Philip Hammond wants 'rapid' EU response to PM's transition deal offer

Philip Hammond has called for a rapid response from the EU27 to the prime minister’s offer of a transition deal, and even warned that there could be no air traffic between the UK and the EU if no exit deal of any kind could be agreed

The chancellor underlined the “need for speed” in agreeing the outlines of the transition, expected to cover around two years, which is aimed at giving businesses and the government time to adjust to the post-Brexit world.

He also warned that a no-deal outcome was still possible, raising the possibility that the talks could end in a “bad-tempered breakdown” – and said in that unlikely scenario it would have a major impact on both sides.

But his main emphasis was to argue that business wanted to know that a transitional deal would be in place soon, describing it as a “wasting asset”, which will be less valuable the longer it takes to agree.

Appearing before MPs on the cross-party Treasury select committee, Hammond said: “It’s self-evident to me that a transitional arrangement is a wasting asset. It has a value today; it will still have a very high value at Christmas, perhaps early in the new year, but as we move through 2018, its value to everybody will diminish significantly, and I think our European partners need to think very carefully about the need for speed.”

The chancellor said he believed a deal was likely, saying: “In my discussion with counterparts across the EU, I find a high degree of consensus that it’s a sensible thing to do, that it’s a practical thing to do.”

But he underlined the fact that securing a transition deal upfront would depart from the structure for the negotiations initially set out by the European commission.

The commission has repeatedly insisted that withdrawal issues – including financial payments, EU citizens and the Northern Irish border – must be settled before any discussions about the future.

Britain wants to discuss its future trading relationship with the EU because 44% of UK exports go to, and 53% of imports come from, the EU 27 countries. Post-Brexit conditions of trade could, therefore, have a major impact on Britain’s economy.

The World Bank estimates UK trade with the EU in goods and services could fall by 50% and 62% respectively if no trade deal is agreed after Brexit, against 12% and 16% if the UK stays in the single market through a Norway-style agreement.

Clean Brexit campaigners say the shortfall can be offset through more trade with non-EU countries, but those who argue the UK must retain close links with the single market doubt this, certainly anytime soon. Both groups want certainty.

However, the EU27’s negotiating guidelines for the two-year Brexit talks say discussion of the “framework” of a future relationship can only take place in phase two of the talks, once “sufficient progress” has been made on the separation phase and particularly the UK’s exit bill.

“The proposal that we have put to the EU calls for a rapid response, and it means breaking out of the structure of the negotiation that has been imposed by the European commission,” he said, adding that he believed the EU’s own negotiators were now willing to accept that approach.

Theresa May said in her Florence speech that the UK would be willing to make financial contributions, and accept existing EU rules, for a transitional period lasting “around two years”.

Hammond said: “We do expect a response from our EU partners. We have set out a fair and generous proposal to the EU. We don’t want them to immediately stand up and say, we agree to everything you’re proposing. We simply want them to say, yes, let’s sit round the table, and let’s look at the issues we will need to debate in order to get to a future partnership arrangement, via a transitional or interim period.”

Asked by the Labour MP Wes Streeting about business’s concerns about a Brexit deal, the chancellor said the “cloud of uncertainty” was already dampening investment.

“The very strong message I get is that certainty itself is of enormous value, and probably more important than getting the perfect outcome,” he said.

Hammond also insisted that, while the government was preparing for every possible outcome to the Brexit negotiations – including no deal – he would not commit to expenditure for that contingency.

He said the government would even have to think about a scenario in which the talks collapsed in acrimony. “We also have to consider the possibility of a bad-tempered breakdown of the talks where we have non-cooperation,” he said, adding that in those circumstances, governments might act against their own economic self-interest.

Pressed repeatedly on the government’s contingency planning, he insisted he was not ready to commit funds immediately to build the necessary infrastructure for no deal.

He said the government would work back from March 2019 to establish when decisions would need to be made in order to be ready for different outcomes, but would not make financial commitments now, to avoid spending that could prove “nugatory”.

“Every pound spent on a hard customs border is a pound that can’t be spent on the NHS or tackling the deficit,” he said.

Hammond also denied that there were divisions in cabinet over Brexit, saying every member had signed up to the text of the PM’s Florence speech.

He will deliver his budget on 22 November, and is expected to have to deal with significantly weaker economic forecasts, as the independent Office for Budget Responsibility reassesses the outlook for productivity.

“I think we do have a fundamental underlying problem about productivity growth in the UK economy,” Hammond conceded.