Lib Dems: 'Labour May Wipe £10bn Off Economy'

A Labour-led government could wipe £10bn off the British economy and add £800 a year to average mortgages as the markets panic, the Liberal Democrats warn.

The party has prepared a dossier of opinions by financial institutions and think-tanks which indicates that Labour would add £4bn in interest on government debt.

Chief Secretary to the Treasury Danny Alexander will use a speech in Aberdeen today to warn that a Labour government propped up by the SNP, or a Tory administration backed up by UKIP, would spell "economic disaster".

The dossier follows a warning from party leader Nick Clegg that the economy is not out of the woods and people's jobs and homes and could be put at risk if David Cameron or Ed Miliband attempt to govern without a majority.

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The document highlights a report by Morgan Stanley which suggested that if an "insurgent party", such as the SNP, holds the balance of power then GDP growth would slow from the investment bank's estimate of 2.7% this year to 2.1% - the equivalent to £10.7bn.

Analysis by the National Institute for Economic and Social Research (NIESR) forecast in February that under Labour plans the Bank of England's base rate would rise by 0.7 percentage points by 2019, a figure that would add £822 a year to payments on the average outstanding mortgage debts.

The NIESR made the same prediction based on Lib Dem plans but a party source insisted the think-tank had made incorrect assumptions about its financial plans, adding the Institute for Fiscal Studies said Labour would spend and borrow more.

Mr Alexander claims Tory plans including a referendum on membership of the European Union by the end of 2017 would reduce growth and threaten trade.

He will say that it is clear neither the Conservatives nor Labour will achieve a majority so the key question is about who will hold the balance of power.

"An unstable government, unable to take serious decisions, pulled sharply to left or right, with Alex Salmond or Nigel Farage, would cost us all dear and jam the brakes on the economic recovery.

"That would be an economic disaster for Britain, and an insult to the massive effort and the many sacrifices made by millions of people and businesses who are powering our recovery."

Mr Alexander will argue only the Lib Dems can keep government in the centre ground and keep the markets happy.