George Osborne has been warned his austerity drive will hurt the economy and that he must be prepared to lose billions of pounds selling off Royal Bank of Scotland (RBS).
The International Monetary Fund (IMF) also expressed concern the Chancellors's flagship plans to boost house ownership would trigger another housing bubble.
Alongside a stern warning on cuts the IMF's annual economic health check told ministers to bring forward spending on infrastructure,
Labour said only a "reckless Chancellor" would "try to plough on regardless" with more cuts.
But Mr Osborne said the Treasury was already pushing ahead with many of the IMF's recommendations.
The IMF's report warned the Coalition's action to tackle rising public debt was a "drag on growth" and a wider strategy was needed.
On Help to Buy, the Government's flagship Budget measure aimed at boosting home ownership, it warned there was a risk it would ultimately lead to higher house prices.
Speaking at the launch of the annual report, the IMF's deputy managing director, David Lipton, said RBS and Lloyds had to be sold off "in a shape to resume lending activity".
However, he said the Government should be prepared to take a haircut on its £46 billion investment in RBS at the height of the 2008 financial crisis.
The Chancellor said he agreed with the IMF that "now is the time for a clear strategy on how to return RBS and Lloyds to the private sector in a way that protects value for the taxpayer".
Labour Shadow Chancellor Ed Balls said: "They [the IMF] say, as we have, that you need to strike a balance between the pace of fiscal consolidation and support for growth and jobs."
Scottish Finance Secretary John Swinney said: "The Chancellor must change the UK's approach to the economy and deliver greater capital investment to stimulate growth and support construction.
"We must not allow Scottish economic recovery to be blown of course by the misguided policies of his Government."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article