The UK's public sector borrowing reached £8bn last month, the first July deficit since 1996, official figures have shown.
The figure was significantly higher than the £500m deficit predicted by analysts. Key figures in the City had expected July, a key month for corporate tax payments, to show a small surplus.
Government spending has risen 7.5 per cent since July 2008, when the government's surplus stood at £5.2bn.
Overall debt now stands at £801bn, or 56 per cent of GDP, the highest level since 1974.
The Chancellor Alistair Darling said that the figures represented a "much more severe dip than people were expecting", but added that the government's debt level remained manageable.
A spokesman for the Treasury said that the large deficit had been expected due to 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," he said.
Vicky Redwood, of Capital Economics, said the figures represented the need for "sharp tax rises and/or government spending cuts in the next few years".
She added: "At this rate, borrowing looks set to overshoot vastly the chancellor's full-year forecast. We expect a figure of at least £200bn."
Both the Conservatives and the Liberal Democrats accused the government of presiding over a debt crisis.
The Liberal Democrat Treasury spokesman, Vince Cable, said: "As the country fights its way through recession we are seeing a collapse in tax revenues. We are now heading for a level of deficit this year even higher than the chancellor's original predictions.
"What is particularly concerning is that the government's hopes for the recovery of the public finances are based on extremely optimistic growth forecasts. Without this growth we will be heading for even higher levels of debt."
The Conservative shadow Treasury minister, Mark Hoban, said: "These appalling figures are even worse than the already dire expectations. Yet the government persists in the outright deception that there is no debt problem, and that it will increase spending after the next election. By denying the scale of the debt crisis ... Gordon Brown is putting our economic recovery at risk."
