Budget 2018: Austerity to continue for five more years if Britain leaves EU with no deal, Philip Hammond warns

Austerity will continue for five more years if Britain crashes out of the EU with no deal, Philip Hammond signalled, in a Budget warning to MPs threatening to vote down Theresa May’s Brexit plans.

The chancellor unveiled a Budget giveaway that cut income tax, announced a tax on the tech giants and conceded to pressure to help the victims of the bungled universal credit shake-up.

But, most significantly, Mr Hammond made clear the prime minister’s promise that “austerity will be over” would only be met in full if Britain sidesteps economic damage from Brexit and the growing risk of leaving the EU with no agreement next March.

Spending would rise by 1.2 per cent per year from next year, he announced – but immediately acknowledged the £20bn for the NHS would gobble up all the extra cash.

All other departments would only “keep pace with inflation”, a Treasury source said, before adding, tantalisingly: “If there’s a good deal, there’s an increase”.

It appeared to be a clear warning to MPs that plunging Britain into the chaos and damage of a no-deal Brexit would prolong the pain of austerity for years to come.

Some key departments – covering spending on the police, the courts and benefits – are still heading for cuts in day-to-day spending until 2022, the Budget book showed.

Labour seized on the Budget and plans for next year’s spending review as proof that “the pledge to end austerity was a broken promise”.

“It is now clear austerity is not over, the cuts to social security will continue and Philip Hammond gave no assurances that departments won’t face further cuts,” said John McDonnell, the shadow chancellor.

The respected Resolution Foundation think tank, said: “The chancellor has significantly eased – but not ended – austerity for public services. However, tough times are far from over.”

It warned that, after other spending protections for defence and foreign aid, the plan “probably means more cuts for other departments”.

And the Child Poverty Action Group seized on the failure to end the four-year freeze on family benefits – cuts in real terms – as proof there was no “substance to the claim that austerity is over”.

The criticism came after a Budget dominated by the spectre of Brexit which, Mr Hammond has acknowledged, could wreck his government’s economic plans.

He was able to announce – and spend – an £11.6bn windfall from rising employment, higher tax revenues and lower debt interest payments, mostly on the NHS, which will receive an extra £7.9bn in 2019-20 alone.

There was good news for workers, with hikes in the income tax-free allowance – to £12,500 for the 20p rate and £50,000 for the 40p rate – brought forward a year to next April.

The minimum wage will increase by 4.9 per cent next April, to £8.21 an hour, there was £160m for counterterrorism police and £400m for schools to buy “little extras”, a description that sparked fury from hard-pressed teachers.

And a digital services tax will raise £400m a year from the likes of Amazon and Facebook from April 2020, after Mr Hammond accused other countries on dragging their heels on international action.

But, strikingly, Mr Hammond refused to echo Ms May’s pledge that austerity would soon be “over’, instead telling MPs it was “coming to an end”.

And he confirmed he was considering another emergency Budget next year, if the Brexit talks fail, by “upgrading” what would otherwise be a low-key spring statement.

The chancellor has not confirmed even a 1.9 per cent spending rise, which remains a “forecast” dependent on the Brexit outcome.

Meanwhile, the independent Office for Budget Responsibility (OBR), was withering about the risk from failing to achieve a smooth Brexit, an event without “precedent”.

“A disorderly one could have severe short-term implications for the economy, the exchange rate, asset prices and the public finances,” its Budget report said.

In his speech, Mr Hammond pointed to the “pivotal moment in our EU negotiations” as he set out a “five-year path for departmental resource spending”.

And he pointed to the prize of spending £15.4bn of funds set aside to guard against a bad Brexit, plus “a boost from the end of uncertainty”.

“Get it right, and we will not only protect Britain’s jobs, businesses and prosperity but we will also harvest a double-deal dividend,” he argued.

Overall, he announced £103bn of extra spending planned for the next five years, increasing the deficit by £10.9bn next year – despite a stated policy of eliminating it.

The OBR said the chancellor had abandoned his plan to achieve a balanced budget by the middle of the next decade, largely to address the NHS’s funding crisis.

Meanwhile, the prospect of the Democratic Unionist Party voting down the Budget – as threatened – appeared to diminish with a promised £1bn of spending for Northern Ireland.