Deal after negotiations end in March 2019 will be needed to avoid serious risks to businesses and financial stability, says chancellor

Philip Hammond has told MPs that the government would be likely to seek a transitional deal to help smooth the Brexit process in order to avoid disruption that could risk Britain’s “financial stability”.

Hammond calls for transitional deal for when UK leaves EU - Politics live Read more

The chancellor’s claim that businesses, civil servants and “thoughtful politicians” all agreed on the issue was one of a series of frank comments indicating that it would take longer than two years to complete the Brexit negotiations he made during questioning by parliament’s Treasury select committee.

During the hearing, Hammond was unequivocal about the need for transitional arrangements that would kick in after the formal two year period for exit negotiations set out by article 50.



“There is, I think, an emerging view among businesses, among regulators, among thoughtful politicians, as well as a universal view among civil servants on both sides of the English channel that having a longer period to manage the adjustment between where we are now as full members of the EU and where we get to in the future as a result of negotiations would be generally helpful,” he said.



The chancellor said such a deal would tend towards a smoother transition and reduce disruption, “including crucially risks to financial stability, which must be a very real concern”.

Hammond also promised that when it came to immigration the government would not to “slam all doors shut”, claiming it was inconceivable that the UK would prevent the flow of highly skilled workers.

On the possibility of onerous checks that could clog up the country’s ports if Britain leaves the customs union, he admitted that the Treasury believed the final Brexit deal could mean a fivefold rise in border inspections.

The comments on a transitional deal, which will have reassured businesses lobbying government to try to avoid a “cliff edge” scenario in the Brexit process, appeared to trigger a small increase in the value of sterling.



Hammond’s intervention follows Theresa May telling the annual conference of the CBI that the government was aware of their worries and would try to avoid a sudden shock.



But the Financial Times has suggested that the Brexit secretary, David Davis, had told a private meeting with key figures in the City that he was “not really interested” in a transitional deal, suggesting the cabinet is not yet united on the issue.

The comments led to an immediate backlash from some Brexit supporters, with former Ukip leader Nigel Farage saying he did not like the look of it, and claiming it looked like “more backsliding”.

“Half Brexit is where they’re going,” he said. “I think they’re going to fudge and give us a Norwegian type deal.” The Norway deal has become contentious because while the country remains inside the single market, it has to accept EU rules, including over free movement of people.

Tim Farron, the Lib Dem leader, said the comments were an example of confusion in government. “One day David Davis says there is no need for a transitional deal, the next the chancellor is backing one,” he said.

“These mixed messages are a sign of the confusion and division at the heart of this Conservative Brexit government.”

Hammond, who is seen as one of the more Europhile members of the cabinet but who has been working closely with Davis, suggested that the subject would need to be one of the first things discussed when formal talks begin next spring.



He said the concerns raised by financial services sector fell into two categories. “They are about disruption to patterns of business – remember that the financial services sector in London supports the real economy across the real economy, businesses in manufacturing and agricultural sectors for example,” he said.

“But also that if changes in practice are carried out in haste there is a danger that regulatory procedures will not be as robust as they should be, that a full understanding of what is being regulated will not necessarily be had by all regulators involved and run risks for stability of the financial system as a whole.”

Stressing again that it ought to be an issue of “shared understanding”, he suggested that both sides would agree to extend the period to deliver Britain’s break from the EU, adding that there were serious issues that could affect business.

The chancellor also argued that a future customs arrangement could require “significant physical infrastructure changes at ports of entry and exit – not only in UK but continental Europe” and could mean a “need to train large numbers of people in anticipation of a much more intensive process at borders”.

Talking about the need to potentially hire people, train them and introduce IT changes, Hammond suggested that the further the negotiation continued the more likely it was that “we will mutually conclude that we need a longer period to deliver”.

The comments come after the Guardian revealed an internal government report that suggested leaving the customs union could result in ports being clogged up and a 4.5% drop in GDP. Davis’s own adviser has suggested previously that the cost could be £25bn a year.

The chancellor also insisted that controls on European migration possible after Brexit would not “choke off” the supply of high-skilled workers.

“Just because you have a system of controlling immigration does not mean you have to use it to slam all doors shut. I can’t conceive of any circumstance in which we would want to impede or prevent the flow of highly-skilled, highly-paid people,” he said, adding: “I don’t think it is highly paid, highly skilled people that cause concern among our own population about migration numbers.”

Despite the comments on transitional arrangements, Hammond admitted there was a clash between the need of business and the needs of politicians to deliver on the EU referendum result.

“You are right that business comes with an ambitious view of what a transitional period might look like,” he said, but argued that there had to be a “compromise between political will and business desire to have longest period possible to make a change”.