Britain will still have to meet its outstanding financial obligations to the EU in the event of a no-deal Brexit, Chancellor Philip Hammond has warned.

Mr Hammond acknowledged the agreement in December that the UK would pay a £39 billion “divorce bill” would fall if there was no overall deal with Brussels.

However he said that would not mean an end to the UK’s obligations under international law.

Giving evidence to the Lords Economic Affairs Committee, he said it could lead to a “time-consuming” process of legal wrangling to establish just how much was owed.

“In the context of no negotiated exit, that agreement (to pay £39 billion), like all the other agreements that were settled between December and March subject to the caveat nothing is agreed until everything is agreed, will fall,” he said.

“What will not fall is our legal obligation under international law to make payments of sums which were due to the European Union. But to quantify those sums could require a complex and time-consuming process of arbitration.”

He added: “If we were to say we are going to sit on our hands and pay nothing we would probably expect a very hard-nosed response from the other side.”

Mr Hammond backed the assessment of the EU’s chief negotiator Michel Barnier that it should be possible to reach an agreement within six to eight weeks.

“If you look at the history of EU negotiations of difficult issues, I think six to eight weeks is probably quite a large time scale. I think that it is doable,” he said.

I am sure his model is very effective but the assumptions that he makes are wildly out of line with assumptions that are used by other economic modellers and, frankly, I believe are not sustainable Chancellor Philip Hammond on Professor Patrick Minford

He said such a deal would comprise a withdrawal agreement, with a legal text that will become a treaty, alongside a “political declaration” on the UK’s future relationship with the EU.

“That will need to have enough detail in it for both sides to be able to understand where we have agreed to go and for Parliament to be able to take a view of the package as a whole,” Mr Hammond said.

“It won’t need to be legal text or even draft legal text.”

He poured scorn on an analysis by Professor Patrick Minford of the pro-Brexit Economists for Free Trade that Britain’s GDP could receive a 7% boost over 15 years if it reverted to World Trade Organisation rules.

Mr Hammond said the assumptions behind his modelling did not stand up.

“He assumes that there are no additional non-tariff barriers to trade between the UK and the EU in a no-deal scenario which is frankly not plausible,” he said.

“I am sure his model is very effective but the assumptions that he makes are wildly out of line with assumptions that are used by other economic modellers and, frankly, I believe are not sustainable.”