Video games industry bodies have reacted with anger to the government's announcement that it will scrap plans to introduce tax breaks for the UK games industry.

In the emergency budget, the chancellor called Labour's pre-election plans to offer tax cuts to video games companies "poorly targeted". Instead, he is introducing generic measures to stimulate growth throughout the business sector, including cuts to corporation tax and national insurance.

The news has come as a blow to UK games developers who are having to compete against countries that offer significant tax advantages to their rivals. In Quebec, for example, the government pays a third of the salary costs of development staff and offers tax holidays for foreign investors. The incentives have prompted publishers such as Square Enix, Electronic Arts, Ubisoft and Warner Bros set up studios in Montreal, often downscaling British investment in the process. Australia, South Korea and the US offer similar incentives.

While the UK remains a leading force in game development, which contributed £1bn to the British economy last year, it lost its position as the world's third largest game producer to Canada in 2007.

Reacting to the announcement, Richard Wilson, the chief executive of the UK games industry's trade body, Tiga, said: "The coalition government has broken pre-election pledges made by the Conservative party and by the Liberal Democrats to support and introduce games tax relief.

"Unless the coalition government introduces games tax relief or a similar fiscal measure, the UK will forfeit millions of pounds in inward investment, jobs will be lost and we will cease to be a leading developer of video games."

The European Leisure Software Publishers Association (Elspa) is also unhappy with the decision. Elspa's director general, Michael Rawlinson, said: "We are extremely disappointed by today's budget. Our industry will be rightly puzzled as to how tax breaks can be lauded before an election, only to be seen as 'poorly targeted' and scrapped just six weeks later."

However, Wilson believes the move to be counter-productive: "The UK video games industry is export-oriented, high-tech, highly skilled and low-carbon in output. This is an industry of the future, which the government should be supporting with action, not words."

Ed Vaizey, the minister for culture, communications and creative industries, who has vocally supported the games industry in the past, is to speak at the Develop conference, an important games developer event in Brighton next month. His appearance was confirmed just as the news of the budget was breaking. It is likely he will now receive a rather different reception from the assembled video game execs than he might have expected a week ago.

Meanwhile, Tiga says it will continue to lobby the government on tax issues. "Tiga's campaign for games tax relief has raised awareness about the video games industry in government and in parliament," said Gareth Edmondson, Tiga's vice-chairman and managing director of the Newcastle-based development studio Ubisoft Reflections. "The medium-term prospects for games tax relief are positive. Tiga will continue to strive to make the UK the best place to do games business."