PHILIP Hammond has backed a transitional deal for Brexit, saying it would be “helpful” to allow longer than two years for the UK to leave the European Union.
The Chancellor told the Treasury Select Committee that “thoughtful politicians” could see the need for such an arrangement to minimise instability.
He said: “There is, I think, an emerging view among businesses, among regulators and among thoughtful politicians ... that having a longer period to manage the adjustment between where we are now as full members of the European Union and where we get to in the future as a result of the negotiations that we will be conducting would be generally helpful, would tend towards a smoother transition and would run less risks of disruption including, crucially, risks to financial stability, which must be a fairly real concern.”
Theresa May has promised to trigger Article 50 by the end of March, starting the formal two-year countdown to Brexit.
But businesses – particularly in the City – have expressed concerns about the possibility of a sudden “cliff edge” change in arrangements once the UK leaves the EU, particularly if it also quits the single market.
The Chancellor said both the UK and the remaining 27 members would need to agree on the need for a transitional arrangement rather than it being demanded by May during the negotiations.
Hammond said: “I don’t think we should approach this on the basis that we need transitional arrangements, because I think we can only get to a situation where we have a transition if there is a genuine meeting of minds on both sides of this negotiation.”
Asked about business calls for a transition period of at least two years following Brexit, Hammond told the committee he expected there to be tension between industry and bureaucratic pressure for a longer changeover and a desire among politicians to get on with the job.
But he added: “It’s not just the business sector, it’s the government sector that has had to think about how long it takes to make changes, hire people, train people, introduce IT changes.”
As an example, he warned that if the UK left the European Customs Union under a “hard Brexit”, the country could face a five-fold increase in border checks, costing hundreds of millions of pounds a year.
“There could be quite significant physical infrastructure changes that need to be made at ports of entry and exit not only in the UK, but in continental Europe as well,” Hammond told the committee. “There might be a need to train large numbers of people in anticipation of more intensive procedures at borders.
“It is true that in certain conceivable outcomes, there would be a very substantial increase in the numbers of customs submissions and customs inspections. We are talking about – in EU trade – perhaps five times as many submissions and inspections being required.
“It could certainly add hundreds of millions of pounds to the cost of operating the customs services.”
Hammond pointed out that the extra cost could be offset by any new tariffs charged on imports by the UK Government.
The Chancellor also cautioned that the UK’s desire to engage in the freest possible trade after Brexit may not bear immediate fruit.
Labour MP Stephen Kinnock MP, a supporter of the Open Britain group campaigning for a soft Brexit deal, said: “It’s encouraging to see that Philip Hammond understands the need for a transitional deal to stop Britain falling into a hard, destructive Brexit that would take our economy over a cliff edge.”
But Steve Baker, chairman of the European Research Group of MPs calling for a clean break from Brussels, said: “Our withdrawal agreement should allow financial services and other business to proceed uninterrupted on the basis of mutual recognition and equivalence.”
He added that a later “broad and deep bilateral free trade deal on the basis of global standards and national recognition" would be permanent.
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