John McDonnell has attacked George Osborne for presiding over a “casino economy” in thrall to the biggest banks at the same time as outlining plans to break up the Treasury.

The shadow Chancellor said the City was still “in the driving seat” despite the financial crisis and the subsequent £850bn bank bailout.

In his latest New Economics events McDonnell said Osborne’s economic strategy was dominated by the financial sector’s “vested interests” rather than the needs of the population.

He criticised the Chancellor for learning nothing “about the problems and long-term weaknesses that led to the crisis of 2008”.

McDonnell also linked Osborne’s desire for a smaller state with the threat of future taxpayer-funded bailouts of the financial system.

At the event at the London School of Economics McDonnell revived the idea – first considered by Tony Blair at the height of his rows with Gordon Brown – of splitting the Treasury into two departments: one to deal with economic strategy and one for day-to-day spending.

“My view has been for a long while – not just under Labour or the Tories, right the way through – is that the Treasury now dominates government. Nothing moves in Government without the treasury. It’s fingers are everywhere. I just want it to get back to its job of managing finances,” he said.

McDonnell went on to say, however, that he would not pre-judge a review carried out by Lord Kerslake, the former head of the home civil service, into the responsibility of the Treasury.

He also confronted evidence from pollsters suggesting Labour is trailing heavily on economic credibility.

“Labour has a fight on our hand to win back economic credibility, but it’s most important fight in a generation. People believe the Tories more than us. Narrative overcomes competence. The Tories have this very simple narrative, and it was extremely successful. They repeated it ad nauseam for five or six years. It was that the deficit wasn’t caused by the economic crisis, it was caused by Labour overspending.”

“Labour must demonstrate economic credibility through competence but get the narrative right too”.