A smooth Brexit that offers frictionless trade with the European Union will give the Treasury a double bonus in the budget, the chancellor said on Friday, 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 has 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 vote. 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 that extra spending on services such as the NHS, debt reduction and tax cuts would be possible if they back the prime minister when the deal is voted on in the Commons.
Speaking in Bali, where he is attending the International Monetary Fund’s annual meeting, he said: “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.”
Hammond said he was unmoved by pleas to use some of his Brexit bonus to increase welfare spending and in particular boost the money available for Universal Credit, which former prime minister Gordon Brown said earlier this week 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 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.
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 to pensions tax relief that costs the Treasury up to £35bn.
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.