BRITAIN will get a Brexit "upside dividend" if it can agree good withdrawal terms with Brussels, Philip Hammond has insisted, pointing to the prospect of more money for public spending and tax cuts.

The Chancellor made the claim as he explained how the last 10 days had seen "a measurable change in pace" in the Brexit negotiations, although many challenges remained ahead to secure a deal.

Mr Hammond is due to present a crunch Budget - the last currently due before the UK quits the EU next March - at the end of October.

The idea of a "Brexit dividend" has previously been floated by Theresa May, who suggested it was a way to part-fund a £20.5 billion-a-year boost to the NHS budget.

However, its validity has been questioned, including from within the Conservative Party.

Mr Hammond, speaking to reporters at the International Monetary Fund's annual meeting in Bali, said: "If we are successful in negotiating that package, there will be an upside dividend in terms of the economy and, consequently, the fiscal numbers, so that's the first bonus.

"The second bonus is that I've been holding a slightly larger fiscal buffer than would otherwise be necessary because of the degree of uncertainty that exists at the moment.

"As that uncertainty is unwound and we're in more favourable circumstances, logically, one would need less of a fiscal buffer and some of that could be released to support the spending envelope or to deliver tax cuts.”

The Chancellor spoke the day after the Office for Budget Responsibility warned that the UK's economy and public finances were likely to be weaker as a result of the Brexit vote than they would have been if the country had decided to stay in the European Union.

A discussion paper by the Government's independent economic forecaster also indicated that a no-deal Brexit could have a "severe short-term impact" on the economy and potentially lead to a sharp fall in asset prices.

Speaking to the BBC this morning, Mr Hammond added that he had always been optimistic about a deal because it was "clearly in the interests of both sides to do so".

He added: "What has happened over the last week, 10 days, is there has been a measurable change in pace. There is a real sense now of engagement from both sides, of shared enterprise in trying to solve a problem rather than posturing towards each other. A really important step change.

"But that shouldn't conceal the fact that we have some big differences left to resolve. Process is a lot more positive this week, substance still very challenging.

"If we are able to get to a good deal for Britain as we leave the European Union I believe there will be a dividend, a deal dividend for us."

The Chancellor said securing a finalised withdrawal agreement at next week's Brussels summit would be "highly ambitious".

He told CNBC: "Well, it is very ambitious and I am not conducting the negotiations. There are people in Brussels right now working hard at this.

"But what is very clear is that we have to make significant progress by the time of the October Council to show that we are on track, that we are moving forward and that it would be, if we don't reach a deal in October, at least we are making sufficient progress that everyone can see it is sensible to come together again in November for that last push to get there."

John McDonnell, his Labour Shadow, dismissed Mr Hammond’s remarks as “good old-fashioned spin”.

He said: “It looks like Hammond is desperate to save his and the Prime Minister's skins by dressing up a classic 'put it off' fudge as a deal, which will fail to provide the long-term security and certainty investors and businesses need.

"It appears that Hammond is planning a few tax conjuring tricks in the Budget to kid people that austerity is over when the reality is that the vast bulk of the cuts are still rolling out. We need a Chancellor not a conjuror," added the Shadow Chancellor.