Osborne determined to block runaway bonuses for bankers

Barclays chief executive Bob Diamond - understood to be in line for an 8m payout this year - told the Treasury Select Committee it was time to "put the blame game behind us".

The backlash over bankers' bonuses has intensified with payments estimated in the region of 8bn set to be paid out.

Mr Osborne was forced to make a statement in the House of Commons on the matter after his Labour counterpart Alan Johnson accused him of breaking a promise on the front page of the Tory election manifesto to introduce "robust" legislation to tackle unacceptable bonuses.

Mr Johnson said banks were effectively being offered a "tax cut" from the 3.5bn garnered by last year's one-off bonus tax to the 1.2bn expected to be raised by the new banking levy. After stating that children were contributing 5bn and students 2.9bn towards reducing the deficit, Mr Johnson asked: "Does the Chancellor think that children and students have the broadest shoulders?

"The Chancellor, who said we are all in this together, bows down to the rich and powerful whilst bearing down on everyone else."

Mr Osborne said "nothing is off the table" if banks failed to reach an acceptable settlement and said the Treasury was in discussions with the banks on over a new deal in which they pay smaller bonuses and prove they are lending to small businesses, among other conditions. He accused the previous Labour administration of signing a "thoroughly inadequate" contract with Royal Bank of Scotland, which put no constraints on this year's bonuses at the 84 per cent state-owned bank.

Treasury sources said that Mr Osborne had ruled out extending the one-off bonus tax for a second year but it is understood that other measures could be taken.