Britain’s private sector is poised to shrink over the next three months as businesses fear a fresh tax raid in the autumn Budget, according to a new survey.

In the latest sign of weak business confidence under Labour, the Confederation of British Industry (CBI) has said that bosses are expected to invest and hire less across all industries.

The lobby group issued the dire warning as part of its latest monthly survey, which revealed it has now been an entire year since it recorded a positive reading for future expectations.

This reflects businesses’ disillusionment with Sir Keir Starmer’s Government following last summer’s election, particularly after Rachel Reeves unveiled £40bn of tax rises last October.

The CBI urged the Chancellor to protect the private sector by not raising taxes again later this year, particularly if she wants to kickstart the economy and improve growth.

According to the latest survey, which had 877 respondents, the consumer services sector was shown to be facing the fastest decline – while retailers and wholesalers are also struggling.

Business and professional services are also predicting a significant slowdown, as do manufacturing companies, as pessimism spreads through the entire private sector.

All companies are battling against rising inflation, which hit 3.8pc in July, and the impact of soaring employment costs caused by higher National Insurance rates and an increase in the minimum wage.

As well as the threat of higher taxes, the CBI also highlighted the impact of Angela Rayner’s Employment Rights bill – which is expected to burden companies with extra costs and less flexibility as workers are handed more rights.

The bill is set for its final reading in the House of Lords this week.

Alpesh Paleja, economist at the CBI, 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.”

It comes as Ms Reeves seeks to raise funds ahead of her autumn Budget, which is expected to unveil a hole in the public finances that some predict could be as high as £50bn.

Meanwhile, the Institute of Directors’ latest tracker of business confidence also revealed a bleak outlook among businesses.

While its latest reading had improved from last month’s record low, it is still at levels comparable with the first Covid lockdown and Liz Truss’s ill-fated mini-Budget.

In response to the survey, companies said they expect to reduce headcount, restrict pay rises and scale back investment.

Anna Leach, the think tank’s chief economist, urged the Government to cut red tape to boost the economy.

She said: “As we head towards another challenging Budget, the Government should seize the chance to unlock growth through smarter deregulation.

“Leaders tell us the biggest barriers they face are in employment and trade. Here lies the tension in the Government’s growth agenda – while trade policy has focused on reducing frictions and opening opportunities, its employment policies risk moving in the opposite direction.

“Higher costs and rising regulatory risks threaten to undermine ambitions for jobs and growth. Meanwhile, ongoing tax rumours further damage confidence.

“We urge the Government to unleash a more coherent and consistent economic plan for the UK, focused on easing the cost of doing business.”

A Treasury spokesman said: “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 25pc.

“The tax decisions we took at the Budget last year mean that we have been able to deliver on the priorities of the British people, from investing in the NHS to cutting waiting lists and putting more money in their pockets with a wage boost for millions as we deliver on the Plan for Change.”

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