City economists predict that the Prime Minister and Mr Healey will have to find billions of pounds to repair the Government’s headroom against the fiscal rules after the surge in bond yields.
The Chancellor is scheduled to give a speech on Monday that will set out his approach to growth. He is expected to say that encouraging wealth creation by private businesses is critical to generating growth in the economy as a whole.
Mr Healey will also make the argument that the UK cannot have growth unless it has fiscal stability, and that there must be a degree of headroom so the economy can withstand any unexpected crises.
Investors have urged Mr Burnham to slash spending to fill the gap. However, the Prime Minister has not ruled out further tax rises or more borrowing.
Rupert Harrison, a senior advisor for the UK at Pimco, which manages more than $2tn (£1.5tn) in assets, said: “The UK is paying a premium because of a perceived loss of economic and fiscal credibility.”
Mr Harrison, a former chief of staff to George Osborne, said a failure to get to grips with inflation and runaway borrowing had left the UK in this predicament.
He said: “The UK has been caught up in this global trend, but our borrowing costs have also been higher than most other advanced economies for some time.”
Prof Rogoff, who was chief economist at the IMF from 2001 to 2003, said the bond rout was a bigger threat to the UK than other developed countries and could force Mr Burnham to call on the IMF for help.
Prof Rogoff, now an academic at Harvard, said: “The UK and the US might be the two most vulnerable countries, and probably the UK more vulnerable.
“There’s no growth story at the moment in the UK. The debt levels are high, interest rates are high, and growth is not.”
