George Osborne wants to scrap his prized rule to get the public finances into a surplus by 2020, just two days after David Cameron insisted it would be wrong to break the promise – driving a wedge between the close allies.
The chancellor said on Friday the UK must be “realistic about achieving a surplus by the end of the decade” thanks to the “clear signs” of shock following the UK’s decision to leave the European Union.
He added: “As the governor [of the Bank of England] has said; the referendum is expected to produce a significant negative economic shock to our economy. How we respond will determine the impact on jobs and growth.
"We must provide fiscal credibility, continuing to be tough on the deficit while being realistic about achieving a surplus by the end of the decade. That's exactly what our fiscal rules are designed for."
But he directly contradicted Cameron, who was asked by Labour leader Jeremy Corbyn at Prime Minster’s Questions on Wednesday whether he would consider abandoning the target.
The PM said in parliament: “I do not believe that would be the right approach. Business, consumers, investors, and those concerned about our economy want to hear that we have taken huge steps over the past six years to get the budget deficit down, to make the British economy more competitive, and to make us an attractive destination for investment.
“They want those things to continue, and one way to react to economic difficulties is to ensure that our public finances and economy remain strong. We should not have taken all the steps of the last six years to get the deficit down just to get us on to a more difficult path."
"I do not think it would be right to suspend fiscal rules," Cameron added.
Osborne hinted that abandoning the rules – which have been widely ridiculed by economists – could lead to more borrowing for large infrastructure projects.
The chancellor also said he was keen for negotiations with the EU to be conducted quickly to avoid the uncertainty in the economy.
Tory leader frontrunner Theresa May also said the policy of a budget surplus (more money coming in than going out) should be scrapped when she launched her campaign on Thursday.
Her views were widely welcomed by economists, who have said the government should stop linking the financial debt of a nation with that of a typical household, because the two are not comparable.
It comes as the Bank of England’s governor, Mark Carney, warned the UK economy was suffering from post-traumatic stress disorder in the wake of the referendum result.
He also suggested interest rates could be cut from 0.5% to 0.25% and more money pumped into the economy. He has already offered to inject £250 billion to keep markets happy.
Friday marked the third and final rule abandoned by Osborne, with the first around the welfare cap being introduced. But heavy criticism from all sides led to his U-turn over tax credit cuts last year.
The second missed rule was national debt falling as a proportion of GDP, but the Office for Budget Responsibility showed this was not achieved.
John McDonnell MP, Labour Shadow Chancellor, welcomed the decision, which he had been calling for since last year
He addded: "Sadly the vote last Thursday for Brexit has only brought forward what was inevitable. The Chancellor had already dropped his other fiscal rules on welfare and debt at the Budget in March, and according to many economists he was expected to be forced to drop this one too.
“In fact, there were no credible economists that could be found to support the Chancellor’s surplus target in the first place."