A “cloud of uncertainty” caused by Brexit is acting as a damper on the UK economy, the Chancellor has said.
Philip Hammond told the House of Commons Treasury Committee that businesses and consumers were holding back on spending decisions until they see the outcome of Brexit talks in Brussels.
Progress in negotiations needs to come “as soon as possible” to remove the drag on growth, he said.
The Chancellor’s comments came after the UK was the only major economy not to see its growth forecast upgraded in an International Monetary Fund (IMF) report, which predicted it would slow from 1.8% in 2016 to 1.7% this year and 1.5% in 2018.
Giving evidence to the committee, Mr Hammond confirmed that he was not ready to spend billions of pounds of taxpayers’ money now on preparing for a “no deal” departure from the EU.
He said the IMF forecasts for the UK were unchanged since its last report in July, while many other economies saw their prospects improve.
“I think it reflects the sense that, while the UK’s economy is fundamentally strong and in good shape, we are being affected by uncertainty around the negotiation process that we are engaged in,” said Mr Hammond.
“There is plenty of anecdotal evidence that businesses and consumers are waiting to see what the outcome is, or what the direction of travel is, before firming up investment decisions and consumption decisions.
“My general view is that our economy is fundamentally robust, we have some very positive things going for us, so a strong outlook for the future.
“But 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.”
Mr Hammond insisted the Treasury was “prepared to spend when we need to spend” on contingency plans for a “no deal” outcome.
“We do have planning for all scenarios, including a ‘no deal’ scenario,” he said. “I’m clear that we have to be prepared for a ‘no deal’ scenario unless and until we have clear evidence that that is not where we will end up.
“At the moment, although of course we hope for a different outcome, we cannot be certain of that different outcome. What I am not proposing to do is allocate funds to departments in advance of the need to spend.”
Mr Hammond said the Government needed to look at the “last point” at which spending can begin to make sure the country is ready for a “day one no deal scenario”.
“That’s when we should start spending hard-earned taxpayers’ money, because every pound we spend on contingent preparations for a hard customs border is a pound we can’t spend on the NHS, social care, education or deficit reduction.”
Mr Hammond said planning for “no deal” was a “moving feast” because while extreme scenarios could be theoretically possible, they were highly unlikely in reality, such as air traffic coming to a halt.
He told MPs that 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.
The Chancellor said departmental spending settlements would not be reopened because cash would come from reserves.
Mr Hammond said leaders of the 27 other EU nations need to recognise the “need for speed” in agreeing an interim period of around two years to follow the official date of Brexit in March 2019.
Agreeing the terms of an interim period will clear uncertainty and reassure businesses and consumers that there will be no “cliff-edge” leap to new rules, he said.
But a transition agreement is a “wasting asset” whose value will decline the later it is reached, as businesses need to take investment and relocation decisions some time in advance, he told the committee.
Mr Hammond said: “It has a value today, it will still have a very high value at Christmas and early in the New Year, but as we move through 2018 its value to everybody will diminish significantly.
“I think 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.”