Osborne takes on business critics

The Chancellor's comments came as Labour sought to keep up the pressure on David Cameron over "excessive" City pay, using a House of Commons debate to demand a repeat of the tax on bankers' bonuses.

Shadow business secretary Chuka Umunna dismissed suggestions that Labour was being "anti-business" by focusing on the massive rewards handed out to some of those at the top of the financial sector. Large bonuses in banks bailed out by the taxpayer should be paid only when they reflect "genuinely exceptional performance", he said.

But Treasury minister Mark Hoban told MPs that Labour was to blame for an unfettered "cash bonus culture" which took hold in the City during its 13 years in power.

And Mr Osborne used a speech to the Federation of Small Businesses to defend the principle of "rewards for success".

"Let me say something about the row over bonuses and pay," said the Chancellor. "Of course we need to reform our banking system - and nobody has done more than this Government to address the too-big-to-fail problem that so offends every taxpayer.

"Of course rewards for failure are unacceptable - and those who believe in the free market are the first to say so. But a strong, free market economy must be built on rewards for success.

"There are those who are trying to create an anti-business culture in Britain - and we have to stop them. At stake are not pay packages for a few but jobs and prosperity for the many."

The debate came as Royal Bank of Scotland chief executive Stephen Hester broke his silence over his decision to give up a bonus of almost £1 million in shares.

In a letter to the largely state-owned bank's staff, Mr Hester said press coverage had been "discomforting to say the least", but insisted RBS was "making progress in the face of a difficult inheritance". The best way to deal with criticism was to "prove the critics wrong", he wrote.