per cent of GDP, the government has its work cut out. It has said it will cut spending significantly over the next four years and most government departments are expected to have to rein in expenditure by 25 per cent or more.
Finance minister George Osborne will detail exactly where spending cuts will fall on October 20, and the Treasury said on Tuesday that the higher than expected August numbers underlined the need to push ahead with the plans for deficit reduction.
PSNB excluding financial sector interventions – the government's preferred measure on which its fiscal forecasts are based -- came in at 15.9 billion pounds, also a record for the month of August and nearly 2 billion pounds higher than in August last year.
That took PNSB ex-interventions for the April-August period to £58.1bn against a full-year forecast of £149bn.
The ONS said the deterioration in August versus last year was mainly due to higher interest payments on index-linked gilts as a result of the rise in the retail price index.
This had shot up by some £2.5bn to £3.8bn after last year's outturns were artificially low because the RPI inflation index had fallen into negative territory.
However, it also revised up back-data on receipts to show the extra tax on bank bonus payments implemented by the previous Labour government had pulled in £3.5bn, around £1bn more than it had previously thought.
Ratings agency Moody's reaffirmed Britain's triple-A rating on Monday.
City A.M. Reporter