Chancellor to warn leadership candidates they can leave with no deal or spend, but not both

The incoming prime minister will be forced to abandon any spending plans if the UK accelerates towards a no-deal Brexit, Philip Hammond is to say in a warning apparently directed at Boris Johnson.

The chancellor, who is likely to be removed from the cabinet under a Johnson premiership, will tell business leaders in his Mansion House speech on Thursday that any leadership candidate must have a plan B if renegotiations with the EU fail, or their “job will be on the line”.

He will say the two “core, unshakeable, beliefs” of the Conservative party are under threat – meaning belief in prudent management of public finances and in the four nations of the UK.

Hammond’s intervention is understood to have been prompted by a shock YouGov poll of Conservative party members, which found 63% of members would be willing to see Scotland leave the UK and 59% would be prepared to lose Northern Ireland in order to secure Brexit. More than 60% were prepared to see “significant damage to the UK economy”.

“I will not concede the very ground we stand on,” Hammond will say. “I will fight, and fight again, to remake the case for pragmatism and, yes, for compromise in our politics – to ensure an outcome that protects the union and the prosperity of the United Kingdom.”

Q&A What does a no-deal or WTO-rules Brexit mean? Show Hide If the UK leaves the EU without a deal it would by default, become a “third country”, with no overarching post-Brexit plan in place and no transition period. The UK would no longer be paying into the EU budget, nor would it hand over the £39bn divorce payment. The UK would drop out of countless arrangements, pacts and treaties, covering everything from tariffs to the movement of people, foodstuffs, other goods and data, to numerous specific deals on things such as aviation, and policing and security. Without an overall withdrawal agreement each element would need to be agreed. In the immediate aftermath, without a deal the UK would trade with the EU on the default terms of the World Trade Organization (WTO), including tariffs on agricultural goods. The UK government has already indicated that it will set low or no tariffs on goods coming into the country. This would lower the price of imports – making it harder for British manufacturers to compete with foreign goods. If the UK sets the tariffs to zero on goods coming in from the EU, under WTO “most favoured nation” rules it must also offer the same zero tariffs to other countries.

WTO rules only cover goods – they do not apply to financial services, a significant part of the UK’s economy. Trading under WTO rules will also require border checks, which could cause delays at ports, and a severe challenge to the peace process in Ireland without alternative arrangements in place to avoid a hard border.

Some no-deal supporters have claimed that the UK can use article XXIV of the General Agreement on Tariffs and Trade (Gatt) to force the EU to accept a period of up to 10 years where there are no tariffs while a free trade agreement is negotiated. However, the UK cannot invoke article XXIV unilaterally – the EU would have to agree to it. In previous cases where the article has been used, the two sides had a deal in place, and it has never been used to replicate something of the scale and complexity of the EU and the UK’s trading relationship. The director general of the WTO, Roberto Azevêdo, has told Prospect magazine that “in simple factual terms in this scenario, you could expect to see the application of tariffs between the UK and EU where currently there are none”. Until some agreements are in place, a no-deal scenario will place extra overheads on UK businesses – eg the current government advice is that all drivers, including lorries and commercial vehicles, will require extra documentation to be able to drive in Europeif there is no deal. Those arguing for a “managed” no deal envisage that a range of smaller, sector-by-sector, bilateral agreements could be quickly put into place as mutual self-interest between the UK and EU to avoid introducing or to rapidly remove this kind of bureaucracy. Martin Belam

Hammond, who is currently locked in a battle with Theresa May over spending commitments the prime minister wishes to make as part of her legacy, suggested he had been alarmed at candidates splashing the cash in their campaign promises.

Johnson’s plan to raise the 40% tax threshold from £50,000 to £80,000 is said to cost £14.1bn. Michael Gove’s promise to scrap VAT and replace it with a lower sales tax has been estimated at £20bn. Sajid Javid has said he would back slowing the pace of debt reduction to use up to £25bn a year for spending, including on education.

“There is a choice. Either we leave with no deal … or we preserve our future fiscal space. We cannot do both,” Hammond is expected to say.

He will also warn that any candidate planning to use no deal as their plan B will be risking a general election. It will be “an immutable truth” that parliament has rejected the current deal, as well as no deal, and that the EU will not countenance renegotiation, he will say.

Hammond is to say: “The question to the candidates is not ‘what is your plan?’ but ‘what is your plan B? If your plan A is undeliverable not having a plan B is like not having a plan at all. So, the candidates need to be honest with the public.

“We cannot allow ourselves to be forced to choose between our democracy and our prosperity. If the new prime minister cannot end the deadlock in parliament, then he will have to explore other democratic mechanisms to break the impasse. Because if he fails, his job will be on the line – and so, too, will the jobs and prosperity of millions of our fellow citizens.”

Meanwhile the government has increased its efforts to find a solution to the Irish border question with the establishment of a technical group to advise on alternative arrangements to the backstop to keep the frontier open.

It is the first of three working groups the Department for Exiting the EU is establishing and is significant because unlike other border delivery groups it embraces some of the leading critics of those who claim the border issue can be solved with technology, without reference to jobs and harmonious community relations.

Among those appointed to the group are Queen’s University sociology reader Katy Hayward, who has recently returned from the US for a six-week study of border arrangements, and Declan Billington, Northern Ireland Food and Drink Association who warned in March that the government’s Brexit tariff policy will wipe out dairy farmers in the region.

Others on the group include Tim Mairs, the Police Service of Northern Ireland’s assistant chief constable, who is likely to reflect the impact of no-deal Brexit on smuggling, organised crime and co-operation with the Gardai without data exchange or the Euro arrest warrant.