Updates October 14: Truss drops UK corporation tax plan after Chancellor sacked, US banking reporting season kicks off

The British Prime Minister’s U-turn on corporation tax risks leaving a tens of billions of pounds black hole in public finances, economists warn.

Liz Truss said on Friday she would revert to a business tax increase to 25% as announced by Rishi Sunak and the previous government and added that public spending would rise “slower than expected”.

Paul Johnson, director of the Institute for Fiscal Studies, wrote on Twitter that spending “cannot rise much less rapidly without actually falling.”

Torsten Bell, chief executive of the Resolution Foundation, a think tank, said “the past two weeks have seen the announcement and unraveling of the worst unforced error in British economic policy-making for generations.”

On Friday, the prime minister sacked Kwasi Kwarteng as chancellor and trashed almost half of his tax cuts, Bell calculated.

“However, the need to fund the remaining tax cuts and the bleaker economic outlook, including higher debt interest costs, mean that despite today’s flip-flops, Jeremy Hunt will not only have two weeks to decide how to fill a black hole of tens of billions of pounds in public finances,” he explained.

Paul Dales, chief UK economist at Capital Economics, said “it’s unlikely to be the last word either”.

He added that it is “possible that the Prime Minister will be ousted before long and/or that more needs to be done to restore the UK’s credibility in the financial markets”.

Stephen Phipson, chief executive of Make UK, a trade association, said the decision to raise corporation tax again “sends the wrong signal to investors about the attractiveness of the UK as a destination for foreign investment”.

“The UK urgently needs a credible long-term economic and industrial strategy that includes a broad view of how we drive investment through the cycle,” he said.

“We cannot continue to zigzag from one policy to another,” he added.