Warning of more austerity

Ministers would be forced to review public spending after a nodeal Brexit, Philip Hammond said yesterday as he hinted that austerity could only end if Britain remained closely tied to the EU.

In provocative remarks that infuriated Brexiteers before the budget, the chancellor claimed that he would have to tear up his plans for the economy and propose a new settlement in the event of no deal in March.

He added that his spending plans were based on a good postBrexit trading relationship with the EU – hinting at the possible need for hard Brexit spending cuts.

His comments also contained a warning to Brussels, suggesting that the government was prepared to rip up state aid rules and reduce business taxes to offset the cost to business of losing competitive access to European markets. ‘‘If we were to leave the European Union without any deal ... then we would need to take a different approach to the future of Britain’s economy,’’ he told the Sky News Sophy Ridge on Sunday programme.

‘‘We would need to look at a different strategy and frankly we’d need to have a new budget that set out a different strategy for the future.

‘‘Then, as any responsible government would, we would take appropriate fiscal measures to protect the economy, to prepare us for the future and to strike out in a new direction that would ensure that Britain was able to succeed, whatever the circumstances.’’

Hammond’s warning was dismissed by Brexiteers as more evidence of the Treasury’s attempt to engineer a soft Brexit that would keep Britain bound into EU laws and regulations.

One said that his comments were ‘‘entirely predictable’’ and based on dubious predictions from his department about the economic impact of trading with the EU on World Trade Organisation terms.

Iain Duncan Smith, the former work and pensions secretary, said it also took no account of the £39 billion (NZ$76b) that the government would save if it did not have to pay an EU divorce bill.

Jacob Rees-Mogg declined to criticise the chancellor and instead criticised officials for ‘‘still being grumpy’’ about Brexit. ‘‘The Treasury has been the bastion of Remoanerism since the referendum and indeed before,’’ he said.

‘‘So, the Treasury has rather embarrassed itself, has a lot of egg on its face from getting its Brexit-related forecasts so wrong so far and I think there is an element within the Treasury that is still grumpy about Brexit, and that’s a pity.’’

John McDonnell, the shadow chancellor, said that he was shocked by Hammond’s remarks. He said that they showed ministers were preparing to move to a Singapore-style low-tax, low-regulation economy after a no-deal Brexit. ‘‘Basically he seems to have accepted a no-deal Brexit and he does want us to be like Singapore, a tax haven, which will undermine our manufacturing base and, I think, put people’s living standards at risk,’’ he said.

With Tory MPs increasingly restive over the impact of the extension of universal credit, Hammond also signalled that he was ready to provide additional support to ease the transition to the new benefits system.

‘‘If we were to leave the European Union without any deal ... then we would need to take a different approach to the future of Britain’s economy.’’

Philip Hammond, Chancellor of the Exchequer