The Chancellor said that the Government would have to “refocus” its priorities if the UK crashes out of the EU without a deal next March, in order to concentrate resources on dealing with the new circumstances.
Mr Hammond was speaking shortly after an official was photographed with an internal Treasury paper which stated that Whitehall departments would have to rely on “internal reprioritisation” as a first resort to cover the costs of no-deal withdrawal.
Headed “Operation Yellowhammer”, the document clutched by an aide leaving the Cabinet Office revealed that the Government’s Civil Contingencies Secretariat held a two-day workshop last week to consider plans for a possible no-deal outcome.
It said that departments should be raising funds to cover “Yellowhammer costs” for 2019/20 through their own spending teams as well as bids to the Treasury.
And it stated: “Their first call should be internal reprioritisation.”
In last year’s Budget, Mr Hammond announced £3 billion for Brexit preparations and said he stood ready to allocate further sums.
Downing Street stressed that no department has had to cut frontline spending to pay for Brexit.
The £3 billion war chest covers the two years 2018/19 and 2019/20, and Mr Hammond said the Treasury was now looking ahead to longer-term pressures on resources.
Asked about the Yellowhammer document during a visit to Glasgow, the Chancellor told the BBC: “Departments have the funding for no-deal planning. What we’re beginning to discuss is now part of long-term contingency planning.”
He added: “In no-deal circumstances we would have to refocus Government priorities so that Government was concentrated on the circumstances that we found ourselves in.
“Let me reiterate again that is not the outcome we are expecting and it’s not the outcome we’re seeking.”
The document also reveals that officials and ministers have been discussing the need to build a “communications architecture” to maintain confidence - particularly in the financial sector - in the event of no deal, as well as to plan for aviation and rail access to the EU.
Theresa May’s official spokesman said the Prime Minister had made clear that the Government was preparing for all possible Brexit scenarios.
Codenames such as Yellowhammer were chosen at random to act as a shorthand for workstreams taking place across Government for major events, such as the Olympics or the football Champion’s League final, he said.
Asked if departments had been forced to make cuts to pay for no-deal planning, the PM’s spokesman said: “There is a pot of money available and nobody has been told to cut frontline spending elsewhere.”
The development came as Brexit Secretary Dominic Raab met EU chief negotiator Michel Barnier for the latest round of talks in Brussels.
The meeting came just a day after the Cabinet minister was told that Mr Barnier had declared Mrs May’s Chequers plan for future relations “dead in the water” during a meeting with MPs earlier in the week.
Labour MP Stephen Kinnock told Mr Raab that Frenchman Mr Barnier had left the Commons Exiting the EU Committee in no doubt that he had written Chequers off, telling them: “Les propositions sont mortes” - the proposals are dead.
Asked about the comments, European Commission spokesman Margaritis Schinas urged people to wait for the official transcript of Monday’s behind-closed-doors meeting.
“Michel Barnier was very clear expressing the Commission position on Chequers from the very first moment,” he said.
“I don’t think that people present in the room and beyond the room have any doubt on what we said on Chequers - we identified where there were positive elements and we discussed also the possibility for further discussions to address issues that still create problems.”
He added that the private meeting provided “the perfect recipe for everybody coming out of there and saying what one or the other understood Michel saying”.
He added: “Let’s wait for the transcript and then let’s check the sort of things that are reported of what Michel Barnier said against what he actually really said.”
Mr Barnier said Thursday’s meeting with Mr Raab would see the pair continue work to find “common ground” between the European Council’s guidelines and the Chequers plan with a view to creating a “new, ambitious partnership”.