Brexit negotiations must move quickly on to agreeing transitional arrangements to a future UK-EU partnership to avoid damage to the British and European economies, Chancellor Philip Hammond has warned.
Mr Hammond told MPs there was a “need for speed” from the remaining 27 EU member states, amid growing signs that the deadlock in negotiations will not be broken at next week’s summit in Brussels.
Delays in moving the talks on from the divorce deal to the transition were creating a “cloud of uncertainty” which was acting as a damper on the UK economy.
Mr Hammond told the Commons Treasury Committee he was not yet ready to authorise massive spending on infrastructure like expanded lorry parks at Channel ports to prepare for the possibility of Britain crashing out of the EU without a deal.
But he said the Government must prepare for the worst-case scenario of a “bad-tempered breakdown” in negotiations, resulting in EU partners withdrawing co-operation even against their own economic self-interest.
He played down suggestions that a no-deal Brexit could mean planes being grounded at UK airports. While this was “theoretically conceivable”, Mr Hammond told the committee that nobody “seriously believes that that is where we will get to”.
Mr Hammond was speaking after European Council president Donald Tusk indicated that he does not expect EU leaders to give a green light for the opening of talks on trade and transition at their October 19 summit and suggested the move may even be delayed beyond the end of this year.
The Chancellor said businesses had sent him the “very strong message” that they want certainty soon, in order to be able to make decisions on contracts and investment plans stretching beyond the official March 2019 date of Brexit.
Early agreement would “avoid people having to make worst-case assumptions and acting on them in a way that would be damaging to their businesses, damaging to the UK economy, damaging to business partners in the other EU countries and damaging to the EU’s economy as a whole”, he said. A transition agreement was a “wasting asset” which will lose its value the longer it takes to agree.
“Astonishingly”, work on the future relationship was under way in the UK but not on the EU side, even though there was “a high degree of consensus” in European capitals that agreement on transition arrangements was “a sensible thing to do and a practical thing to do”.
“We need our European partners to engage with us, look at our proposals,” said Mr Hammond.
He urged EU leaders to allow “at least exploratory discussions” to begin on transition arrangements and the future relationship. Progress on the kind of interim deal proposed by Theresa May in her speech last month in Florence would mean “breaking out” of the negotiation structure set out by the European Commission.
“Our European partners need to think very carefully about the need for speed in order to protect the potential value to all of us of having an interim period that protects our businesses and citizens and allows investment and normal business activity – contracting and so on – to carry on,” said Mr Hammond.
He made clear Britain was preparing for the possibility that no deal would be reached.
“We have to consider the possibility of a bad-tempered breakdown in negotiations where we have non-cooperation, or a worst-case scenario where people are not necessarily acting in their own economic self-interest,” he said.
“The commitment we have made is that we will be ready with the necessary minimum structures to operate the system on day one. Will everything we ever need be there on day one? Definitely it won’t. It will build over time.”
Mr Hammond said the Government must wait until the “last point” before spending on facilities and staff for a hard customs border which might not eventually be needed, because it would involve diverting cash from priorities like the NHS, social care and education.
The Government would need to decide at some point what was the “realistic” worst case they needed to plan for. But the Treasury has “no plans” to publish any documents assessing the possible outcomes, the committee was told.
Britain was the only major economy not to see its growth forecast upgraded in an International Monetary Fund (IMF) report on Tuesday, which predicted it would slow from 1.8% in 2016 to 1.7% this year and 1.5% in 2018.
Mr Hammond told the committee that this reflected businesses and customers delaying spending decisions because of uncertainty about what the final Brexit deal would be.
“The cloud of uncertainty is acting as a temporary damper and we need to remove it as soon as possible by making progress with the negotiation process,” he said.
Mr Hammond told the committee he was able to envisage scenarios where a favourable resolution to Brexit talks and fresh deals with non-EU nations meant Britain was better off than under existing arrangements.
But he warned: “Obviously, there is a very significant economic advantage to the UK in having barrier-free supply chains across the EU for our businesses to be able to get their goods not just tariff-free but non-tariff barrier-free into EU markets.
“We don’t know at this stage what level of facilitation there will be at the customs border between the UK and EU27 in the future, but clearly anything which restricts the flow of goods or delays the flow of goods or introduces new bureaucracy and costs compared to now will have a negative impact and that has to be set against the positive impact of freedoms to do trade deals elsewhere.”