Critics, including the CBI, say a £40bn tax increase will harm profits, competitiveness, and investment, potentially leading to job losses and higher prices

In a dramatic turn of events following Chancellor Rachel Reeves’ recent budget announcement, businesses across the UK have strongly criticised the largest tax increase in decades. The Labour government, which campaigned on a growth-oriented agenda during the last general election, has been accused of stifling the very growth it promised to support.

The £40 billion tax rise, the most significant since John Major’s government in 1993, aims to address a £22 billion financial shortfall, left by 14 years of Conservative leadership. However, the Confederation of British Industry (CBI) has voiced its alarm, arguing that these fiscal measures will do more harm than good, especially for businesses already grappling with a tough economic climate.

Rain Newton-Smith, head of the CBI, is expected to deliver a pointed message at the group’s annual conference in London on Monday, warning that businesses are being forced to scale back their growth plans due to rising taxes. She will argue, “Across the board, in so many sectors, margins are being squeezed and profits are being hit by a tough trading environment that just got tougher.”

Newton-Smith stressed that profits are not merely surplus cash for companies but essential fuel for future investment. “When you hit profits, you hit competitiveness, you hit investment, you hit growth,” she added, highlighting the long-term consequences of the tax hike.

The Office for Budget Responsibility (OBR), which monitors the government’s fiscal performance, has indicated that the burden of the tax increase will likely be felt by workers in the form of lower wages and by consumers through higher prices. Retail industry leaders have also voiced their concerns. In an open letter, dozens of retail bosses, including those from the UK’s largest supermarket chain Tesco, warned that the tax rise would add £7 billion to their costs next year alone.

The British Retail Consortium (BRC), which coordinated the letter, highlighted the dangers of passing on these costs to consumers, warning that the rapid implementation of the tax hikes would lead to job losses and diminished investment. “The sheer scale of new costs and the speed with which they occur create a cumulative burden that will make job losses inevitable, and higher prices a certainty,” the letter stated.

The budget’s implications are far-reaching. One of the most significant changes comes in the form of higher employer National Insurance contributions and an increase in the National Living Wage. Retailers, in particular, face the prospect of higher overheads, which they may be forced to pass on to shoppers in the form of higher prices.

Chancellor Rachel Reeves, however, defended her budget decisions, acknowledging that raising taxes was not easy, but asserting that it was necessary to address the fiscal gap left by the previous government. “Raising taxes was not an easy decision, but it was the right decision,” she said during a recent interview. Reeves also admitted that her party had underestimated the scale of the financial hole it would need to fill upon taking office. She argued that the previous government had concealed the full extent of the deficit, which only became apparent after Labour assumed power.

Following the budget announcement, Reeves admitted she had been “wrong” during the election campaign when she claimed that tax increases were not needed. Now, she suggests businesses may need to make difficult choices: either absorb the additional costs through improved efficiency and productivity or accept lower profits, which could lead to lower wage growth.

The fallout from the tax hikes continues to unfold, with the business community urging the government to reconsider its approach. While the Labour government remains steadfast in its position, the pressure from both business leaders and consumers will likely grow as the economic ramifications of these decisions become clearer in the coming months.