By William Schomberg and Estelle Shirbon
LONDON (Reuters) - British government borrowing unexpectedly grew last month, underscoring chancellor Philip Hammond's challenge as he weighs calls for more spending in his budget on Wednesday against the prospect of weaker economic growth ahead.
Hammond is under pressure to help embattled Prime Minister Theresa May in his new tax and spending plans, and he will not welcome some signs in Tuesday's data that the economic slowdown this year is being felt in government revenues, economists said.
The deficit, excluding state-run banks, stood at 8.0 billion pounds, up 6.9 percent compared with October 2016, the Office for National Statistics said on Tuesday.
That contrasted with a median forecast that the shortfall would fall to 7.0 billion pounds in a Reuters poll of economists.
Rising debt costs, linked to Britain's higher inflation since the Brexit vote, were a driver of the shortfall while corporation tax revenues fell for a fourth month in a row and growth in value-added tax revenues slowed.
The figures contrasted with a recent run of better-than-expected readings of the public finances that still leave Hammond on track to beat his target for this year.
Borrowing in the first seven months of the financial year is down by nearly 10 percent at 38.5 billion pounds.
Tuesday's data also showed the deficit for September had been revised down by nearly 1 billion pounds.
But the challenge for Hammond further out looks like it is about to get tougher, limiting his room for manoeuvre.
"We expect tomorrow's budget to be generally cautious, incorporating a broadly neutral package of tax and spending changes," Paul Hollingsworth, an economist with Capital Economics, said.
Britain's official budget forecasters are expected to cut their forecasts for economic growth in the coming years because of the country's stubbornly weak productivity record. Weaker growth would mean lower tax revenues than previously thought.
Hammond was quoted as saying on Sunday that the government was heavily constrained fiscally, "but we do have some room" and he said he would seek to speed up house-building in his budget.
Many voters say they are tired of seven years of spending cuts in many public services, a factor behind June's election result which cost Prime Minister May her parliamentary majority.
Britain has been struggling to fix its public finances since the budget deficit surged to around 10 percent of gross domestic product in 2010 in the wake of the global financial crisis.
Since then it has been cut steadily to 2.3 percent of GDP in the 2016/17 financial year which ended in March, its smallest since before the global financial crisis.
But public debt remains around double its level before the global financial crisis at almost 90 percent of GDP, including the Bank of England's economic stimulus programmes.
Hammond has said he wants to balance the budget by the mid-2020s while at the same time keeping some room to allow him to spend more if needed to support the economy through Brexit.
As well as measures to boost house-building, Hammond is likely to announce the latest push to improve Britain's weak productivity, a challenge which has become more acute as exporters lose some of their access to EU export markets.
Employers group CBI said British factories have had their best month for orders in nearly 30 years in November, boosted by the fall in the value of sterling and by strong economic growth in Europe and beyond.
"Nonetheless, uncertainty continues to hold back investment and cost pressures remain strong," Anna Leach, the CBIs' head of economic intelligence, said.
(Additional reporting by Andy Bruce; Writing by William Schomberg)