Image: Foreign and Commonwealth Office Image: Foreign and Commonwealth Office

The UK would burn through its multi-billion pound Brexit war chest and risk significant damage to the economy in the event of a no-deal, Chancellor Philip Hammond is warning.

In a speech at the annual Mansion House dinner, Mr Hammond is expected to say that the Conservative party leadership candidates must put forward a plan B to avoid a no-deal. He will say that a second referendum may be required if no alternative is suggested.

The Chancellor has already announced a £26 billion fund to help cope with the economic impact of leaving the EU with a deal, but he will warn that tax and spending plans pledged by the candidates coupled with a greater economic downfall from a no-deal would see the government burn through that fund very quickly.

He will explain that leaving the EU without a deal would leave the economy in a position unable to support the candidates' pledged tax cuts and public spending increases.

In his speech, Mr Hammond is expected to say: "I cannot imagine a Conservative and Unionist-led government, actively pursuing a no-deal Brexit; willing to risk the Union and our economic prosperity.

"[Leadership candidates] need realistic strategies for taking the UK economy out of the holding pattern in which it has been stuck for the last nine months and landing it safely on the runway marked 'prosperity Brexit'.

"If the new prime minister cannot end the deadlock in Parliament, then he will have to explore other democratic mechanisms to break the impasse."