Chancellor George Osborne answered questions about the economic outlook on Thursday from members of the economic affairs committee at the Lords.

Following are highlights from the session:

FISCAL STIMULUS WOULD HARM UK'S CREDIBILITY

I think in this environment, additional so-called fiscal stimulus would risk the credibility of fiscal policy, put up interest rates. And any increase in interest rates would more than outweigh any stimulus that fiscal spending could deliver. I think growth will only come if you have fiscal credibility.

ON CONTINGENCY PLANS FOR EURO COLLAPSE

We are doing contingency plans for all eventualities. I think that would be a sensible thing for the Treasury to do at the best of times. I don't think it's a surprise we're expending even more effort on these plans than previously.

I'm confident we have got the right plans in place. I would give fair warning that however much contingency planning you do, a disorderly collapse of the euro would do huge damage to the UK. It doesn't matter how many plans you have to deal with that, you could make a bad situation less worse, but it would still be a bad situation.

IMPACT ON UK OF EURO COLLAPSE

As is clear from the OBR report and the OECD, the collapse of the euro would do enormous damage to the British economy. It would do huge damage to the British economy. Those who say we would have a year or two of hardship then bounce back out of it, are maybe somewhat optimistic. There would be a significant drop in UK GDP if the euro were to fall apart.

ON CURBING BANK BONUSES:

Given the situation in the financial markets at the moment, they (banks) should limit those distributions and seek to build their balance sheets and enhance their capital positions. And the Bank of England governor and myself in the last week have made it very clear that is now what we expect these banks to do.

They've had some time to absorb that advice, and I would absolutely expect them to do so, and there would be consequences if they didn't.

I don't want to spell out everything we might be able to do in those circumstances, but I think the regulator is very clear as well, they've had advice from the Financial Policy Committee, so I would expect in the first instance the FSA to be interpreting the FPC's recommendations into regulatory action if required.

(Reporting by London bureau)