The government is seeing a reduction in tax revenues
The UK's public sector net borrowing totalled £8bn last month, the first July deficit for 13 years, official figures have shown.
The figure was much worse than the £500m deficit expected by analysts, and comes as the recession continues to reduce the government's tax returns.
July is typically a month of surplus, due to corporate tax payments.
The government's overall debt now stands at £801bn, or 56.8% of GDP, its highest level since at least 1974.
The BBC's chief economics correspondent Hugh Pym suggested things are unlikely to get much worse from here.
"A return to economic growth in the third quarter should prop up the public finances and the planned reversal of the VAT cut will boost revenues," he said.
"But the chancellor will have some nervous months watching the borrowing figures in the next few months."
Chancellor Alistair Darling told the BBC that the figures reflected a "much more severe dip than people were expecting", but insisted that the UK had been well prepared going into the recession.
He hinted at a cut in government spending, saying "in the medium term", the UK would have to "live within our means" .
The Treasury said in a statement that the large deficit in July was expected, and caused by the recession.
"In the first half of the year the whole world was in a steep recession and that affected the public finances here in the UK," said a Treasury spokesman.
In July of last year, the public sector finances posted a surplus of £5.2bn.
Shadow Treasury minister Mark Hoban said the latest borrowing figures were "appalling".
"By denying the scale of the debt crisis and the need for spending cuts, whoever wins the general election, Gordon Brown is putting our economic recovery at risk," he said.
Less tax revenues
Last month's deficit was the first in July since 1996, and the largest for that month since at least 1993.
July is traditionally a strong month for public finances, as it includes a quarterly corporation tax bill.
However, tax revenues fell to £6.2bn last month, from £9.9bn a year earlier, when profits at oil giants such as BP and Shell were lifted by record global crude prices.
Income tax and VAT takings last month were both down 15% from a year earlier.
Meanwhile public sector spending, including unemployment payments, was up 10.4%.
In April's budget, the chancellor forecast that borrowing this year would reach £175bn.