Reeves told she will have to raise further £9bn for public services

Rachel Reeves has been warned that an extra £9bn of tax rises may be required to avoid a fresh austerity drive in some public services as her record tax-raising budget sent tremors through the financial markets.

- Richard Partington Jessica Elgot

Government borrowing costs rose sharply in the City yesterday as traders turned on Reeves's tax and spending measures. Their reaction threatens to undermine the chancellor's claim that her budget would restore economic stability to Britain.

On a day of wider losses in global markets, the negative reaction came despite the International Monetary Fund lending its backing to the first Labour budget in 14 years.

The yield - in effect the interest rate - on benchmark 10-year government bonds jumped to the highest level this year, rising by more than 0.15 percentage points to above 4.5% yesterday, before falling back slightly by the evening. The higher the yield, the more the government has to pay to borrow money.

City traders said the higher short-term borrowing levels set out in the budget threatened to derail the Bank of England from pushing ahead with a round of interest rate cuts. The pound also fell against the US dollar to its lowest for two months.

Some analysts sought to draw comparisons with Liz Truss's mini-budget, when financial markets were thrown into a tailspin, though they noted that the gyrations in the City were far less substantial this time. Others said there were dangers in holding the budget so near to a close-fought US election, amid a febrile backdrop for the historic tax and spending package.

Jonas Goltermann, deputy chief markets economist at the consultancy Capital Economics, said the fallout from Reeves's budget was "still a very long way from the 2022 'mini-budget' debacle", but the similarities could trigger alarm bells in Westminster. "A meltdown of similar proportions remains unlikely, but plainly investors are nervous about the fiscal outlook in the UK (and elsewhere)," he said.