John McDonnell says he will address leavers’ grievances if failure to do deal with EU leads to snap general election

The shadow chancellor, John McDonnell, is preparing an anti-austerity budget to deal with the grievances of voters who support Brexit if failure to strike a deal with the EU leads to a snap general election.

McDonnell said he understood why people living in the poorer parts of Britain had voted to leave the EU in the 2016 referendum, but added that the chaotic negotiations had led to “instability, insecurity and uncertainty”.

McDonnell dismissed the idea that the chancellor, Philip Hammond, would bring an end to austerity as a Halloween trick-or-treat at next week’s budget and said a growth plan to benefit all parts of the country was needed.

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“The Tories say they are going to end austerity, but they are not going to do so in this budget or in future budgets either,” he said.

Labour would stick by its approach at the 2017 election and would levy higher income tax on the richest 5% of earners and reverse most of the cuts in corporation tax introduced since 2010, he said, in order to make a decisive break with the policies followed by Hammond and his predecessor, George Osborne.

“There are a range of mechanisms by which we can end austerity. We have a sizeable programme for raising tax. We would borrow to invest. We would set out our priorities and lay the foundations of what we want to create. I am confident about that. The issue is about a fair taxation system and growing the economy in a way that benefits all regions.”

The shadow chancellor said he had been taking roadshows to the parts of Britain that voted for Brexit and had been struck by what he had heard. “The message coming back has all been about regional imbalances and inequality. Whole areas have been ignored. They have seen lots of publicity stunts, but nothing has happened.”

He said that while Labour had campaigned to remain in the EU in the referendum, he could see why the vote had gone the other way. “It was like a nationwide byelection for people in some parts of the country. All their grievances went into that vote and you can see why. Their jobs had gone, they saw massive investment in London and nothing in their own areas.

“Their children studied hard at school, went off to university, came home with £50,000 of debt and couldn’t get a job in their home town. They went away to find work and couldn’t get a roof over their head. I can see why people hit back at the establishment.”

McDonnell said Theresa May had put Hammond in a difficult position by using her speech at the Conservative party conference to announce the end of austerity. Something would be cobbled together by the Treasury to make Hammond look like the “last of the big spenders”, he predicted.

“The end of austerity won’t wash,” he said. “People … want change, but the government can’t deliver it because it can’t manage the economy effectively.” The economy was barely growing, productivity growth was poor and investment was stagnant, he said.

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“There has been no real recovery and now we have Brexit thrown in. I think the idea of an end to austerity is a Halloween trick-or-treat. What Hammond does won’t even touch the sides.

“People have had enough. There are 4 million children living in poverty and the figure is heading for 5 million. Wages are still below their 2010 level. People don’t see any light at the end of the tunnel.”

In the event of a general election, Labour would pledge to raise taxes, boost welfare spending, invest in public services and launch a transformation fund in a bid to boost regional growth.

McDonnell said the cost of corporation tax cuts would be £110bn by the end of this parliament, but that firms had been hoarding cash rather than investing. “They have been operating with cheap labour rather than tackling productivity,” he said.

On Brexit, McDonnell said: On Brexit negotiations, McDonnell said: “We think we would get a deal swiftly on a customs union. We would negotiate on the basis of mutual interest and benefit rather than by banging on the table and threatening to walk away.”

Shadow cabinet members had held talks with the EU’s chief negotiator, Michel Barnier, and the atmosphere with Labour at the negotiating table would “change overnight”, he said

A Labour government would also start a discussion about the UK’s relationship with the single market focused on flexibility over free movement of labour and the support government could provide for industry through state aid.

The EU, he predicted, would offer the prime minister a face-saving deal, but added that if the package failed to protect jobs and the economy Labour would refuse to vote for it.