GORDON BROWN is ready to promote Ed Balls, his closest political ally, to chancellor this week in a high-stakes gamble to restore Labour’s political fortunes.

According to a top-level leak from Downing Street, the prime minister wants to make the appointment the centrepiece of a sweeping reshuffle on Friday, after the local and European polls.

With Balls, the schools secretary, one of the most divisive figures in government, the move would be a huge risk, which could trigger a ferocious backlash within the Labour party that could spiral into a leadership challenge.

The Sunday Times understands that Lord Mandelson, the business secretary, has warned Brown of the potential dangers, but is ready to support the move as part of a final attempt to revive the government’s fortunes.

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However, the scheme is still open to challenge from some No 10 advisers as well as Balls’s powerful Blairite enemies who will attempt to block it.

Brown’s authority has become so weakened that some ministers are openly defying Downing Street. Insiders claim the most audacious are dodging his calls – deliberately “going to ground” when he tries to phone them.

As part of a fightback as Labour hits a historic low in the polls, the prime minister is also preparing to announce plans for a legally binding code of conduct for MPs in the wake of the expenses scandal.

MPs could be forced to provide a minimum standard of service to constituents, or face sanctions including financial penalties or even ejection from the Commons. He is also drawing up a “national plan” to show how Britain can pay off debts while protecting public services.

According to the well-placed insider, Brown has been working on the scheme to make Balls chancellor since the expenses debacle engulfed Westminster, taking a handful of his closest aides into his confidence.

Brown knows the appointment would be highly controversial and is ruminating over the possible consequences. However, Balls’s elevation would fit into a wider strategy to position Labour for the next general election, which rests on hopes of an upturn in Britain’s economic fortunes just before polling day.

Balls, who is widely respected in the City, could appear a younger, fresher face than Alistair Darling to take on George Osborne, the shadow chancellor, in the run-up to the elections.

While Darling is considered by the party to have done a good job in the most difficult of circumstances, he is associated in the public mind with the darkest days of the recession. He has also been damaged by the expenses scandal, attracting criticism for “flipping” the designation of his main and second homes to maximise parliamentary allowances and claiming expenses for an accountant to complete his tax return.

Brown is said to calculate that Balls, an aggressive and effective campaigner, will be better suited to deliver the message that Britain is on the road to economic recovery.

However, the spectre of Balls as chancellor risks enraging powerful Blairite figures, some of whom regard such a promotion as a “deal breaker”. It risks aligning a swathe of the Labour parliamentary party – many of whom are not normally sympathetic to the Blairite faction – to these critics, dramatically increasing the chances of a leadership challenge.

While few question Balls’s economic competence, many backbenchers remain deeply distrustful of the prime minister’s closest henchman.

Yesterday one senior Blairite figure warned of devastating consequences for the prime minister if he pressed ahead. “If Gordon wants to bring the whole house of cards tumbling down, this is the way to do it. The reaction will be apoplectic,” he said.

Vince Cable, the Liberal Democrat Treasury spokesman, yesterday called for Darling to be sacked, saying: “He is the finance director who has been caught with his fingers in the till.”

Darling could be sent to the Home Office, a simple move for Brown since Jacqui Smith, the home secretary, has privately made it clear she is ready to step down.

Balls, a former City minister and Brown’s most loyal ally, has made no secret of his ambition to become chancellor, and plays a crucial role in economic strategy. His influence has led to tension with Darling.

A Downing Street spokesman said: “We do not comment on reshuffles.”

A poll this weekend puts Labour on 21%, its lowest rating in polling history. It raises the possibility that the party could come third in the European elections for the first time, behind the Tories and UKIP.

Such a disastrous performance would fuel the prospect of a leadership challenge, with Alan Johnson, one of the few potential contenders undamaged by the expenses furore, considered Brown’s most likely successor.

In the past few days, Johnson, the health secretary, and James Purnell, the work and pensions secretary, another possible candidate, have set out in newspaper articles their vision for restoring trust in politics, fuelling speculation.

This week, David Miliband, the foreign secretary and one-time favourite to oust Brown, will outline his ideas in a speech to the Fabian Society.

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