Andrew Bailey, Governor of the Bank of England, has warned Prime Minister Andy Burnham that Britain faces "very, very substantial challenges" as turmoil in bond markets pushed UK borrowing costs to a 28-year high this week. Speaking at the London School of Economics, Bailey pointed to structural pressures including an ageing population and rising defence spending, while a separate report from the National Institute of Economic and Social Research (NIESR) cautioned that without urgent action on Britain's £2.9trillion debt pile, future generations risk "inheriting the mortgage without the house". The warnings pile further pressure on the government ahead of next month's Budget, as investors grow increasingly anxious about how the Chancellor will balance the books.

The NIESR report, titled Can't We Just Borrow A Bit More, argues that sticking to existing fiscal rules will not be enough and calls for Britain to target a primary surplus for the first time in 25 years, implying roughly £40billion in tax rises and spending cuts. Britain currently pays the highest borrowing costs among G7 economies and spends £110billion a year on debt interest — equivalent to one pound in every ten of revenue, and more than the defence and transport budgets combined, with a third of that debt held by foreign investors. The bond market sell-off has also threatened to erode Chancellor John Healey's fiscal "headroom", complicating efforts to fund pledges such as Burnham's plans for more council housing and social care reform.