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The chancellor has pledged to spend a £26.6bn Brexit war chest to boost the economy, if MPs vote to leave the European Union with a deal.

Philip Hammond vowed to free up more money to cut taxes and spend on public services in a “deal dividend”.

However, he said these spending plans were based on a smooth Brexit.

Mr Hammond used his Spring Statement to warn that a disorderly Brexit would deal a “significant” blow to economic activity in the short term.

He said the decision by MPs to reject Theresa May’s Brexit deal for a second time had left a “a cloud of uncertainty hanging over our economy”.

Growth slowdown temporary

The latest figures from the Office for Budget Responsibility (OBR) forecast that the UK economy will grow at the slowest pace since the financial crisis this year.

The OBR cut its 2019 growth forecast to 1.2%, the weakest growth rate since 2009.

That is a significant cut from the 1.6% expansion predicted by the government’s economic watchdog last October.

After that growth is expected to rebound.

Mr Hammond said the economy had “defied expectations” as wages were expected to keep growing at rates of above 3% over the next five years.

He hinted that the government would have up to an extra £26.6 billion to spend if MPs voted to leave the EU with a deal. This is almost double the £15.4 billion estimated by the OBR in October.

The statement left the forecast for GDP growth in 2020 at 1.4% and now expects the UK economy to expand by 1.6% a year in the following three years.

Healthy public finances

The government is expected to borrow £22.8 billion this financial year to plug the gap between the money it spends on public services and the tax revenues it collects.

This is almost £3 billion lower than the £25.5bn predicted by the OBR in the October Budget.

The watchdog expects the improvement in the public finances to continue in future years, helped by stronger tax receipts and lower spending on debt interest.

While borrowing is then expected to rise to £29.3bn next year, it is then predicted to fall over the next four years.

The chancellor announced he was making an additional £100m available over the course of the next year to help deal with the surge in knife crime.

The cash is to be used for police overtime and to fund new ‘Violent Crime Reduction Units’ to help respond to the increase.

Student loans headache

Mr Hammond is expected to set out detailed plans about how money will be allocated to different government departments beyond 2020 in a spending review this summer.

However, changes to the way student loans are treated on the government’s books will eat away at the Brexit war chest that Mr Hammond has set aside.

The changes, which reflect the fact that many students will never fully repay their loans, are expected to reduce the pot of available cash by around £12 billion.

The watchdog said this would also make an ongoing aspiration of eliminating the deficit “harder to achieve”.