The Labour Party is widely expected to form the government after the UK election in July, leading to speculation in some quarters that the resulting increase in public spending will result in higher taxes and an exodus of investors.

But how worried should wealthier residents and investors really be?

While UAE-based wealth managers trumpet an exodus and hold the emirates up as a haven for wealthy residents fleeing higher taxes, banks say the nature of the UK’s financial position in 2024 leaves little fiscal headroom for raising public debt levels.

Citing last week’s report by citizenship advisor Henley & Partners, Yann Mrazek, Managing Partner at UAE-based wealth advisor MH/Q, said the level of concern is “considerable”.

“Millionaires are on the move and the momentum is unlikely to slow down: after losing 1,600 high net worth individuals (HNWIs) in 2022 and 4,200 in 2023, the UK is expected to see an unprecedented net loss of 9,500 millionaires in 2024. And for the third year running, the largest inflow will benefit the UAE.”

Developing economies are simply more attractive at the moment, Mrazek said, as they are growing at twice the rate of advanced economies.

Investment firms faced with a stagnant UK and post-Brexit red tape automatically look to the UAE, he added, describing the relationship between the UK and the UAE as a “one way street” for investors.

David A. Meier, an economist at Swiss bank Julius Baer, said that under normal circumstances, markets would react poorly to a shift to the Labour party due to the possibility of spending-driven fiscal policy that drives up deficit and public debt.

However, he described them as currently “indifferent” due to the Conservative Party’s loss of political capital after a series of problems, capped by a cost-of-living crisis which saw the UK struggle with inflation and high interest rates for borrowers.

“Although the economic backdrop looks better with the ongoing economic recovery and headline inflation that is back to the target of 2%, [which] enables Prime Minister Rishi Sunak to declare victory over the cost-of-living crisis, the damage done seems to be irreversible until July 4,” he said.

A Labour government has little fiscal manoeuvrability, he said, noting that UK fiscal rules imply that public debt levels have to recede in the fifth year of a budget.

“Raising the projected public debt level even further seems no option for Labour, as it would again risk undermining market confidence in the UK’s fiscal policy.”

What will Keir Starmer’s Labour government do?

A long-held plan Labour plan to scrap the controversial “non-domicile” tax status, under which wealthy residents live in the UK but pay tax elsewhere, was actually adopted by the Tories in March but has been criticised by Labour as full of loopholes, which they have vowed to close should they form the next government.

The closed tax and other loopholes as well as an increase in capital gains tax could reduce potential growth from the finance sector, Meier said.

However, Meier described the Labour manifesto, published last week, as “business-friendly for left-leaning standards”, including a promise not to raise taxes for individuals, only minor capital gains tax changes, and taxes in the oil and gas sector to incentivise the energy transition.

The closed tax loopholes will finance a £4.8 billion ($6 billion) public services expansion, he said, adding that this and other changes are marginal compared to an annual GDP of £2.3 trillion.

Meanwhile, Bill Papadakis, a senior macro strategist for Lombard Odier, said Starmer has taken a careful approach about fiscal matters by steering clear of tax policies that may disrupt investors. He added nonetheless that the risk that a Labour government would raise revenue through higher taxes should be considered and that its impact on investors would depend on the timing, extent and type of tax policy changes.

There is unlikely to be a repeat of bond market instability as seen under the ill-fated Prime Ministership of Liz Truss last year, he said.

“In their approach to fiscal prudence, policy predictability and consideration for the process and for institutions such as the Bank of England and the Office of Budget Responsibility, the current Labour leadership couldn’t be more different than the approach of Liz Truss,” he said. “We expect the predictability and stability of fiscal policy (together with an easier monetary policy stance, as inflation continues to abate) to be well received by bond markets.”

(Reporting by Imogen Lillywhite; editing by Seban Scaria)