PHILIP Hammond will resist spending the UK’s higher than expected tax returns during Wednesday’s budget, as he prepares for the “unexpected challenges” of Brexit.

The Tory Chancellor has also given the clearest indication yet that the government would respond to not getting the Brussels deal it wants by cutting taxes and slashing regulations in a bid to lure business. The UK Government, Hammond said, was willing to “do whatever we need to do to make the British economy competitive”.

Hammond told the BBC’s Andrew Marr Show: “If there is anybody in the European Union who thinks that if we don’t do a deal with the European Union, if we don’t continue to work closely together, Britain will simply slink off as a wounded animal, that is not going to happen.

“British people have a great fighting spirit and we will fight back.

We will forge new trade deals around the world. We will build our business globally. We will go on from strength to strength and we will do whatever we need to do to make the British economy competitive and to make sure that this country has a great and successful future.”

Asked if this meant the UK would slash taxes to attract investment away from the EU, the Chancellor said: “People can read what they like into it. I’m not going to speculate now on how the UK would respond to what I don’t expect to be the outcome.

“But we are going into a negotiation. We expect to be able to achieve a comprehensive free trade deal with our European Union partners, but they should know that the alternative isn’t Britain just slinking away into a corner.”

Hammond also told Marr that the UK would pay what it owed the EU when it left. Reports from Brussels have suggested that, according to the European Commission’s chief Brexit negotiator Michel Barnier, it could be a £52 billion divorce bill.

Earlier in the day, a report from the House of Lords financial affairs committee suggested the UK was in a strong legal position to walk away without paying anything if there is no deal. “Although there are competing interpretations, we conclude that if agreement is not reached, all EU law – including provisions concerning ongoing financial contributions and machinery for adjudication – will cease to apply, and the UK would be subject to no enforceable obligation to make any financial contribution at all,” the peers’ report said.

In response however, Hammond insisted that the UK was a “a nation that honours its obligations and if we do have any bills that fall to be paid we will obviously deal with them in the proper way.”

He added: “We are a nation which abides by its international obligations. We always have done, we always will do, and everybody can be confident about that.”

Hammond has higher than expected tax receipts to play with for Wednesday, but reports suggest rather than big spends, other than around £500m to overhaul technical education and more than £1bn for social care, he is to give a cautious budget. Last week, the Treasury asked other government departments to “find further savings” and cut budgets by between two per cent and six per cent by 2019-20.

Figures show that public spending as a share of GDP has fallen steadily from 45 per cent in 2010 to an expected 40 per cent this year. Though Hammond has abandoned predecessor George Osborne’s target of eliminating the deficit by 2020, he still aims to balance the books at some point in the 2020s.

According to the Institute for Fiscal Studies, achieving this by 2025 would require up to £34bn in spending cuts and tax rises.

Stewart Hosie MP, the SNP’s economy spokesperson, said: “The circumstances of this year’s Budget may be very different from previous years but what Philip Hammond will confirm with his Brexit bombshell budget is that this Tory government remains wedded to austerity and is responsible for the largest increase in inequality since Thatcher according to the Resolution Foundation. Instead of ferreting away a £60 billion ‘war chest’ to deal with the effects of crashing out of the single market, this Budget needs to be ambitious in introducing measures to boost economic growth, it needs to protect households from further damaging austerity, and it must mitigate the impact of leaving the EU.”