Philip Hammond says post-Brexit transitional deal will be needed

Philip Hammond in Rome

Philip Hammond has told MPs that it will be necessary to have a post-Brexit “transitional deal” because it will not be possible to complete divorce negotiations within the timetable set out by article 50.

Related: Hammond calls for transitional deal for when UK leaves EU - Politics live

Speaking at the Treasury select committee, the chancellor said that almost all civil servants, many businesses and “thoughtful politicians” were starting to accept that a transitional deal after the Brexit negotiations conclude in March 2019 would be necessary to avoid serious risks to businesses and financial stability.

Businesses are concerned that the Brexit process will see the UK kicked out of the EU after a two-year negotiation following article 50. In theory, that will mean leaving the union before a formal trade deal is agreed, resulting in fears of a “cliff-edge” scenario for companies. A transitional deal could either mean extending the negotiating period, or agreeing to a softer deal that would act as a bridge to a full exit.

Hammond added that the Brexit deal could require the UK – and other European countries – to build significant physical infrastructure at Dover and other ports and train large numbers of people to deal with intensive customs checks that are expected to become necessary.

The UK has said it will trigger article 50 – the mechanism by which the UK can leave the European Union – by the end of March next year. Formally that allows for a negotiating period of two years, although the EU’s lead negotiator, Michel Barnier, said in practice there would only be 18 months to allow for ratification.

Asked by Andrew Tyrie, the chair of the Treasury select committee, about whether a transitional deal would be necessary, Hammond said: “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.

Hammond argued that such a deal “would tend towards a smoother transition and would run less risks of disruption – including crucially risks to financial stability, which must be a very real concern”.

Asked by Tyrie if he could take Hammond’s answer as a yes, he replied: “That is another way of putting it.”

However, the chancellor was clear that this would not be something that the UK should push for as something just Britain required but as something that would be a “meeting of minds on both sides” as something that would be mutually beneficial.

The comments come after Theresa May hinted that she would consider how the government could best avoid a “cliff-edge” scenario for businesses.

Hammond, who is seen as one of the more Europhile members of the cabinet but who has been working closely with the Brexit secretary, David Davis, suggested that the question of a transitional process would need to be one of the first things discussed when formal talks begin between Britain and negotiators representing the EU27.

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 effect business.

The chancellor 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.

However, Hammond admitted there was a clash between the need of business and the needs of politicians to deliver on the EU referendum result, with many thinking that the UK must have secured limits to free movement before a general election at the end of the decade.

“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”.

Powered by Guardian.co.ukThis article was written by Anushka Asthana Political editor, for theguardian.com on Monday 12th December 2016 18.44 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010