Matthew Hancock-Mp

What Portugal means for the UK

What Portugal means for the UK
Text settings

Last night, Portugal's parliament voted to reject its latest measures to deal with its deficit. It was the fourth time that the Portuguese parliament had been asked for more taxes and for more spending cuts. The result has been a further loss of confidence in Portugal’s ability to pay its debts. Market interest rates have risen to over 8 percent. European leaders are meeting this weekend to work out a path forward. The lessons for us here in the UK are starkly clear.

First, it is better to set out all the difficult decisions needed to deal with the debt crisis, even if these take place over a number of years, rather than continually going back to ask for more. That the Budget was neutral overall shows that a clear plan is being followed here.

Second, to budge from the course of living within our means would lead to sharply higher interest rates. Our deficit is more than double Portugal's; yet our market interest rates are around 3.5 percent, not 8 percent.

If our plan was abandoned, and interest rates increased to 8 percent, it would be a catastrophe for Britain's homeowners and businesses. It would undoubtedly ruin the recovery.

What's more, the OBR shows that the direct costs to the taxpayer of higher interest rates are £5.3bn a year by 2015 for every 1 percent rise in rates. If rates rose to 8 percent here, that would cost £24bn.

So the question for those without a plan to deal with the deficit is this: what would you do to pay the £24bn extra that we would have to pay in interest?

This shows that to abandon the plan to deal with the deficit would be a huge risk. It would be to gamble the nation's finances on the bond markets. We should not play chicken with the bond markets. The safest option for the future of our economy is to stick with the plan – the plan that will rebalance the economy, restore sustainable growth, and rebuild the legacy we will leave to our children.

Matthew Hancock is the Conservative MP for Suffolk West