UK's Osborne drops 2020 budget surplus target after Brexit vote

* Osborne says must be realistic on budget

* Target (NYSE: TGT - news) was seen as challenging even before Brexit

* Move by Osborne could help restore confidence - economist (Adds details, background, comments from economist, Labour)

By William Schomberg

LONDON, July 1 (Reuters) - Finance minister George Osborne on Friday gave up his centrepiece policy of turning Britain's budget deficit into a surplus by 2020, faced with potential economic stress following the country's shock decision to leave the European Union.

It was the latest setback for Osborne who was once considered a future British leader but who has not put himself forward to succeed Prime Minister David Cameron after the two men failed in their campaign to keep Britain in the EU.

"The government must provide fiscal credibility, so we will continue to be tough on the deficit but we must be realistic about achieving a surplus by the end of this decade," Osborne said in a speech on Friday.

Even (Taiwan OTC: 6436.TWO - news) before the referendum, many economists had questioned the ability of Osborne to deliver the surplus by the end of the decade because of the scale of the spending cuts or tax increases that would be required to hit it.

Martin Beck, an economist with EY ITEM Club, said Osborne's announcement could help to counter the Brexit hit to confidence in the economy.

"This is a welcome step at a time of economic uncertainty. Achieving a surplus was always set to drag on activity over the next few years," Beck said.

Bank of England Governor Mark Carney said on Thursday that he expected the central bank would need to pump more monetary stimulus into the economy over the summer.

Osborne inherited a deficit of more than 10 percent of gross domestic product when he became finance minister in 2010. Since then, the shortfall has fallen and was just under 4 percent of GDP in the 2015/16 financial year which ended in March.

When Osborne announced a new fiscal plan last year, including the 2020 surplus target, he included a clause relieving the government of the requirement to put the public finances in the black in the event of a hit to the economy.

One of the front-runners to succeed Cameron as prime minister, interior minister Theresa May, said on Thursday that she would not stick with the 2020 budget surplus target.

Britain's opposition Labour Party has criticised the target.

"He should now lay out a programme of government investment and support for businesses, bringing forward shovel-ready projects particularly in those areas hardest hit by long-term economic decline," Labour's main spokesman on the economy, lawmaker John McDonnell, said. (Writing by William Schomberg; Editing by Ana Nicolaci da Costa and Andy Bruce/Jeremy Gaunt)