Mr Hammond admitted analysis of Mrs May’s Brexit plan shows the economy will be “slightly smaller” under her preferred option.
His comments came ahead of the publication of analysis of the impact of Theresa May’s Brexit deal by the Treasury and the Department for Exiting the European Union.
Mr Hammond said: “It will show that a ‘no deal’ exit will have a much higher impact on the economy than the deal the Prime Minister has negotiated.”
He said the draft Withdrawal Agreement offers the political benefits of being out with “very little economic cost” to the UK.
Speaking to Sky News, he said: “If you look only at economic benefits, yes there will be a cost to leaving the European Union.”
But speaking to BBC Radio 4’s Today programme he said: “What the Prime Minister’s deal does is absolutely minimises those costs, and reduces to an absolute minimum the economic impact of leaving the EU, while delivering the political benefits, in terms of being able to do third-country trade deals, having control of our fishing waters, and the many other issues that will be delivered politically.”
SNP’s Treasury spokesperson Kirsty Blackman MP said: “The Prime Minister should listen to her Chancellor – Brexit will damage the UK economy, costing jobs, hitting incomes and shrinking our economy.
“As the Scottish Government set out in its analysis yesterday, this will mean £9 billion shaved off Scotland’s GDP. Or in other words, Theresa May’s bad deal with cost each of us £1,600.”