Policy Exchange warns that mortgages could cost £1,400 more per year if the deficit isn't cut

ConservativeHome produced the poster on the right to illustrate the dangers of Labour's do-nothing approach to the Budget deficit. We warned that the average mortgage might cost up to £1,440 more per year to service if the deficit was not cut back.

A new paper from Policy Exchange vindicates ConHome's concern.

Chief Economist Andrew Lilico warns that the average annual mortgage bill could go up by £700 - £1,400 if the Government does not reduce the amount it plans to borrow:

"The UK currently has a budget deficit of nearly 12% of GDP. When deficits are very high, that adds a risk premium to interest rates, because of fears about inflation or default. An extended period of deficit at 12% of GDP could be expected to add more than 2% to government bond rates. The effect of this would be for the costs of funds for banks will rise, and this rise passed on to their own borrowers (mortgage-holders)."

Andrew Lilico commented:

“Early spending cuts will promote growth, even in the short term. This is the highest period of borrowing since the since the Second World War, and to continue at such a rate is simply not sustainable. The last thing we should be doing is raising taxes to lock in high Government spending – the consequence would be low growth. Instead, we need an early and credible start to the spending cuts programme, to build confidence in markets and for consumers."

More here.