George Osborne has come under fire for pushing ahead with a "gimmicky" new proposal which would force the government to always run a budget surplus.
Under Osborne's plans announced yesterday, a new law would be introduced preventing the government from spending more than it takes in taxes.
A senior aide to the Conservative mayor Boris Johnson warned that the policy would be "no easy task" and could damage growth by restricting the government from stimulating the economy in hard times.
Johnson's economic adviser Dr Gerard Lyons said it would be a "challenge" to run budget surpluses given this had only been achieved in seven of the last 50 years. He added that borrowing to invest remained a useful tool in hard times.
"Agree UK should run budget surpluses in good times but also fiscal policy must be used as effective counter cyclical fiscal tool when needed," he added this morning.
He also suggested that the policy could prevent governments from stimulating the economy by investing in infrastructure, adding that spending was about "quality not just quantity".
Johnson has previously advocated that the government should borrow to invest in new infrastructure projects both in London and elsewhere.
Two years ago he led calls for huge new investment in infrastructure adding that it was "one of the most effective ways of tackling social exclusion and, to put it bluntly, avoiding riots". More recently he has lobbied to be made "infrastructure secretary" once he finishes his term as mayor next year. The new law proposed by Osborne, who is widely seen as a rival to Johnson for next Tory leader, would significantly hamper his ability to take on that job.
One challenge @BBCr4today is UK has probably only run budget surpluses in about 7 of last 50 years, so no easy task to run surpluses.— Gerard Lyons (@DrGerardLyons) June 11, 2015
Agree UK should run budget surpluses in good times but also fiscal policy must be used as effective counter cyclical fiscal tool when needed— Gerard Lyons (@DrGerardLyons) June 11, 2015
The policy also came under fire as political "gimmickry" from city figures. In a particularly damning editorial the Financial Times said the new law was "unnecessary" and designed only to put Labour into a difficult political position.
"Mr Osborne now seems determined to spurn the very pragmatism he wisely displayed and to impose unnecessary limits on his freedom for manoeuvre…
"It is easy to see why Mr Osborne is tempted to take such a swipe. As Labour starts its leadership contest, the opposition’s stance on public spending and deficit reduction remains unclear. Mr Osborne is a master at putting his political opponents on the wrong side of an argument that he has framed himself. But one month after an election that the Conservatives won outright, the Tories ought to concentrate on governing, not wrongfooting a Labour party that will be out of office for at least five years."
Osborne also came under fire today after he revealed he will sell off the government's stake in RBS at a £7 billion loss.
RBS shares are currently priced at 354.8 pence, compared with the 500 pence they paid for them.
"It's the right thing to do for British businesses and British taxpayers. Yes, we may get a lower price than that was paid for it - but we will get the best price possible"
Osborne has come under pressure from city figures to put the shares back in private hands. He announced his plans at the annual Bankers and Merchants dinner yesterday.