Investment house Abrdn has said the Chancellor will be forced to hold a spring Budget to rein in government spending and settle investors’ nerves, after the cost of government borrowing rose to its highest level for 16 years yesterday.

Bond yields have risen as investors worry about the underlying state of the government’s finances after chancellor lifted taxes by £40 billion in the October budget, including a £25bn rise in employers’ national insurance contributions.

This has contributed to a sharp fall in business confidence and hiring and has led to calls for cuts in taxes and spending.

Matthew Amis, an investment manager at Abrdn, said the volatility showed “investors need confidence” to buy government debt otherwise “gilt yields will continue to move higher and the currency will continue to weaken”.

He added: “The spending review is not due to be delivered until June, that’s a long time for the market to speculate with confidence continuing to erode.

“We ultimately expect to see a Spring budget alongside the OBR [Office for Budget Responsibility] forecasts, where she signals greater cuts to government spending.” 

Analysts have likened the tumoil to that seen in 1976, when the International Monetary Fund was forced to bail out the UK. Nigel Green, chief executive of advisory firm De Vere Group, described the market reaction as a “brutal throwback”.

Treasury minister Darren Jones attempted to calm the markets by rejecting calls for emergency measures.

Mr Jones told the Commons: “The fiscal rules are non-negotiable, public services will have to live within their means, we’ve set the budget.

“We have the OBR forecast coming in March, those are the numbers departments are working to in this spending review; those are the numbers we will hold public services to when we conclude the spending review in June.”

Sterling fell 0.9% against the dollar to $1.226 though it recovered ground in the afternoon. The pound has fallen despite a rise in bond yields, which would normally lift the currency. The weakness indicates that investors are sceptical about the government’s growth ambitions and management of the public finances.

The pound is also caught up in a general shift to the dollar amid expectations of fewer interest rate cuts by the US Federal Reserve.

The FTSE 100, which usually benefits from a weaker pound, rose 60.88 points to 8,311.90. The more domestically-focused FTSE 250 increased by 0.22%. Wall Street closed higher last night.

The rise in government bond yields has all but eradicated Rachel Reeves’s £9.9 billion margin of error against her self-imposed fiscal rules. However, figures next week may show a dip in inflation, offering some comfort to the Chancellor.

The Bank of England expects prices to fall to 2.5% in December from 2.6% in the previous month.