UK needs financial reserves in the tank for Brexit - Hammond

By William Schomberg and Paul Sandle

LONDON (Reuters) - Britain's finance minister Philip Hammond said he would keep "reserves in the tank" to see the economy through its looming Brexit challenge, signalling little room for extra spending in this week's budget despite better news on borrowing.

He also said tensions were now easing with other European Union countries after Prime Minister Theresa May shocked her peers by saying no deal was better than a bad deal.

Hammond is due to deliver a budget plan on Wednesday which will be overshadowed by the triggering of the two-year Brexit process which is expected this month.

Britain's economy coped surprisingly well with the initial shock of June's referendum, meaning official growth forecasts for 2017 will probably be raised sharply in the budget.

It also means Hammond will probably announce a modest fall in the amount of money that Britain needs to borrow over the next five years.

But he said on Sunday that he will not be relaxing his strategy of fixing what remains one of the biggest budget deficits among the world's big rich economies.

"If your bank increases your credit card limit, I don't think you feel obliged to go out and spend every last penny of it immediately," Hammond told BBC television.

"I regard my job ... as making sure that our economy is resilient, that we have got reserves in the tank."

In a separate interview with ITV television, he said an improvement in the short-term outlook for borrowing did not mean that things would necessarily be better over the longer term.

Britain's government is under pressure to spend more on its health system and its care for the elderly as well as its often violent prisons and a host of other services.

Hammond acknowledged the strains but he said cash was not the only answer and some authorities were coping better than others. Further ahead, the government needed to rethink how it will fund its plans to cope with an ageing population, he said.

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Despite its robust response to the Brexit vote in 2016, the outlook for Britain's economy remains clouded by its approaching split from the bloc which buys about half its exports.

Hammond said on Sunday that the tone of private discussions between Britain and other members of the EU had improved.

"Whatever is being said publicly ahead of the negotiation, the private messaging is that people are now engaging with this more as a shared problem, something that we have to solve together," he told ITV. "There is an increasingly pragmatic approach."

In January, May prioritised tighter controls on migration over continued membership of the bloc's single market. In the same month, Hammond suggested Britain could slash its corporate tax levels if it did not get a good Brexit deal.

As well as setting aside money to cushion Brexit's impact on the economy in the coming years, Hammond is seeking to fix Britain's long-standing problem of low productivity growth which has made it reliant on often volatile spending by consumers.

The finance ministry announced the government would spend more on skills training for 16- to 19-year-olds, addressing a concern of businesses who worry that Brexit will mean they will find it harder to employ migrant workers.

(Writing by William Schomberg; Editing by Louise Heavens and Dominic Evans)