Philip Hammond has warned the UK economy will have to strike out in a “different direction” if the government is unable to agree a Brexit deal with Brussels.
The Chancellor will set out his annual Budget today, but said he would have to tear this up and issue new spending plans if Britain leaves the European Union next March without an agreement in place.
It came as Scotland’s Finance Secretary Derek Mackay called for the UK government to end austerity in today’s Budget, in line with previous pledges by Prime Minister Theresa May.
Mr Hammond played down the prospects of a spending giveaway when he makes his speech to MPs today.
He said detailed departmental allocations would have to wait until the spending review next year, by which time the outcome of the Brexit negotiations is expected to have become clear.
Shadow chancellor John McDonnell said he was “shocked” by Mr Hammond’s remarks which, he said, showed ministers were preparing to move to a low tax, low regulation economy following a no-deal Brexit.
Mr Hammond insisted he remained confident the government would reach an agreement with Brussels but said they had to be prepared for any eventuality, including a no-deal break.
He said in a TV interview yesterday: “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.
“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 we found ourselves in.”
Also speaking on TV yesterday, the Chancellor acknowledged such a change would represent a “very big transition” to the way the economy operated.
He said: “If our businesses are no longer able to trade with European Union neighbours, if their supply chains are cut off, they will have to find different markets and different ways of doing business.
“The economy will change. It will have to restructure itself over a period of time and that will be a fairly major transition.”
Mr McDonnell said: “Basically he [Mr Hammond] 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.”
The Chancellor will also use the Budget to set out plans for a £28.8 billion national roads fund for major routes, with a further £420 million for local pothole repairs, in part funded by ring-fencing revenues from vehicle excise duty.
He is also expected to find extra cash for defence, social care, and an extension of superfast broadband to remote rural areas, as well as a temporary cut in business rates for small firms.
However, he indicated that any further loosening of the purse strings would have to wait until the outcome of the Brexit negotiations is clear.
“Once we get a good deal from the European Union and the smooth exit from the EU, we will be able to show the British people that the fruits of their hard work are now at last in sight,” Mr Hammond said.
Mr Mackay has called on the Chancellor to dleover on pledges to end austerity.
He said: “The Prime Minister recently announced she would bring an end to austerity and I want to see this delivered within the UK government’s Budget.
“This statement must be backed up by concrete actions to provide a meaningful uplift in funding for public services, in addition to the funding increases announced for the NHS being delivered as a true net benefit and not offset by other cuts to the Scottish budget.
“In a letter to the Chancellor this month, I asked for the roll-out of Universal Credit to be postponed until the flaws are fixed, a position supported by the Public Accounts Committee this week. Yet as we’re promised an end to austerity, the UK government continues to press ahead with this damaging policy.
“This year, working Universal Credit claimants in Scotland will lose £164m, and around £245m by 2021. We have repeatedly called for a halt to the roll-out until it can be proved not to cause further hardship.”
Even Conservative MPs have been restive over the Universal Credit roll-out after problems have been identified, and Mr Hammond signalled he was ready to provide additional support to ease the transition.
“If we find cliff edges and difficulties, frictions in the move from the old benefits system to Universal Credit, then of course we will always try to smooth those out,” he said.