Chancellor George Osborne yesterday vowed to fight an “anti-business culture” in the UK, warning that the row over bonuses and pay threatens to undermine the jobs and prosperity provided by the free market economy.

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: “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 £1million 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.

Labour initially planned to use the opposition day in the Commons to force a vote on Mr Hester’s bonus. After the RBS boss waived the payout in response, leader Ed Miliband sought to keep the spotlight on the issue of pay by calling a debate on reform and responsibility in the banking industry.

Mr Umunna denied that Labour was being anti-business in calling for restraint in the City.at a time when families and small businesses were suffering.

“This is an absurd notion. Amongst the most vociferous critics of our banks are the small and medium-sized businesses who make up the majority of businesses in this country,” he said.

And he added: “People have seen this extraordinary squeeze in their living standards, but as for the institutions and bankers right at the centre of the crisis that created these problems, those people now seem not only not to be suffering a gigantic squeeze on their living standards, but actually get continued very high remuneration, in part because the taxpayer has been forced to step in and bail them out.”

Mr Umunna said: “The public rightly expects that the culture of excessive bonuses must stop.

“That means bank executives’ remunerations stated to be ’performance-related’ should be just that – related to performance.

“Very large bonuses should only be paid to reflect genuine exceptional performance if trust in the system is to be maintained.”

Mr Hoban told MPs that the coalition Government was reforming regulation, taking action to stimulate lending and changing the rules on pay to keep bonuses down.

“We are remedying what the Chancellor has described as ‘the biggest failure of economic management and banking regulation in our country’s history’ and that failure was presided over by the party opposite,” said Mr Hoban.

City bonuses tripled under Labour to £11.6 billion, but fell to £6.7 billion last year and are expected to fall further when banks make settlements with high-earning staff over the coming weeks, said Mr Hoban.

“Under the previous government, bonuses became a right not a reward,” he said. “After 13 years of Labour government, we have a substantial challenge to dismantle the culture of excessive pay in the banking sector.”

The Government had gone some way to tackle the bonus culture, but had “some way to go”, said Mr Hoban.

David Hillman, spokesman for the Robin Hood Tax campaign, which is campaigning for a financial transaction tax, said: “It is high time the Government moved beyond rhetoric and token gestures and took concrete steps to tackle City excess.

“It will take more than warm words in the Commons to ensure banks pay to repair the damage done to our economy and society.”