Pound falls and bond yields rise but UK rules out emergency action

Jones said: “It is normal for the price and yields of gilts to vary when there are wider movements in global financial markets, including in response to economic data,” adding that the government’s decision to only borrow for investment was “non-negotiable”.

But Stride said: “The government’s decision to let rip on borrowing means that their own tax rises will end up being swallowed up by the higher borrowing costs at no benefit to the British people.”

The pound fell by 0.9% to $1.226 against the dollar on Thursday, while borrowing costs jumped earlier in the day but calmed by mid-afternoon.

Sterling typically rises when borrowing costs increase but economists said wider concerns about the strength of the UK economy had driven it lower.

The government generally spends more than it raises in tax. To fill this gap it borrows money, but that has to be paid back – with interest.

One of the ways it can borrow money is by selling financial products called bonds.

Mohamed El-Erian, chief economic adviser at asset manager Allianz, told the BBC’s Today programme the rise in borrowing costs means the amount of interest the government pays on its debt goes up and “eats up more of the tax revenue, leaving less for other things”.

Mr El-Erian added that it can also slow down economic growth “which also undermines revenue”.

“So the chancellor, if this continues, will have to look at either increasing taxes or cutting spending even more – and that’s going to impact everyone,” he said.