Private sector set to shrink as CBI warns Reeves against fresh tax raid

Britain’s private sector is bracing for contraction over the coming quarter as weak confidence, rising costs and fears of another tax raid dominate the outlook for business.

According to the latest monthly survey from the Confederation of British Industry (CBI), bosses expect to cut back on both hiring and investment across every major sector, with the lobby group warning the Chancellor not to pile further pressure on companies in her autumn Budget.

It is now a full year since the CBI last recorded a positive reading for future expectations — underlining the depth of disillusionment in corporate Britain since Labour’s election victory last summer and Chancellor Rachel Reeves’s £40bn package of tax rises announced last October.

The survey, which gathered responses from 877 firms, showed the consumer services sector facing the steepest decline, with retailers, wholesalers, business and professional services, and manufacturing companies also forecasting significant slowdowns.

Firms cite the combined impact of 3.8% inflation in July, higher National Insurance contributions, and an increase in the minimum wage, alongside regulatory pressures such as Angela Rayner’s Employment Rights Bill, which is set for its final reading in the House of Lords this week. The bill, which strengthens workplace rights, has been criticised by business groups for increasing costs and reducing flexibility.

Alpesh Paleja, CBI economist, said: “Firms are already shouldering the cost of the Government’s fiscal decisions. The autumn Budget must not add to that strain with further tax rises that risk undermining investment and growth. If the Government wants to unlock growth, it must cut the cost of doing business, give firms tax certainty, and rethink the Employment Rights Bill.”

Reeves is preparing to deliver her second Budget this autumn amid forecasts of a £50bn hole in the public finances. Economists expect new measures to close the gap, with rumours of further tax increases fuelling unease in boardrooms.

The CBI urged the Treasury to avoid repeating last year’s approach, instead focusing on “smarter deregulation” and cost reductions to boost growth.

The Institute of Directors (IoD) painted a similarly bleak picture in its latest confidence tracker. Although sentiment had improved slightly from last month’s record low, levels remain comparable to those seen during the first Covid lockdown and the fallout from Liz Truss’s ill-fated mini-Budget.

IoD chief economist Anna Leach said leaders planned to restrict pay rises, cut headcount and reduce investment, adding: “Higher costs and rising regulatory risks threaten to undermine ambitions for jobs and growth. Ongoing tax rumours further damage confidence. The Government must present a more coherent and consistent economic plan, focused on easing the cost of doing business.”

A Treasury spokesperson defended Labour’s record, arguing that the government remained pro-business: “We are a pro-business government – 380,000 jobs have been created since the start of this parliament and business confidence is the highest in over ten years, according to a recent Lloyds Bank survey.

“Since the election, we have struck three major trade deals with the EU, US and India, business rates are being reformed and corporation tax is capped at 25%. The tax decisions we took at the Budget last year mean we can deliver on the priorities of the British people, from investing in the NHS to boosting wages and cutting waiting lists.”

With confidence weak across both the CBI and IoD surveys, the Chancellor faces intense pressure to reassure business leaders when she delivers her autumn Budget. The choice for Reeves will be whether to lean on further tax rises to plug the fiscal gap or pivot towards cost-cutting and deregulation to restore growth momentum in the private sector.

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Private sector set to shrink as CBI warns Reeves against fresh tax raid