UK's deficit spirals to £12.1bn, damaging George Osborne's borrowing targets

Chancellor George Osborne's borrowing targets have been dealt a blow after Britain's deficit spiralled to £12.1 billion last month, marking the widest August shortfall in government funding for three years.

Figures from the Office for National Statistics (ONS) showed borrowing - excluding the effect of bank bailouts - increased by a worse-than-expected £1.4 billion year-on-year in August.

Economists had expected borrowing in August to come in at a lower level of £9.2 billion.

The ONS put the increase down to a fall in self-assessment income tax, which had their weakest August since records began in 1999.

Self-assessment income tax is collected between August and July, but this year almost all of the forms were filled in July. Corporation tax also fell during August.

However, the ONS added that borrowing for the fiscal year-to-date, which runs from April to August, now stands at £38.4 billion - £4.4 billion lower than it was at the same point last year.

The latest forecast by independent government watchdog the Office for Budget Responsibility (OBR) says that the Chancellor would have to borrow no more than £69.5 billion in this financial year, to keep to his commitment of eliminating Britain's budget deficit by 2020.

Mr Osborne has already borrowed 55% of this amount.

Some economists expect gains in living standards to continue boosting income tax receipts and help him meet his commitments.

But other economic observers say the unexpected dip last month makes the Chancellor's annual target harder to hit.

Howard Archer, IHS chief UK and European economist, said the August figures were "a nasty surprise for the Chancellor".

Mr Archer said that even though monthly borrowing figures can be highly volatile "the fiscal targets for 2015/16 look much harder for George Osborne to achieve than they did only a month ago".

He said if the pattern of the first five months of the financial year continued, full-year public sector borrowing would hit £80.7 billion, some £11 billion higher than the OBR targets he set himself in his July Budget.

But David Kern, chief economist at the British Chambers of Commerce, said although the August figures were slightly disappointing, steady progress has been made throughout the year, which has resulted in a reduction of public borrowing in the year to date.

Mr Kern said: "Despite August's weaker figures there is still a chance that the outcome for this financial year will be better than was estimated by the OBR in the July Budget."

The Treasury insisted its plan was making progress.

A spokesman said: "Britain's hard work is paying off with cumulative borrowing £4.4 billion lower than at this point last year.

"We have more than halved the deficit but there's more to do with debt remaining higher than 80% of gross domestic product.

"We've learned there's no shortcut to fixing the public finances to provide economic security for working people - that's why while the economy is growing we have to continue with the hard work of identifying savings and making reforms necessary to finish the job and build a resilient economy."