Andy Burnham moved to calm volatile bond markets on Wednesday as surging borrowing costs threatened to wreck plans for his government’s crucial first budget next month.

After a days-long sell-off of government bonds – and with the chancellor, John Healey, facing the prospect of sharply reduced spending power, Burnham used his first appearance at prime minister’s questions to promise decisions would be “grounded in fiscal responsibility”.

That was widely seen as an attempt to soothe investors after his statement to parliament on Tuesday, in which he made bold promises of more public control of utilities, further interventions on the cost of living and a recommitment to a 3% increase in defence spending.

While those offers were broadly welcomed by Labour MPs, Burnham was criticised by others for inflaming the sell-off. His former economic adviser, Jim O’Neill, said it was the “last thing” the markets needed.

Investors across world markets have been dumping government bonds amid fears about rising inflation, runaway deficits and competing demand for capital from tech companies on a debt-fuelled AI spending spree. The sell-off has driven up yields, or interest rates, including in the UK. At one point on Wednesday, the cost of 10-year borrowing for the government hit its highest level since 2008, at 5.29%, before easing slightly.

That is expected to be costly for Healey when the Office for Budget Responsibility draws up its budget forecasts. The independent watchdog bases its projection for bond yields on a snapshot of market interest rates taken several weeks before each budget and that is expected to be about now for Healey’s 28 October statement.

The chancellor has repeatedly stressed that fiscal discipline is the “bedrock” of government policy. He will give a speech on Monday setting out his plans for economic growth – less than six months after senior City and business figures gathered to hear his predecessor, Rachel Reeves, lay out her approach.

In his first PMQs clash with Kemi Badenoch, Burnham blamed the Conservative leader’s party for leaving the UK vulnerable to market turmoil.

Criticising Burnham’s three-hour statement in the Commons the day before, Badenoch said: “He did not say no to a single spending request … And personally, I think it’s delightful that he wants to make everyone happy. But a prime minister needs to be a leader, not a people pleaser.”

Burnham said his budget would “stick to the fiscal rules, but at the same time, we will help reduce cost of living pressure on our constituents”.

Analysts believe higher interest rates on public debt could wipe out up to half of the £24bn headroom Rachel Reeves built up against Labour’s fiscal rules.

Government insiders told the Guardian they believed it would be very difficult for Healey to deliver a budget that had less than double-digit headroom, given the signal that would send to bond markets. However, that would leave him with almost no leeway for additional spending. No 10 sources declined to be drawn on what Burnham’s preferred level of headroom would be.

Healey will also have to show how the Treasury intends to fill a funding gap in defence spending and pay for Burnham’s cost of living measures, including the VAT cut on electricity bills.

Helen Miller, the director of the Institute for Fiscal Studies, said: “Debt interest is now one in every £12 the government is spending, so even relatively small changes can add up quite quickly.”

Alongside the narrowing margin for error against the rules, Miller identified two other budget headaches for Healey – the likely hit to growth forecasts from falling immigration and the demand for more spending on defence.

She said: “It’s not that any one of these things on their own are the kind of ‘hit the panic button’ moment, but when you add them all together, they do add real pressure on the government.”

Ruth Curtice, the director of the Resolution Foundation, said febrile markets meant the government would face additional scrutiny over the sustainability of the public finances.

She added: “The risk of not facing up to the challenges has gone up, but also maybe the reward from showing that you’re serious about addressing them might have gone up too.”

The thinktank boss backed a call by Lord O’Neill for the new government to scrap the triple lock pension as a way of showing it was serious about balancing the books: “Jim O’Neill was on to something, in that part of the test for markets is, are they prepared to do politically unpopular things, in the name of trying to sort some of these fiscal problems out?”

O’Neill had been mooted as an economic adviser to Burnham but has instead gone public with criticism of the fledgling government.

A Treasury source insisted that unlike other major economies, including the US, the UK had a plan – inherited from Reeves – for reducing the deficit and bringing down debt. “To the extent that investors start looking at fiscal plans, we should start to distinguish ourselves in a positive way,” they said.

Global markets have been spooked by higher oil costs after a resumption of the Middle East conflict, resulting in higher expectations for future inflation.

Investors now believe the Bank of England will step in and raise interest rates three times, to 4.5% over the next year, to tackle inflation. That would push up mortgage costs just as Burnham hopes to cut the cost of living.

Burnham will host Emmanuel Macron for talks in No 10 on Thursday, as he begins to build his own relationships with European allies before the next stage of the UK’s reset with the EU.

The prime minister is expected to use the talks to continue pushing for greater cooperation with Europe to support British businesses and drive growth, with the French president a key figure in the government’s pursuit of a closer trading relationship.

Downing Street sources suggested that while the EU reset would not officially be on the agenda – because the responsibility for any deal lies with Brussels – it was likely to come up in the margins of the bilateral discussions.

Burnham indicated in the Commons on Tuesday that the next reset summit, which was delayed by the EU after Keir Starmer was ousted as prime minister, could be held in November.