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The United Arab Emirates (UAE) has created a distinct niche for itself, thanks to its unique fiscal position, in the absence of income tax, low public debt, and significant investments in its infrastructure and global economic development. This stands in contrast to many western countries that rely heavily on personal and corporate income taxes and grapple with higher levels of public debt. Having lived and worked in the UAE for over 19 years, and having been an expat child here as well, I really have seen the economy develop in extraordinary ways, therefore in this in-depth article I will delve into the factors that enable the UAE to maintain its exceptional fiscal landscape, compare the UAE’s budget spending with that of several Western countries, and offer a personalized and comprehensive analysis of the UAE’s economic strategy.

Factors Enabling the UAE’s Unique Economic Position

1. Hydrocarbon wealth:

The backbone of the UAE’s economy is its abundant oil and natural gas reserves. The country possesses approximately 97.8 billion barrels of proven oil reserves, which is about 5.9% of the world’s total reserves. In 2023, the UAE produce around 3.2 million barrels of oil per day, making it one of the world’s leading oil producers. The revenues generated from oil exports significantly contribute to the government’s budget, enabling it to fund public services and infrastructure projects without resorting to income taxes in the UAE.

2. Economic diversification:

Over the past few decades, the UAE has actively diversified its economy to reduce its dependence on hydrocarbons. Dubai, in particular, has successfully transformed itself into a global hub for trade, finance, tourism, and real estate. In 2022/23, the non-oil sector accounted for approximately over 80% of Dubai’s GDP. Other emirates, such as Sharjah and Ras Al Khaimah, have also made strides in diversifying their economies by focusing on industries like manufacturing and tourism.

3. Free trade zones and business-friendly regulations:

The UAE has established over 47 free trade zones across its seven emirates, offering tax incentives, 100% foreign ownership, and minimal bureaucracy. These factors attract businesses and investors from around the globe. The Jebel Ali Free Zone in Dubai and the Masdar City Free Zone in Abu Dhabi are among the most prominent examples of these zones, which have played a crucial role in boosting the UAE’s non-oil revenues.

4. Other forms of taxation:

Although the UAE does not impose income tax, it generates revenue from other forms of taxation. For example, the 5% Value Added Tax (VAT), introduced in 2018, generated around AED 27 billion (approximately $7.4 billion) in revenue in its first year. Corporate taxes are levied only on foreign banks and oil companies, while custom duties, fees, and fines also contribute to government revenue. In recent years, Dubai in particular has created ever-increasing revenue from land and real estate transactions.

5. Low public debt:

The UAE’s vast hydrocarbon wealth, economic diversification, and prudent budget management have resulted in a relatively low level of public debt. As of 2021, the UAE’s public debt-to-GDP ratio stood at around 40%, significantly lower than that of several western countries, such as the United States (108%), the United Kingdom (99%), and France (115%).

Comparing UAE and Western Countries’ Budget Spending

1. Infrastructure and economic development:

The UAE invests heavily in infrastructure and economic development projects to support its diversification efforts and position itself as a global business hub. These investments encompass transportation, telecommunications, tourism, real estate, and renewable energy projects. In contrast, infrastructure spending in many western countries is often a smaller proportion of their budgets, as they have more mature infrastructure systems and prioritize other areas, such as social welfare and healthcare.

2. Social welfare:

Western countries typically allocate a significant portion of their budgets to social welfare programs, including pensions, unemployment benefits, and various social services. In the UAE, there is a limited social welfare system, as the majority of the population comprises expatriate workers who are not entitled to the same benefits as Emirati citizens. However, the UAE does provide certain benefits to its citizens, such as housing assistance, healthcare, and education subsidies. Overall, the UAE’s spending on social welfare is far lower as a percentage of its budget compared to many western countries.

3. Defense and security:

The UAE has a relatively high defense budget, which is used to maintain its armed forces, purchase advanced military equipment, and support regional security initiatives. In 2020, the UAE’s military spending was around 5.7% of its GDP, which is significantly higher than the average defense spending in western countries. For instance, the United States spent around 3.1% of its GDP on defense in 2023, while the United Kingdom and France spent around 2.1% and 1.9% of their GDP, respectively.

4. Healthcare:

Healthcare spending in the UAE has been growing in recent years, as the government aims to improve the quality of healthcare services and attract medical tourists. However, the UAE’s healthcare spending as a percentage of its GDP is still lower than that of many western countries. The UAE spend around 3.6% of its GDP on healthcare, while the United States, the United Kingdom, and France spend approximately 16.9%, 9.8%, and 11.2% of their GDP on healthcare, respectively.

5. Education:

The UAE has been investing in education to improve the quality of its human capital and to support its economic diversification efforts. Education spending in the UAE accounts for a significant portion of its budget, with the aim of modernizing the education system and promoting research and innovation. The UAE spend around 4.6% of its GDP on education, which is comparable to the spending levels in many western countries. For example, the United States spend around 5.0%, the United Kingdom spend 5.5%, and France spend 5.4% of their GDP on education in the same year.

Future Prospects and Challenges

While the UAE’s economic landscape offers many advantages, it also faces potential challenges. The global shift towards renewable energy and potential fluctuations in oil prices pose risks to the country’s hydrocarbon-dependent economy. To counter these challenges, the UAE continues to diversify its economy and developing alternative sources of income.

Moreover, the UAE’s impressive economic growth has been accompanied by an increase in its expatriate population, which now constitutes around 88% of the total population. This demographic shift poses challenges in terms of social integration, cultural preservation, and Emirati workforce development. The UAE continues to invest in education, training, and workforce development programs to ensure that its citizens are equipped with the skills required to thrive in the rapidly evolving global economy.

Final Thoughts

The UAE’s unique economic landscape sets it apart from many western countries that rely heavily on income taxes and have higher levels of public debt. Their distinctive approach has its unique advantages, and with continued diversification to its economy and addressing potential challenges will ensure long-term economical stability and sustainable growth. As a long term UAE resident with extensive experience in the region I remain very optimistic about the UAE’s future prospects and look forward to witnessing its continued progress on the global economic stage.

About Mike Coady

Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.

Mike is an award-winning money coach and industry leader in the financial sector.

Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Founding Fellow of the Institute of Sales Professionals (FF.ISP), and a Fellow of the Institute of Directors (FIoD) and featured as a highly qualified Financial Adviser in Which Financial Adviser.

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Blog published by Mike Coady.