Citi’s analysis comes just days after a leaked recording revealed Labour is considering an inheritance tax raid to “redistribute” wealth if it gets into power.
Darren Jones, the shadow chief secretary to the Treasury, suggested higher death duties would be used to tackle “inter-generational inequality”.
Pat McFadden, Labour’s national campaign coordinator, failed to rule out such a move on Wednesday.
He told Good Morning Britain: “From that moment we’ve said that nothing in our manifesto requires us to raise any taxes beyond the very specific things that we’ve set out in the manifesto, and that remains the position on this as with anything else.”
Bim Afolami, the economic secretary to the Treasury, said: “Labour are plotting a hidden tax raid that is not in their manifesto and if they are given a super-majority on Thursday they will be free to impose it.”
Citi noted that even a Conservative majority was likely to involve “some [fiscal] tightening” but this would come “in fits and bursts”.
Warning that the UK’s tax and spending outlook remained “dark”, Mr Nabarro added that Labour would also have to increase defence spending, putting further pressure on Whitehall budgets.
“Demand for additional spending remains significant. In recent years, performance indicators for the public sector have deteriorated. Metrics such as waiting times for A&E, elective surgery, or the gap between reported offences and prosecutions have all widened,” he said.
“Other historical supports such as trend reductions in defence spending are also likely to reverse – we think any government will now likely increase defence spending to 2.5pc GDP by 2030.”
Citi also warned that the end of an era of ultra-low interest rates and cheap public borrowing for the UK would also keep borrowing and therefore Britain’s debt burden high.
Mr Nabarro said: “The challenge is adjustment to this new fiscal reality is only now beginning.”
