Chancellor George Osborne has abandoned his target to restore government finances to a surplus by 2020.
It had been the chancellor's most prized goal and had been driving austerity measures in previous budgets.
However, Mr Osborne said the UK must be "realistic about achieving a surplus by the end of the decade".
The UK economy is showing "clear signs" of shock in the aftermath of the vote to leave the European Union, he said.
In a speech on Friday, Mr Osborne said: "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."
It is thought that the government will raise borrowing, so it can avoid further cuts in spending or raising taxes. It could also borrow to invest in big building projects.
Even before the referendum vote, there were questions over whether Mr Osborne could meet the budget surplus target.
It is also not clear whether Mr Osborne will remain as chancellor when the Conservative Party chooses a new leader.
Analysis: Kamal Ahmed, BBC economics editor
It is sometimes easy in these incredible political times to forget that for most people "it's the economy, stupid" still holds true.
For the UK economy, one of the most important passages of Theresa May's speech yesterday was when she signalled that George Osborne's "fiscal rule" (to produce a budget surplus by 2020) was for the Treasury shredding machine.
"While it is absolutely vital that the government continues with its intention to reduce public spending and cut the budget deficit, we should no longer seek to reach a budget surplus by the end of the parliament," Mrs May said.
Now the Chancellor has said he agrees, arguing that the government must be "realistic" about its fiscal targets and that austerity policies could be eased.
My Treasury sources point out that the "rule" can be varied in "non-normal" times.
And these are pretty "non-normal" times.
The abandonment of the fiscal target suggests the government could borrow more, presumably for investment in infrastructure and to mitigate the need for tax rises and spending cuts, if the economy does take a turn for the worse as some predict.
Political turmoil
The Tories have been in turmoil since David Cameron announced his intention to resign following the UK's vote in favour on leaving the European Union.
In a shocking development on Thursday, Boris Johnson, widely seen as the frontrunner to become prime minister, announced that he would not be running.
And on Friday, the BBC learned that Michael Gove is now coming under growing pressure to abandon his bid to become Tory leader.
Sources have told the BBC government ministers are trying to persuade the justice secretary to give way so the party can "unite" around Home Secretary Theresa May.
Mr Gove opted to stand after switching his support from Boris Johnson. In a speech on Friday, Mr Gove said his decision to stand to become Conservative leader is driven by "conviction" about what is right for the UK, not personal ambition.
It had been the chancellor's most prized goal and had been driving austerity measures in previous budgets.
However, Mr Osborne said the UK must be "realistic about achieving a surplus by the end of the decade".
The UK economy is showing "clear signs" of shock in the aftermath of the vote to leave the European Union, he said.
In a speech on Friday, Mr Osborne said: "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."
It is thought that the government will raise borrowing, so it can avoid further cuts in spending or raising taxes. It could also borrow to invest in big building projects.
Even before the referendum vote, there were questions over whether Mr Osborne could meet the budget surplus target.
It is also not clear whether Mr Osborne will remain as chancellor when the Conservative Party chooses a new leader.
Analysis: Kamal Ahmed, BBC economics editor
It is sometimes easy in these incredible political times to forget that for most people "it's the economy, stupid" still holds true.
For the UK economy, one of the most important passages of Theresa May's speech yesterday was when she signalled that George Osborne's "fiscal rule" (to produce a budget surplus by 2020) was for the Treasury shredding machine.
"While it is absolutely vital that the government continues with its intention to reduce public spending and cut the budget deficit, we should no longer seek to reach a budget surplus by the end of the parliament," Mrs May said.
Now the Chancellor has said he agrees, arguing that the government must be "realistic" about its fiscal targets and that austerity policies could be eased.
My Treasury sources point out that the "rule" can be varied in "non-normal" times.
And these are pretty "non-normal" times.
The abandonment of the fiscal target suggests the government could borrow more, presumably for investment in infrastructure and to mitigate the need for tax rises and spending cuts, if the economy does take a turn for the worse as some predict.
Political turmoil
The Tories have been in turmoil since David Cameron announced his intention to resign following the UK's vote in favour on leaving the European Union.
In a shocking development on Thursday, Boris Johnson, widely seen as the frontrunner to become prime minister, announced that he would not be running.
And on Friday, the BBC learned that Michael Gove is now coming under growing pressure to abandon his bid to become Tory leader.
Sources have told the BBC government ministers are trying to persuade the justice secretary to give way so the party can "unite" around Home Secretary Theresa May.
Mr Gove opted to stand after switching his support from Boris Johnson. In a speech on Friday, Mr Gove said his decision to stand to become Conservative leader is driven by "conviction" about what is right for the UK, not personal ambition.
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