Who will profit from this chaos?

You’ll probably be as surprised as I was by what I’m about to share.

But I’ve learned from social media that all the political drama in the UK involves a big conspiracy.

Yes, you heard right!

Former chancellor Kwasi Kwarteng’s Mini Budget, new chancellor Jeremy Hunt’s Reverse Mini Budget, more U-turns than at the dodgems…

…it looks like bungling, but it’s really part of a global plot to take control of the British economy.

I know – it’s hard to believe.

Like you I thought sinister conspiracies unfolded in the shadows. Not on the nightly news!

Presumably I’ll get my invite soon to a dingy basement or a motorway services carpark, where I’ll be briefed at last on how it all makes sense.

Cui bono?

You know, it would almost be a relief to believe in conspiracies these days.

Then there would be some method to the madness. A rationale behind mortgage rates rocketing and millions worrying about their pensions.

But in reality, Kwasi Kwarteng promising unfunded tax cuts against a backdrop of inflation, rising rates, skittish bond markets, and over-leveraged pension funds more than explains the mayhem.

I’ll leave it to political pundits to debate what it means for power at Westminster.

What savers and investors want to know is what does it mean for our personal finances – and for the fortunes of British companies we invest in?

Because the one thing the conspiracy theorists are right about is there will be winners and losers from this upheaval.

Feel the squeeze

Certainly most Fools will have less money to save and invest than they might have expected after last month’s Mini Budget.

That’s because Kwarteng’s income tax cut to 19% has now been cancelled – indefinitely. The additional 45% tax rate stays too. Taxes on dividend income remain unchanged.

Indeed of the touted personal tax massacre, all that’s left is the scrapping of the social care levy and of the associated 1.25% National Insurance hike.

To be fair, new chancellor Jeremy Hunt has mostly just rewound time. Apart from the 1% income tax trim – originally set for 2024 – big tax cuts weren’t expected before the Mini Budget anyway.

But Britons already face the biggest tax take for 70 years, and it won’t be easing any time soon.

As individuals, all we can do is try to protect our money for ourselves.

Cash is more valuable than ever as the cost-of-living crisis mounts, so be sure to use your tax-free shelters – ISAs and pensions – to mitigate paying more tax than you have to.

Of course with mortgage rates soaring in the wake of the Mini Budget, it will be harder for many middle-class households to find extra money to save in the first place.

There’s some hope rates will soften as things calm down. But for now a growing mortgage burden will add to more expensive utility bills from April 2023, thanks to the curtailing of energy bill support.

It’s hard to disagree we need to get the State’s finances on a securer footing, but costlier energy bills and mortgages in the meantime are hardly conducive to saving and investing.

Pensions under pressure

For others, it was the headlines about troubled pension funds, forced selling and ‘doom loops’, and even the Bank of England using the phrase ‘fire sale’ in a press release that was most unsettling.

Nobody wants to think their retirement funds could be in peril, however remote the risks.

Fortunately, the Bank of England’s temporary intervention in the gilt market eased these pressures.

Pension funds have raised the additional collateral they require. And in the longer term, their funding position actually looks healthier, as higher rates make it easier to meet future liabilities.

Still, as the dust settles I expect we’ll hear of a few close-shaves and near-misses from the chaos.

BT’s huge pension scheme has disclosed its assets fell by more than £11bn in recent weeks, though thankfully it says there was no overall worsening in its funding position.

And L&G – a big player in the pensions market  – had to reassure investors in the midst of the crisis that its business had not been overly disrupted and its balance sheet was strong.

For older hands, it was an unwelcome reminder of the financial crisis of a decade ago.

Rating their choices

At least since Jeremy Hunt took charge, long-term gilt yields have fallen back.

That’s important because of their link to the rate the government pays on the borrowing needed to meet its spending commitments.

For commercial companies that haven’t thought about rising rates for a decade, higher rates present both opportunities and challenges.

Obvious beneficiaries are High Street banks.

Higher rates increase their net interest margin – basically the difference between what interest they pay on deposits versus what they rake in on mortgages and loans. These margins were squeezed by the near-zero interest rate era.

However it’s not all good news even here.

If high interest rates make it difficult for people to pay their mortgages, we could see mortgage defaults and even a house price crash.

Other kinds of loans could sour, too – and stock market-listed firms with large borrowings up for renewal could also struggle.

So I expect banks to increase the provisions they set against bad debts in the months ahead.

Another popular sector of the stock market hurt by higher rates are house builders. Share prices here have been falling all year as rates rose, and the past month has made things worse.

More expensive mortgages reduce the spending power of buyers for new homes. That curbs the prices they can stretch to – if not taking them out of the market altogether.

Taxes taxes everywhere

If we do see a marked slowdown in the UK property market then we can expect a deep recession. Housing is arguably the engine of Britain’s economy.

And that would clearly be bad for nearly all UK companies that operate in the domestic market.

Less a matter of if than when, though, is the rise in corporation tax that goes ahead from April 2023.

This rise will help plug the multi-billion hole in the chancellor’s budget, but it will also reduce the spare cash firms have to reinvest in their business, or return to shareholders as a dividend.

UK banks again will suffer. They already pay an additional 8% surcharge on profits that was set to fall to 3% but will now stay unchanged. Add that to the upcoming 25% rate of corporation tax, and banks face a 33% tax rate.

Then there’s the threat of more windfall taxes to help balance the nation’s books.

In opposition Labour has been calling for an extended windfall tax on UK energy producers. A pragmatic Jeremy Hunt may decide he has no choice but to raise more revenue here.

Energy suppliers – including the renewable investment trusts popular with private investors as income plays – have already been told they face a price cap that will see most of their ‘excess’ revenues go to government.

Again, share prices slid in anticipation and the trusts now trade on a discount.

Fingers crossed

In summary, it’s hard to be optimistic about the economy, household budgets, or for British-focused companies for the foreseeable future.

We were warned months ago by the Bank of England that Britain faced a long recession. Things have only deteriorated since then.

There are some bright notes. Higher rates are welcome if you have spare cash. And wholesale gas prices have come down recently. Perhaps next year’s energy bills won’t be quite as high as feared.

Also, one thing I’ve noticed over the years of being the bearer of bad news is such articles often age badly. True, it can be because things get worse! But the economy is inherently unpredictable and can surprise positively too. (An end to war in Ukraine would be a game-changer.) For now there’s little a Fool can do, though, but to batten down the hatches.