A "cloud of uncertainty" caused by Brexit is acting as a damper on the UK economy, the Chancellor has admitted.

Philip Hammond told the House of Commons Treasury Committee that businesses and consumers were holding back on spending decisions until they saw the outcome of Brexit talks in Brussels.

Progress in negotiations needed to come "as soon as possible" to remove the drag on growth, he insisted.

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The Chancellor's comments came after the UK was the only major economy not to see its growth forecast upgraded in an International Monetary Fund report, which predicted it would slow from 1.8 per cent in 2016 to 1.7 per cent this year and 1.5 per cent in 2018.

Giving evidence to the committee, Mr Hammond confirmed that he was not ready to spend billions of pounds of taxpayers' money now on preparing for a "no deal" departure from the EU.

He said the IMF forecasts for the UK were unchanged since its last report in July, while many other economies had seen their prospects improve.

"It reflects the sense that, while the UK's economy is fundamentally strong and in good shape, we are being affected by uncertainty around the negotiation process that we are engaged in," explained the Chancellor.

"There is plenty of anecdotal evidence that businesses and consumers are waiting to see what the outcome is or what the direction of travel is before firming up investment decisions and consumption decisions.

"My general view is that our economy is fundamentally robust, we have some very positive things going for us, so a strong outlook for the future.

"But the cloud of uncertainty is acting as a temporary damper and we need to remove it as soon as possible by making progress with the negotiation process," he said.

Mr Hammond insisted the Treasury was "prepared to spend when we need to spend" on contingency plans for a "no deal" outcome.

"We do have planning for all scenarios, including a 'no deal' scenario," he declared. “I'm clear that we have to be prepared for a 'no deal' scenario unless and until we have clear evidence that that is not where we will end up.

"At the moment, although of course we hope for a different outcome, we cannot be certain of that different outcome.

"What I am not proposing to do is allocate funds to departments in advance of the need to spend."

Mr Hammond said the Government needed to look at the "last point" at which spending could begin to make sure the country was ready for a "day one no deal scenario".

"That's when we should start spending hard-earned taxpayers' money, because every pound we spend on contingent preparations for a hard customs border is a pound we can't spend on the NHS, social care, education or deficit reduction."

Mr Hammond said planning for "no deal" was a "moving feast" because while extreme scenarios could be theoretically possible, they were highly unlikely in reality; such as air traffic coming to a halt.

He told MPs that the Government would need to decide at some point what the "realistic" worst case they needed to plan for was.

But the Treasury had "no plans" to publish any documents assessing the possible outcomes, the committee was told.

The Chancellor said departmental spending settlements would not be reopened because cash would come from reserves.

Mr Hammond went on to say that leaders of the 27 other EU nations needed to recognise the "need for speed" in agreeing an interim period of around two years to follow the official date of Brexit in March 2019.

Agreeing the terms of an interim period would clear uncertainty and reassure businesses and consumers that there would be no "cliff-edge" leap to new rules.

But a transition agreement was a "wasting asset" whose value would decline the later it was reached as businesses needed to take investment and relocation decisions some time in advance, he told the committee.

"It has a value today, it will still have a very high value at Christmas and early in the New Year, but as we move through 2018 its value to everybody will diminish significantly,” explained the Chancellor.

"Our European partners need to think very carefully about the need for speed in order to protect the potential value to all of us of having an interim period that protects our businesses and citizens and allows investment and normal business activity - contracting and so on - to carry on."

Mr Hammond said UK businesses had given him a "very strong message" about the need for early certainty about the outcome of Brexit.

Industrial sectors with supply chains running through other EU states typically operated on three-year contracts and needed to know what the environment for cross-border trade would be that far into the future.

The Chancellor stressed how there was "complete understanding" in Government of their concerns.

Early agreement on an interim period would "avoid people having to make worst-case assumptions and acting on them in a way that would be damaging to their businesses, damaging to the UK economy, damaging to business partners in the other EU countries and damaging to the EU's economy as a whole", he said.

It would also save governments on both sides from having to spend "very large amounts" on new infrastructure which might eventually turn out not to be needed.

Mr Hammond said he believed there was "a high degree of consensus" in European capitals that agreement on transition arrangements was "a sensible thing to do and a practical thing to do".

But he told the committee that so far, the only work that had been done on the future UK-EU relationship in areas like financial services had been done by Britain.

"We need our European partners to engage with us,[to] look at our proposals," said the Chancellor.

"By all means challenge them and kick the tyres but this is a shared problem and if we don't talk about it, we are not going to get to a solution in a timescale that allows the future partnership that I do believe the vast majority of our European partners want to achieve."

Mr Hammond said that making progress on the kind of interim deal proposed by Theresa May in her speech last month in Florence would mean "breaking out" of the negotiation structure set out by the European Commission, under which agreement must be reached on withdrawal issues like citizens' rights, the Irish border and the UK's divorce bill before talks moved on to trade.

He urged EU leaders to allow "at least exploratory discussions" to begin on transition arrangements and the future relationship, telling the committee that the UK believed that EU negotiators now accepted that "phase one" withdrawal issues could only be resolved in the context of broader agreement about the long-term outcome.