Chancellor defiant as CBI warns of £7bn hole in tax revenues

Business leaders launched a pre-emptive strike on Gordon Brown, warning the Chancellor not to hit the corporate sector with a post-election tax rise to a fill a black hole in his public finances.

Business leaders launched a pre-emptive strike on Gordon Brown, warning the Chancellor not to hit the corporate sector with a post-election tax rise to a fill a black hole in his public finances.

The CBI, the largest employers' group, said the Government would have to cut spending or raise taxes by some £7bn a year over the next economic cycle.

But the Chancellor, who delivers his pre-Budget report this week, showed little sign of backing down on his forecasts, saying Britain had a "unique opportunity" to be one of the biggest success stories of a globalised economy.

The CBI predicts that at the end of the current business cycle in 2005-06, Mr Brown will either meet his "golden rule" - which states the Government will borrow only to invest over the course of a cycle - or miss it by a "negligible" amount. But it warned the next cycle would start with a £34bn deficit, with little prospect of improvements in the public finances without concerted Government action.

Ian McCafferty, its chief economic adviser, warned tax rises would be "extremely damaging" to the global competitiveness of UK business, and urged all parties to focus instead on cutting public spending and reducing waste.

"There is a significant problem brewing for the next cycle and for after the general election, if there were one next year," he said. "The Government will have to pull in its horns and business cannot be expected to dig it out of a hole when profits and investment are under so much pressure."

The British Chambers of Commerce called for a business-friendly PBR, saying the cost to business of compliance with red tape stood at £30bn.

Yesterday the Conservatives insisted the Chancellor was in breach of his second fiscal rule - that debt should stay below 40 per cent of GDP - if unfunded public sector pension liabilities were included in the accounts.

David Willetts, the shadow Secretary of State for Work and Pensions, said: "With pensions in crisis, Gordon Brown should use his pre-Budget report to let people know the true cost of the pension promises that have been made."

But the Chancellor showed little sign of weakness yesterday, setting a long-term "patriotic vision of Britain's future". In language likely to be echoed on Thursday, he said the UK must make investment in skills, science and enterprise its priority over the next decade.

In an article published yesterday on the website of the US magazine Newsweek, the Chancellor said Britain had to prepare for a "harshly competitive world" where 5 million US and European jobs could be outsourced to the developing world within two decades. "No nation can shield itself from these forces," he wrote, warning that the price of inaction will be low growth, high unemployment and poor standards of living.

In a veiled attack on his critics within the trade union movement, he said: "To those in Britain who want to postpone long-term decisions and tell us that there should be no change without security, my answer is there can be no security without change."

He used the article to reiterate his long-term vision for Britain that has been seen as a potential leadership manifesto. He wrote: "We must build a stronger shared national economic purpose as Great Britain, a stronger sense of our patriotic vision of Britain's future as a country of aspiration and ambition."