The UK cannot stay in the single market following Brexit because EU leaders made it clear they would not allow curbs on the free movement of people, Philip Hammond has said.
The Chancellor said the Government recognised the "red lines" of other member states, who have repeatedly warned the EU's four freedoms of goods, services, people and capital cannot be separated.
Speaking in Treasury questions in the House of Commons, Mr Hammond said: "For six months, we have kept open as many options as possible while we review the way forward in this negotiation with the European Union.
Read more: Theresa May - Britain will leave single market when it quits EU
"We have heard very clearly the views and the political red lines expressed by other European leaders, and we want to work with them, we want to recognise and respect their political red lines.
"And that is why the Prime Minister is setting out, right now, the position that she is, which is that we will go forward understanding that we cannot be members of the single market because of the political red lines around the four freedoms that other European leaders have set, but expressing an ambitious agenda for a comprehensive free trade arrangement with the European Union that will allow our companies to trade in Europe and European companies to trade in Britain - minimising the disruption to existing business patterns and minimising the disruption to pan-European projects."
Mr Hammond's comments came as Theresa May announced that Britain will leave the single market, in her first detailed speech on Britain's plans for Brexit.
Read more: Theresa May - Britain will leave single market when it quits EU
SNP Treasury spokesman Stewart Hosie said the "hard Tory Brexit" being outlined by the Prime Minister is "a kick in the teeth" for many who wanted to continue to have full economic ties with Brussels.
But Mr Hammond dismissed this characterisation and said the Government is "engaging constructively with the real world - recognising the political red lines of our European partners".
"Because if we don't recognise them, frankly we are banging our heads against a brick wall," he said.
Read more: Theresa May - Britain will leave single market when it quits EU
"They have to recognise our political red lines, we have to recognise theirs, and then we have to work together to find a pragmatic solution that works for all the people of the UK within those red lines."
Mr Hosie also raised concerns that it could take Britain decades to negotiate new trade agreements with all the countries that currently have deals with the EU.
He said: "Given it takes on average 28 months to conclude a single agreement, how many pragmatic decades does the Chancellor believe it will take to put in place the trade agreements we need to mitigate the damage of a hard Tory Brexit?"
But Mr Hammond dismissed these fears and said countries are keen to strike "quick and simple deals" with Britain.
He said: "The discussions I've had with third countries who currently have free trade agreements with the European Union suggest there is a strong appetite for a quick and simple agreement with the UK, so that as it leaves the European Union we are able to immediately enter into a successor agreement with those countries, Korea for example, that will allow us to continue trading with them on the same (basis)."
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