The Government Incompetence Special

How to profit as the politicians panic

Good Afternoon Team.

We’re at the find out stage of the Labour Party’s Sixth Form Economics experiment - and gosh! Isn’t it going well?

All the retailers (M&S, Next, Greggs, Tesco, Sainsbury’s, Card Factory, B&M etc etc) are sinking because they can’t afford tax rises without price increases. And their customers can’t afford to pay more.

We’re hours away from the ‘bond market vigilantes’ headlines - I guarantee you there’s an editor at the Financial Times just itching to change a Meta Title.

With gilts at a 27-year-high (worse than when lettuce lady was in charge), and sterling sinking through the floor to a 14 month low against USD, we’re may be looking at zero rate cuts in 2025.

It’s more expensive for the UK to borrow money than Greece. Mortgage rates are going to stay high. Wage growth remains fairly poor. And Centrica is warning that UK gas storage is now ‘concerningly low’ (translation - we ain’t got any).

The NHS is on its knees, and there’s a two year wait to get them replaced. Rayner doesn’t understand the housing crisis (or even which house she’s living in), while Starmer can’t get dressed without asking his Sugar Daddy for money.

I could go on, though hopefully you get the picture. I’d recommend Ed Conway’s explainer on Twitter for a professional overview of the macro.

But I’m pretty sure that Reeves is toast. Running to China to generate £600 million over five years (just over one day of NHS spending) is not a good look.

The bottom line is that the government is out of fiscal headroom, and the choices in front of the Chancellor are to cut spending, borrow more or increase taxes further.

Labour will be loathe to cut spending.

Labour will be loathe to borrow more.

Because cutting spending = austerity, and borrowing more = fiscal irresponsibility; both are red meat for Reform and the Tories.

Yes, we will get headlines about cuts to disability benefits and increased efficiency savings, but politically it looks worse than more tax rises. Letters will be sent to important people telling them to save more from budgets, but it isn’t going to happen.

So more tax rises it is. My guess:

• Increase the freeze on tax bands for more years, possibly into the 2030s

• Increase VAT to 25%

• Increase employee NI, rolling back the recent cuts

• Scrap the remaining dividend/CGT allowances

• Increase CGT a little more

• Scrap the triple lock

Of course, doing any or a combination of these tax rises will just make growth harder, making the UK riskier, increasing bond yields further. But in Labour’s eyes it will be the only choice.

Longer term, I expect they will make SIPPs less generous and introduce a lifetime contribution allowance to the ISA.

But in the end analysis, the only way out is severe cuts to both tax and spending - and the axe will fall disproportionately on the less productive elements of the UK economy: the old, the sick and anyone relying on benefits.

This is a structural problem. The data is simple:

9.4 million people representing 22.2% of the UK’s population are economically inactive. This is 850,000 more people since before the pandemic.

Some of these will be students, non-working parents, or disabled.

But the data shows that ‘the current continued rise in inactivity is being driven by an increase in the number of people who are unable to work due to long-term sickness.’

7% of the working age population is now inactive due to long-term sickness.

Then we have the growing number of pensioners, and a falling number of workers.

The Office for National Statistics projects that more than 24% of people living in the UK will be aged 65 or older by 2042, up from 18% in 2016. As a result, State Pension spending rose to £92 billion in 2017 (equivalent to 5.1% of GDP), up from £26 billion in 1992 (3.6% of GDP). It will hit 6.1% of GDP by 2042.

ONS data shows us that there were 43,199,200 people aged 16-65 in the UK as of mid-2022 and 12,006,567 people aged 66+. This equates to 3.6 working age people per pensioner.

Rewind over 100 years ago to 1911 (just after the state pension was introduced for those aged 70+) and there were 23,929,000 people aged 15-69, with just 1,092,000 aged 70+. Back then, there were 22 working age people for every pensioner.

As we have consistently voted against immigration, and have created a society where having children is incredibly expensive, it doesn’t much matter who’s in charge.

There aren’t enough workers to sustain the system for the economically inactive - meaning cuts will happen - regardless of which colour tie the politician of the day is wearing.

It’s just a matter of time.

Of course, the other way out is sustained wage growth. But UK wage growth has been comparatively awful for years, and when combined with frozen tax bands, high house prices, and significant inflation - it would take an economic miracle to get out of the mess.

By the way, I’m not blaming any individual for this systemic problem. Anyone can get sick. Anyone can be born, or become, disabled.

Everyone gets old.

But it’s simple maths.

Naturally, there are things you could do to improve the situation overnight. Reopen the North Sea, approve Rolls-Royce SMRs, get rid of the 2030 EV target and scrap the £22 billion carbon capture nonsense that won’t work. Don’t give away the Chagos Islands and pay £9 billion for the privilege. Longer term, total NHS reform.

In effect, stop wasting money….

But while the government messes about trying to catch its tail, there are plenty of ways to profit.

The simplest way right now is bonds, as out of vogue as they are. UK 10 year bonds are paying out a *risk-free* 4.86%. You can also get 20 year bonds paying out inflation plus 2% guaranteed.

This won’t be for everyone, and bonds have historically underperformed equities. But interest rates where they are, are crippling the UK given the debt pile - so they won’t stay here forever.

Of course, we also want a few companies to consider:

1. FRP Advisory

specialises in restructuring, insolvency, and financial advisory services, helping businesses deal with financial distress. They help you deal with administration, liquidation, debt restructuring, and turnaround planning. FRP also offers corporate finance advice, including mergers and acquisitions advice.

The Insolvency Service indicates that there were 1,966 registered company insolvencies in England and Wales in November 2024, a 13% month-on-month increase from the 1,743 reported in October. Increased Employer NI and squeezed consumers is only going to send this trend one way.

2. Spire Healthcare

operates private hospitals across the UK, providing medical, surgical and diagnostic services. It serves both private patients and NHS referrals…and it’s clear to me that the government is going to have to spend big to cut waiting lists.

There are 6 million people waiting for treatment and Starmer’s plans to send people to get direct referrals for tests and scans without seeing a consultant first are not going to work.

Spire is going to hoover up our tax money because fixing the NHS is not going to happen anytime soon.

3. Energy Pathways

is going to get government funding for the MESH (Marram Energy Storage Hub) project. A prediction, not a guarantee.

But Ed Miliband has the business acumen of a Theranos TR1 holder, and he’s going to throw so much cash at energy storage that it’s going to happen, whether it’s a good idea or not.

This one actually is, as it happens.

As Centrica has helpfully pointed out, we have nowhere near enough energy storage in the UK, and very little compared to other European countries. I will probably do a deep dive on EPP soon, but for now would say just wait for some good news.

4. Prospex Energy

is not really on the UK to be fair, but the base case here is that energy security is emerging as a key theme over the 2020s.

With gas prices surging, all you need to do is some back of a napkin maths on projected revenue, consider their partners and the geopolitical chaos, and wait for the re-rate.

It’s a nice series of projects for a larger player to take out.

5. ITM Power

develops and manufactures hydrogen energy solutions, focusing on electrolysers that produce green hydrogen. The company supports decarbonisation efforts in industries including transport, energy, and manufacturing.

ITM Power is a key player in the UK’s hydrogen economy and the government has committed £2 billion in funding for green hydrogen production projects over the next 15 years.

Most recently, ITM won a £7.5 million grant for Gigastack, a system that uses electricity from Orsted’s Hornsea Two offshore wind farm to generate renewable hydrogen for the Phillips 66 Humber Refinery using the company’s electrolysers.

Further funding is likely incoming already.

6. Knights Group

is a well-regarded legal and professional services business offering full-service corporate, commercial, and dispute resolution support to clients across multiple industries in the UK.

Here’s the thing.

The government is pissing off a lot of companies, and many of them are going to push back with lawyers. You’re also going to see ever more legal cases as businesses engage in ‘creative’ accounting to circumvent higher levels of tax.

Knights Group are the ones they’re going to hire.

7. Kainos Group

is a technology company specialising in digital transformation and software solutions. It deals with cloud implementation, digital development, and data analytics and is particularly well known for its expertise in Workday implementations and public sector projects.

Kainos is a pre-approved provider on key major UK frameworks, and already works on the NHS SBS Cloud Solutions 2 Framework and the Defence, Digital and IT Professional Services Framework.

More contracts will come its way as the government seeks to make widespread cost savings.

It probably won’t work, but the money is going to be there.

8. Greggs

Greggs lost about a quarter of its market value last week even with sales for the full year rising by 11.3% to more than £2 billion.

It opened a record 226 new shops last year and plans to open perhaps another 150 in 2025.

Yes, you can take the worries about taxes and consumer confidence to heart, but for me the basic reality is that people are lazy and Greggs remains both fast and cheap compared to its competitors.

Just don’t drink the headache coffee.

The bottom line

When the government gives you lemons, make lemonade.

Despite the chaos, plenty of businesses are going to benefit.

Just be ready for the next round of tax rises!