More than 20 Labour MPs have defied Jeremy Corbyn's orders in his first major Commons vote, abstaining on the Charter for Budget Responsibility after an "embarrassing" U-turn.
Some 37 Labour MPs missed the crunch division but Labour sources said only 16 had permission to be absent. Labour MPs had been under a three line whip to oppose the plan, which carried 320 to 258, majority 62.
Among the Labour MPs defying the leadership were former leadership contender Liz Kendall, former shadow chancellor Chris Leslie, former shadow education secretary Tristram Hunt and former cabinet minister Ben Bradshaw.
The move sparked a furious row and claims the party's new leadership was a "shambles". During a tense 90-minute debate on the charter, Mr McDonnell acknowledged his U-turn was "embarrassing" but told MPs: "A bit of humility amongst politicians never goes amiss.
"When the circumstances and judgments change it is best to admit to it and change as well."
Moving the new charter, Mr Osborne told MPs: "The position adopted by Labour on this measure sends the wrong message to the general public.
"The people who suffer most when governments lose control of the public finances are precisely the most vulnerable in society, they are precisely the people who lose their job, who get cast out of work.
"It's not the trade union barons who lose their jobs when the economy fails. It's not the richest in society who pay the price, it is the poorest in society and it is the most progressive thing a government can do to run a sound fiscal policy and provide financial stability to the working people of this country."
Mr Osborne added: "The truth is running a deficit forever is not socialist compassion it is economic cruelty and Britain wants no more of it."
Mr McDonnell accused Mr Osborne of changing the economic targets he sets.
"It is difficult to take seriously the charters and mandates when time after time the Chancellor has come to Parliament to revise his own charter," he said.
The shadow chancellor also announced a review of potential expansion of the remit of the Bank of England's Monetary Policy Committee (MPC), which is in charge of setting interest rates and meeting the inflation target.
It will be led by former MPC member Professor David Blanchflower and will be part of Labour's "radical project".
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