Painful belt-tightening is needed to get a grip on UK debt, with the economy facing 'very, very substantial challenges', Andy Burnham has been warned.
The governor of the Bank of England made the comments after turmoil on bond markets this week saw UK borrowing costs pushed to a 28-year high.
Andrew Bailey, speaking at the London School of Economics, said: 'There are very, very substantial challenges at the moment, structural challenges.'
These included ageing populations and the need for higher defence spending.
It came as the Prime Minister was warned unless Britain starts to tackle its £2.9trillion debt pile now, it risks saddling the growing burden on future generations while leaving little to show for it.
Without a plan for tax hikes and spending cuts of around £40billion, they will 'inherit the mortgage without the house', the National Institute of Economic and Social Research (NIESR) said.
Global markets have been gripped by fears over inflation and soaring debt this week, resulting in a bond market sell-off which has caused government borrowing costs to spike across the world.
Britain – which already pays the highest borrowing rates among all G7 economies – has been especially vulnerable at a time when investors are increasingly worried about how the Chancellor will make the sums add up in next month's Budget.
UK Prime Minister Andy Burnham attended a preview event for the Bayeux Tapestry Exhibition in September
Governor of the Bank of England Andrew Bailey attended the Bank of England press conference in July
The bond market turbulence has made this even harder, threatening to blow a multi-billion-pound hole in John Healey's 'headroom' for meeting fiscal rules.
A report from the NIESR argued for action to tackle Britain's debt pile now – and that sticking to current fiscal rules designed to keep a lid on borrowing would not be enough.
Titled Can't We Just Borrow A Bit More, the report reveals the pressures facing the Chancellor as he faces calls to hike defence spending as well as funding Mr Burnham's costly pledges to build more council houses and overhaul social care.
The think-tank argues that far from growing the debt even more, Britain must target a primary surplus – when tax revenues are greater than spending excluding debt interest, something not achieved for 25 years.
That would imply big tax hikes and spending cuts that would more than wipe out the current primary deficit of 1.3 per cent of GDP, amounting to around £40billion.
NIESR argued current fiscal rules, intended to keep a lid on debt, effectively allow it to ratchet higher. That leaves limited room for manoeuvre for government spending to respond to future shocks.
It pointed out Britain is currently paying debt interest costs of £110billion a year – one pound in every ten of revenue and more than the defence and transport budgets combined.
'This is money that could be spent on public services or investment today, but instead is being handed to investors who have bought our debt – a third of it held by foreign investors,' the think-tank report said.