No Deal ‘would be like a bank system collapse’

Hammond’s warning as experts say stalemate has hurt economy

A NO-DEAL Brexit would cause an economic ‘shock’ comparable to ‘the collapse of a banking system’, Philip Hammond warned yesterday.

The Chancellor said he remained confident of a Brexit deal, but added that leaving without one could force the Government to tear up the Budget.

Mr Hammond said ministers would honour a pledge to provide an extra £20billion a year for the NHS.

But he warned that other Budget plans, such as slashing income tax for more than 30million, might have to be ditched.

On the flip side, he said a deal allowing ‘friction-free access to markets’ would ‘give a boost to business confidence and increase economic growth in the future’.

Mr Hammond told the Commons Treasury committee: ‘If there were an external shock to the economy, and a no- deal Brexit is one such potential shock, but it’s by no means the only one that I can posit for the committee.

‘The collapse of a banking system in any major country, or the outbreak of a major trade war between any two significant international trading powers could deliver equally a shock to the economy.

‘We would need to react to that in the usual way, with monetary policy for the Bank of England and fiscal policy for the Treasury, in order to support the economy to get to a new equilibrium.’

Mr Hammond also warned that the UK would not be able to escape paying most of a £39billion divorce bill even if it leaves without a deal. If the UK were to refuse to meet its obligations ‘we would effectively rule ourselves out as being regarded as reliable partners in future international deals, including trade deals’. His remarks came as it emerged that at a Cabinet meeting today Theresa May will warn ministers that preparations for a no deal Brexit will have to be stepped up dramatically unless an agreement is reached by the end of the month.

Meanwhile, a report yesterday suggested that the British economy is slowing as uncertainty over Brexit takes its toll on business. Research group IHS Markit said the economy is on course to grow by only 0.2 per cent in the final three months of the year.

The services sector, which makes up about 80 per cent of UK output, suffered its worst performance since March, when the Beast from East snowstorms hit business.

Markit said its index of activity in the sector, where scores above 50 show growth, dipped from 53.9 in September to 52.2 in October.

It also emerged that Britain will be unable to leave a ‘temporary’ post-Brexit customs union unilaterally under plans being negotiated by Mrs May.

Whitehall sources said last night that demands for the UK to have complete control over when the ‘Irish backstop’ plan comes to an end had proved ‘impossible to negotiate’ and were likely to be dropped as the Prime Minister tries to seal a deal with Brussels.

Instead, Mrs May is focused on trying to secure an ‘exit clause’ that would be decided jointly by Britain and the EU.

Privately, she has abandoned hopes of securing agreement in time for a special summit of EU leaders pencilled in for November 17-18, although she still hopes to agree a deal by the end of the month.

Earlier, Ireland warned publicly that it would veto any Brexit deal that allowed the UK to unilaterally withdraw from the backstop plan, which is designed to guarantee there is no reemergence of a hard border on the island of Ireland even if trade talks falter.

‘We can’t escape divorce bill’