Exclusive: insiders say ministers will have to choose between economic interests or sovereignty but Brexit department denies any change of mood

British officials have quietly abandoned hope of securing the government’s promised “cake and eat it” Brexit deal, increasingly accepting the inevitability of a painful trade-off between market access and political control when the UK leaves the EU.

Government insiders report a dramatic change of mood at the Department for Exiting the European Union (DExEU) since the general election, with growing Treasury influence helping force ministers to choose between prioritising economic interests or sovereignty.

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This is in stark contrast to the public position of both main political parties, first set out in the Theresa May’s Lancaster House speech in January, in which she echoed Boris Johnson’s boast that Britain can “have its cake and eat it” – enjoying full trade access without conceding over immigration, courts and payments. Labour’s Jeremy Corbyn sacked three shadow ministers on Thursday for departing from a similar position.

Yet UK civil servants are now said to be presenting ministers with a more binary choice: accept political compromises similar to aspects of the European Economic Area (EEA), or settle for a much more limited trade deal such as the recent EU-Canada free trade agreement (Ceta).

“We have a problem in that really there are only two viable options,” one official told the Guardian. “One is a high-access, low-control arrangement which looks a bit like the EEA. The other is a low-access, high-control arrangement where you eventually end up looking like Ceta – a more classic free trade agreement, if you are lucky.

“Of course the policy position remains the Lancaster House speech which says what we want is a high-access, high-control situation, but the author of that speech [reported to be Downing Street adviser Nick Timothy] is no longer in an influential position.”

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Though full EEA-style participation in the single market is seen as politically toxic due to its requirement to accept freedom of movement, pressure is building in Whitehall for a rethink of opposition to a customs union with the EU. This would satisfy many business leaders, who are clamouring for ways to avoid trapping manufacturers behind an inflexible tariff wall but possibly still allow new international trade deals to be pursued in the service sector.

“What we’ve seen post-election is that business voices that had felt bullied into silence pre-election are recovering their voice,” explained a senior official. “The economic arguments that had got lost in the last six months are now being heard again and those who had tried to railroad this by saying you are talking your country down are being given a run for their money.

“There are some ministers, such as the chancellor, who understand that and there are others who either don’t or are unwilling to,” the official added. “[Brexit secretary David Davis] is in the middle somewhere. His method of negotiating is always to be shameless in asking for something you can’t get because then you’ll end up in a place closer to what you want than if you start with a realistic offer ... but he is more pragmatic.”

A spokesman for the Brexit department denied there had been any change of mood since the election and said the approach outlined in the prime minister’s Lancaster House speech remained the government’s official strategy. Asked to respond to reports of ministers now being forced to consider a trade-off, the DExEU spokesman said they “did not recognise the language”.

But reports of the new mood of realism across Whitehall have been confirmed by at least two other officials at the highest levels of DExEU and the Treasury who have spoken privately.

Tensions burst into the open last week when Hammond gave a speech in Berlin warning against allowing “petty politics to interfere with economic logic” and publicly ridiculing the “cake and eat it” approach. Davis hit back by questioning the consistency of the chancellor’s calls for a transition phase.

Facebook Twitter Pinterest Philip Hammond speaking at the Economy Day of the Economic Council in Berlin. Photograph: Bernd von Jutrczenka/AP

The Brexit secretary’s former chief of staff James Chapman this weekend claimed the Lancaster House speech had “hamstrung” the government with “absolutist” positions on red lines such as participation in the European court of justice.

Charles Grant, director of the Centre for European Reform, last week revealed the existence of an unpublished Treasury analysis showing that the costs of leaving without a customs union deal far outweigh any benefits from future overseas trade deals.

“The coalition of forces pushing for a softer Brexit is considerable,” Grant said. “The Treasury, long an advocate of retaining close economic ties to the EU, is newly emboldened.”

Terry Scuoler, chief executive of the Engineering Employers Federation, will meet Davis, Hammond and the business secretary, Greg Clark, on Friday at Chevening House in Kent, in a revived business summit that many view as another sign of the shifting mood.

“We are having a much more realistic conversation now,” said Scuoler, who will warn them not to “set about ideologically dismantling the best free trade agreement in the world”.

Internally, the influence of Treasury mandarins is said to be the decisive factor in sweeping away the pretence of a “cake and eat it” option, but the battle is now on to decide what replaces it.

“I don’t know where this will end up,” said one of the official sources. “The cabinet is pretty divided, but both sides of the argument are getting airtime. Quite a few people in the Conservative party, including the chancellor, [have] said that one of the reasons the election went the way it did is that the Conservatives abandoned their traditional territory of being the party of business and the economy.”

But insiders warn that the clock is now ticking to agree which vision will prevail before the first phase of EU negotiations is concluded over the summer.

“There is still a fudge and before we get down to negotiating in October/November we have got to decide once and for all which of those two options we are going for,” he added. “What you can’t do is sustain a fudge because then you are going into negotiations without knowing what you want.”