Hammond says Tory leadership candidates must 'be honest' over spending plans

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Media captionHammond: Candidates' promises 'exceed fiscal headroom'

The chancellor has called on Tory leadership candidates to "stop and think" about their spending promises.

Both Jeremy Hunt and Boris Johnson have announced a raft of policies during the contest, including cutting taxes and increasing spending on public services.

But Philip Hammond said they needed to "be honest" as the policies "greatly exceed" the Treasury's coffers.

He also said available money would be needed to support the UK economy in the case of a no-deal Brexit.

Asked by BBC political editor Laura Kuenssberg if the candidates were being honest with the electorate, he said: "I think they need to be very careful about setting out these ambitions and being clear about the consequences of them."

The warning comes after Mr Hunt said he would decide by the end of September whether there was a "realistic chance" of reaching a new deal with the EU were he to become PM.

The foreign secretary said he would deliver a provisional "no-deal Brexit budget" in early September, but abandon talks at the end of the month if there was no "immediate prospect" of progress - instead moving to a no-deal footing.

His rival Boris Johnson has vowed to leave "come what may" by 31 October.

Speaking to reporters on Monday, Mr Johnson said it was important to have a "hard deadline" for leaving, adding that previous no-deal preparations had "sagged back down" after exit dates were not met.

The Conservative Party's 160,000 members will begin voting next week and Theresa May's successor is expected to be announced on 23 July.

Mr Hammond said the Treasury had "built up fiscal headroom to protect against the cost of a no-deal Brexit" and that money could be released "if we have a smooth Brexit with a transition period in an orderly way".

But he said the current proposals on the table from Mr Hunt and Mr Johnson would already require increased borrowing beyond the government cap, or spending cuts or tax rises elsewhere - even without a no-deal Brexit-shaped "hole" in the public finances.

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Analysis box by Laura Kuenssberg, political editor

Jeremy Hunt and Boris Johnson have been busy spraying around hypothetical cash - whether on defence, on care for the elderly, on schools, for more police, the list goes on.

It is not politically surprising that they both want to signal they would turn on the spending taps a bit after a long, long period of cuts. But one of their erstwhile colleagues seems to have had enough.

After making some carefully crafted warnings in the last couple of weeks, Chancellor Philip Hammond has tried to call a halt, telling the BBC that both of the candidates have to resist the temptation of a bidding war, worrying that the party's reputation is at risk too.

Mr Hammond told me the candidates needed to "stop and think". And that by his calculation, both of the candidates' plans "greatly exceeds" the amount of wriggle room they will inherit from No 11 if they are lucky enough to be the one that moves in next door.

Mr Hammond also said the headroom wasn't "a pot of money sitting in the Treasury", but a way of borrowing more without breaching government limits.

"Whether it is a leadership competition or a general election, there is always a temptation to get into a bidding war about spending more and cutting taxes," he said.

"But you can't do both, and if we're not careful, all we end up doing is borrowing more, spending more on interest, instead of on our schools, hospitals and our police, and delivering a bigger burden of debt to our children and grandchildren."

He said the candidates' policies were "sensible and interesting ideas", but said the government had "built up a reputation for fiscal responsibility... and it is very important we don't throw that away".

"We have to live within our means and people have to be honest about the consequences of either spending more money or of cutting taxes that will have implications for borrowing or spending elsewhere," he added.

Compare the candidates' policies

Select a topic and a candidate to find out more

BREXIT

Jeremy Hunt
Foreign Secretary

- Wants to leave with a deal, but says he would back a no-deal Brexit with "a heavy heart" if necessary. - Will create a new negotiating team to produce an "alternative exit deal" to Theresa May’s plan, and engage with EU leaders over August. - Will present a provisional no-deal Brexit budget in early September and decide by the end of the month if there is a "realistic chance" of a new deal. - If not, will abandon talks and focus on no deal preparations. - Pledges to cover the cost of tariffs imposed on the exports of the farming and fishing industries in the case of a no-deal Brexit.

Boris Johnson
Backbencher

- Vows to leave the EU by the 31 October deadline "come what may", but claims the chance of a no-deal Brexit is a "million to one". - Wants to negotiate a new deal, which will include replacing the Irish backstop with alternative arrangements. - Will not hand over the £39bn divorce settlement with the EU until the UK gets a new deal. - If a new deal is not agreed, will ask the EU for a "standstill period" to negotiate a free trade deal. - Argues a provision under the General Agreement on Tariffs and Trade, known as GATT 24, could be used for the UK to avoid tariffs for the next 10 years, but admits it would need EU sign off. - Promises to support the rural community in a no-deal Brexit scenario with "price support" and "efficiency payments".

IMMIGRATION

Jeremy Hunt
Foreign Secretary

- Calls for flexibility on immigration, saying skilled workers should be prioritised. - Wants to review policy of stopping migrants with less than £30,000 coming to the UK to work. - Pledges to scrap the target to reduce net migration to below 100,000.

Boris Johnson
Backbencher

- Wants a new Australian-style points-based system, considering factors such as whether an immigrant has a firm job offer and their ability to speak English. - Will get Migration Advisory Committee to examine the plan. - Wants to block the ability for immigrants to claim benefits immediately after the arrive in the UK. - Opposes the net migration target of under 100,000 a year.

TAX

Jeremy Hunt
Foreign Secretary

- As an entrepreneur, he wants to turn Britain into "the next Silicon Valley... a hub of innovation". - Wants to cut corporation tax to 12.5%. - Wants to raise the point at which workers start paying National Insurance to at least £12,000 a year. - Pledges to scrap business rates for 90% of high street shops. - Will increase the tax-free annual investment allowance from £1m to £5m.

Boris Johnson
Backbencher

- Pledges to raise the tax threshold for the higher rate to £80,000 (rather than the current £50,000). - Wants to raise the point at which workers start paying income tax.

SPENDING

Jeremy Hunt
Foreign Secretary

- Wants to increase defence spending by £15bn over the next five years. - Promises to keep free TV licenses for the over-75s. - Wants to build 1.5 million homes and create a “right to own” scheme for young people. - Backs both HS2 and a third runway at Heathrow.

Boris Johnson
Backbencher

- Pledges more money for public sector workers and wants to increase the National Living Wage. - Will “find the money” to recruit an extra 20,000 police officers. - Promises to maintain spending 0.7% of GDP on Foreign Aid. - Wants to review the HS2 train project. - Pledges full fibre broadband in every home by 2025.

HEALTH AND SOCIAL CARE

Jeremy Hunt
Foreign Secretary

- Promises more funding for social care. - Wants to introduce an opt out insurance system to fund future care, similar to the way pensions work. - Wants to target manufacturers of unhealthy foods to make them cut the sugar content. - Mental health support to be offered in every school and a crackdown on social media companies that fail to regulate their content.

Boris Johnson
Backbencher

- Rules out a pay-for-access NHS, saying it would remain "free to everybody at the point of use" under his leadership. - Has previously said money spent on the EU could be put into the NHS. - Plans to give public sector workers a "fair" pay rise, according to supporter Health Secretary Matt Hancock. - Says more should be spent on social care, according to a cross-party "national consensus".

EDUCATION

Jeremy Hunt
Foreign Secretary

- Pledges to write off tuition fees for young entrepreneurs who start a new business and employ more than 10 people for five years. - Wants to reduce interest rates on student debt repayments. - Long-term plan to provide more funding for the teaching profession. - Wants to abolish illiteracy.

Boris Johnson
Backbencher

- Wants to raise per-pupil spending in primary and secondary schools, with a minimum of £5,000 for each student in the latter. - Wants to look at lowering the interest rate on student debts.

'Raise money honestly'

Cabinet Office Minister David Lidington has also warned the candidates about their spending promises, saying they had to "raise the money honestly from somewhere".

The de-facto deputy prime minister said: "While in a short term crisis you can ease up on the borrowing, money borrowed has to be repaid by the next generation with interest - so you shouldn't take on extra borrowing lightly, nor should we be wanting to impose more taxes on people already working very hard.

"Sound money and restraint in public spending remains a good Tory principle."

He said the "stewardship" of Mr Hammond meant "money is available" to "cushion the impact" of a no-deal Brexit.

But, he added: "I don't think any of us should pretend that no-deal would be easy even with the most meticulous and thorough planning."

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Media captionJeremy Hunt: Who is the Conservative leadership contender?

Mr Hunt has said he wants to negotiate a new deal with the EU and would be building a team to create an "alternative exit deal" to be published by the end of August.

He would then engage with other EU leaders, but keep up preparations at home for a no-deal Brexit.

But BBC political editor Laura Kuenssberg said the timeline Mr Hunt was setting out was very tight - especially given the notice the government's fiscal watchdog, the OBR, usually needs to prepare for a Budget.

Earlier, one of Mr Johnson's leading backers, Health Secretary Matt Hancock, told the Times the days of public sector "pay freezes" under Theresa May and David Cameron would be over if Mr Johnson was elected.

But during a campaign visit in Kent on Monday, Mr Johnson declined to make a detailed pledge on public sector pay, saying only that remuneration should be "decent".

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Media captionBoris Johnson: Who is the Conservative leadership contender?

A no-deal exit on 31 October remains the default position in UK law after MPs rejected the deal Mrs May had agreed with Brussels three times.

If that does happen, the UK will automatically begin trading with the EU under the basic World Trade Organization (WTO) rules.

Under these rules, the tariffs - the taxes on imported and exported goods - will be different to what the UK currently trades under.