Scrapping plans to build 300,000 new homes a year will deal a £17bn blow to the economy and deprive the Treasury of much-needed tax revenues, major developers have warned.

In a letter to the Office for Budget Responsibility (OBR), Britain’s largest residential property developers say a government proposal to drop housing targets will cause the annual number of new homes delivered to plunge by 100,000.

They claim local councils, which are responsible for allocating land for development, will “significantly reduce” planning permissions without pressure from Whitehall.

The letter from the Home Builders Federation (HBF) argues that the resultant drop in housebuilding will result in the loss of £17bn worth of economic activity and £1.2bn of government tax receipts.

The HBF’s claims suggest that the fall in housebuilding will make it harder for the government to plug a £70bn hole in the public finances.

Under previous prime ministers David Cameron, Theresa May and Boris Johnson, the government aimed for 300,000 new homes to be built per year, in a bid to boost to address the supply-demand imbalance across many parts of the country.

However, Liz Truss and Rishi Sunak both argued against housebuilding targets in the last Tory party leadership election.

Simon Clarke, the Levelling Up Secretary until last week, vowed to “create incentives for residents to support development” instead of building targets.

In the letter, sent to OBR chairman Richard Hughes, the HBF said the shakeup would result in annual housing completions plunging by as much as 100,000 to just 140,000 – the lowest level since the 2008 financial crisis.

Stewart Baseley, the industry group’s chief executive, told Hughes: “As you will be aware, the economic footprint of the house building industry is vast due to its significant contributions to GDP, employment, and public finances.

“It also has an important role in stimulating demand and economic activity through its extensive supply chains and networks.

“If housing delivery declines significantly, as is anticipated due to the Government’s upcoming reforms, the economic consequences will be substantial.

“HBF and its members would appreciate any attention the OBR can bring to these issues in its upcoming forecast.”

But in contrast to his predecessor, the re-appointed housing secretary, Michael Gove, yesterday said that the government is still committed to a manifesto pledge of building 300,000 homes every year by the mid-2020s.

However, he told the BBC: “The cost of materials has increased and there is a tight labour market.”