UK's Hammond rejects major investment surge, backs "modest" projects

* New (KOSDAQ: 160550.KQ - news) finance minister says will still target budget surplus

* "Modest" infrastructure projects best for fiscal stimulus

* UK public finances still "unhealthy", debt can't rise much (Adds detail, reaction)

By David Milliken and William Schomberg

LONDON, Sept 8 (Reuters) - New finance minister Philip Hammond played down expectations of a surge in public spending to offset the economic hit from the Brexit vote, but said he could fund modest infrastructure projects if needed.

Shortly after taking office in July, Hammond said he might 'reset' his predecessor's plans to target a budget surplus by 2020, suggesting he could go big on spending to help Britain cope with the impact of June's European Union referendum result.

But on Thursday, he signalled that any stimulus in the budget update he is due to announce on Nov. 23 is likely to be modest.

"We have not abandoned the intention to move to a surplus," Hammond said in his first appearance before a parliamentary committee as finance minister. "What I have said is that we will not target that at the end of this parliament (in 2020)."

Since Hammond made his initial remarks on the possible need for a fiscal 'reset', signs have grown that the economy has bounced back from the immediate shock of the Brexit vote.

The Bank of England has cut interest rates to a record low and restarted its bond buying programme, though on Wednesday Governor Mark Carney said he still expected growth to halve from its rate in the months before the referendum.

Many economists have said record low borrowing costs and Britain's weak growth prospects present an ideal opportunity for the government to break away from the tight controls on spending imposed by former finance minister George Osborne over the last six years and borrow to fund major infrastructure projects.

But Hammond said big projects would take too long to deliver an economic benefit. "I think there is a role for big, strategic projects, but they are unlikely to be ever able to contribute to fiscal stimulus because of the timelines involved," he said.

"Often it is modest, rapidly deliverable investments that can have the most immediate impact, particularly on the road network, but also in some places on the rail network."

Bigger rail projects such as High Speed 2, which will link London with northern England, or a possible east-west link for northern cities, needed to be considered separately, he said.

"UNHEALTHY" FINANCES

Britain's public finances were "unhealthy" and public debt was close to a level that might affect markets' willingness to buy British government bonds, Hammond said. "So I don't think we should be cavalier about the level of the debt," he said.

Britain's budget deficit last year was 4 percent of gross domestic product - high for a country that was enjoying strong growth - and its 1.6 trillion pounds ($2.1 trillion) of public debt amounts to 83 percent of GDP.

Brian Hilliard, an economist at Societe Generale (Swiss: 519928.SW - news) in London, said Hammond's comments reduced the chance of a "big bang" announcement on Nov. 23. "I think one should be expecting rather less dramatic changes in the Autumn statement," he said.

Boosting productivity was the biggest challenge for the economy and housing was an area where the country lagged, Hammond said.

Britain needed to increase the rate of house building, which was more constrained by planning rules than by finance, and to ensure there were homes to rent as well as to buy.

Former Prime Minister David Cameron and Osborne focused on helping home-owners get mortgages, but successive governments have failed to reform Britain's complex planning system.

Despite the low cost of public borrowing, there was also a case for using private-sector finance but only as part of a package that transferred construction and operating risk to the private sector, Hammond said.

The involvement of France's EDF (Paris: FR0010242511 - news) in the construction of a new nuclear power station at Hinkley Point - a project Prime Minister Theresa May has put under review - did meet these standards, Hammond said.

He also said the government would sell student loans to the private sector when market conditions were right. ($1 = 0.7520 pounds) (Additional reporting by Andy Bruce, Kylie MacLellan and Laura Gardner Cuesta)