Andy Burnham has attempted to calm bond markets on his first appearance at Prime Minister’s Questions, but faced Conservative claims that he was a “spendthrift” unable to refuse requests for higher public spending. With UK borrowing costs hitting their highest level since the 2008 financial crash, Burnham insisted his government would be “grounded in fiscal responsibility” and that Britain was cutting its deficit faster than any other G7 country. But Kemi Badenoch, Tory leader, used her first duel over the despatch box with Burnham to present the prime minister as a leader who would trigger a further sell-off of UK debt because he would be unable to contain public spending.

Badenoch noted that Burnham had taken 125 questions from MPs during a marathon Commons statement on Tuesday but claimed that “he did not say ‘no’ to a single spending request.” Her comments were given added weight because they reflected concerns raised by Lord Jim O’Neill, former Goldman Sachs chief economist and an adviser to Burnham in the past, who said he shared market fears over public spending control. O’Neill said on Tuesday that traders were worried about Burnham talking about taking “public control” over privatised utilities and were asking: “Who’s going to get real in this country about the challenges of getting our debt down and controlling spending?” Burnham blamed the Conservatives for “turbulence” in the bond markets, saying that Liz Truss’s disastrous 2022 mini-Budget had unsettled market confidence in Britain. He declined to rule out tax rises in the Budget on October 28 — arguing that no prime minister would ever do so — to fill a hole in the public finances created by rising borrowing costs.

The 10-year gilt yield has jumped more than 0.11 percentage points this week already, to 5.24 per cent, as a surge in oil and gas prices has reignited fears among investors that the global economy is facing another bout of higher inflation. Bond yields rise as prices fall. Gilt yields were little changed after Burnham’s comments at Wednesday’s PMQs, continuing to be caught up in the global government bond sell-off that has gripped markets this week.

But analysts said that the looming Budget — alongside the UK’s particular vulnerability to higher oil and gas prices, as an energy importer — was partly responsible for investors demanding an extra premium for UK bonds compared with the country’s peers. Rising government borrowing costs are likely to have carved a hole of £11bn into the headroom that former chancellor Rachel Reeves left in March, according to Cathal Kennedy, senior UK economist at RBC Capital. That means chancellor John Healey may be faced with a fiscal buffer of just £13bn when he receives the initial draft of the Office for Budget Responsibility’s forecast ahead of the October 28 Budget.

Kennedy said markets had not yet heard much from Healey himself, but that it was critical that the Budget restored the headroom to a “minimum” of £20bn. The key fiscal rule requires the chancellor to bring the current budget — excluding borrowing for investment — into surplus by the end of the parliament. The UK, said Kennedy, was “caught in the crosshairs of a global move” led by hawkish rhetoric from Kevin Warsh, the US Federal Reserve chair, and the re-escalation of Middle East hostilities.

Ruth Gregory, UK economist at Capital Economics, said much would depend on market movements in the weeks leading up to the Budget. But as things stood, Healey could find himself caught in the “same headroom trap as Reeves,” she said, meaning the chancellor needs to cut government spending and/or raise taxes to restore headroom and maintain fiscal credibility.