In his annual Mansion House speech, George Osborne outlined his plan to ensure governments run a surplus in "normal" times. Mr Osborne first proposed the changes to fiscal policy in January. In the same speech he also confirmed that the government plans to sell its stake in the Royal Bank of Scotland.
The announcement comes amid concerns over the national debt, which has doubled since the financial crisis. The plan would legally prevent future governments from spending more than they receive in tax revenue when the economy is growing.
'Sun shining'
"With our national debt unsustainably high, and with the uncertainty about what the world economy will throw at us in the coming years, we must now fix the roof while the sun is shining," Mr Osborne said in his speech in London.
The Office for Budget Responsibility (OBR), an independent watchdog, will be responsible for policing the new rules. The OBR is also expected to have the power to decide when the government should be able to spend more than it is taking in revenue, for example, when the country is in a recession.
Currently, the government is committed to balancing day-to-day spending by eliminating the structural deficit by the end of the 2017-18 financial year.
But earlier this week ratings agency Moody's cast doubt on the chancellor's ability to balance the books by that time, and said it "expects a more moderate reduction in the budget deficit, to 1.2% of GDP by the end of this parliament" in 2020.
On BBC Radio 4's Today programme Danny Gabay, co-director of Fathom Consulting and formerly of the Bank of England, said imposing such a fiscal rule on future government was neither feasible or desirable.
He added: "Given that the last five years was the tightest fiscal settlement that we've seen in modern times... it was extremely hard on spending, and yet the level of debt continued to go up. "You can sense his [Mr Osborne's] frustration, but does it make sense to take it out on the rest of us? No, not really."
bbc.com
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