A smooth Brexit that offers frictionless trade with the European Union will give the Treasury a double bonus in the budget, the chancellor has said, allowing him to boost public spending and consider cutting taxes.
Philip Hammond said a deal with Brussels offering open trade with the EU would free up much of the £15.4bn he had saved this year to act as a buffer against a no-deal Brexit.
It would also allow the Office for Budget Responsibility to revise its predictions for GDP growth over the next five years, which it cut in the aftermath of the referendum result. The OBR, which is the Treasury’s independent forecaster, could give back up to £15bn of revenues that it said would be lost following a basic agreement to leave the EU.
In a clear message to Tory backbenchers who oppose Theresa May’s proposals to stay inside a customs union with the EU indefinitely, Hammond said extra spending on services such as the NHS, debt reduction and tax cuts would be possible if they backed the prime minister when the deal was voted on in the Commons.
Speaking in Bali, where he is attending the International Monetary Fund’s annual meeting, he said: “I believe there will be a dividend, a deal dividend for us. If we are successful in negotiating that package, there will be an upside dividend in terms of the economy and consequently the fiscal numbers.
“The second bonus is that I have been holding a slightly larger fiscal buffer than would be necessary because of the degree of uncertainty that exists at the moment. As that uncertainty is unwound and we are in more favourable circumstances, logically one would need less of a fiscal buffer and some of that could be released to support the spending envelope or deliver tax cuts.”
It is possible Hammond will consider cutting pension benefits after he described pensions tax relief as an “eye-watering” sum, but he is expected to make only limited changes.
Hammond said he was unmoved by pleas to use some of his Brexit bonus to increase welfare spending and in particular to boost the money available for universal credit. The former prime minister Gordon Brown said this week the new benefit system would spark a summer of discontent and poll tax-style chaos if it was rolled out nationally next year.
Hammond said he had already given £6bn to ease the rollout of the scheme, which is a replacement for benefits including tax credits and housing benefit. He would be prepared to find further sums for “bumps in the road”, but said he was committed to its implementation.
“I believe universal credit is the right way to go. It is a huge improvement to our welfare system. It is a structural change that gives us a system that focuses on those who need it most,” he said.
The chancellor is already committed to spending an extra £35bn more than he has budgeted for by 2022 after the prime minister’s pledge to boost NHS spending by £20bn a year and lift the revenue cap on local authorities to boost council house building.
Hammond said he was optimistic that a Brexit deal would be struck with the EU but some major differences remained.
“What has happened over the last 10 days is that there’s been a measurable change in pace. There’s a real sense now of engagement from both sides of shared enterprise in trying to solve a problem rather than posturing towards each other.
“So, a really important step change, but that shouldn’t conceal the fact that we’ve still got some big differences left to resolve. So [the] process is a lot more positive this week, [but the] substance is still very challenging.”
