Osborne faces post-Asia crisis angst amid corporate cash-hoarding
The UK faces a crisis in corporate cash-hoarding – depressing growth and investment – with echoes of the post-Asia crisis malaise. The recent budget is no game-changer for corporate investment but offers a ray of hope.
Few economists would mark the latest UK budget as a radical plan to tease capital out of anxious corporates – hoarding vast cash piles – to invest in the UK economy. Yet chancellor George Osborne has made it clear the future for the UK is increased exports and business investment – but kick-starting that investment process is another matter.
“I would be very surprised if the budget did a lot for reducing corporate cash piles through a rise in investment, not due to reading all the budget details but due to historic experience,” says Vanessa Rossi, consultant and economic adviser to Oxford Analytica.
With some estimates of the cash balances of private non-financial companies as high as £750 billion, almost 50% of UK GDP, it is possible the scale of UK cash balances is being overstated, says James Carrick, economist at Legal & General.
“These figures can easily be skewed significantly by big numbers with the biggest corporates, and may not give an accurate picture of what is happening in the country as a whole,” he says.
Setting that aside, a budget designed to encourage corporates to invest their own cash in growth and other things that would benefit the economy will first aim to instil confidence with a Keynesian largesse.
An injection of demand into the economy would typically need to be around £20 billion or more to make a substantial difference, says John Hawksworth, chief UK economist at PwC. A few billion here and there will not have a material impact on growth at a national level.
In any case, the UK budget centres on the Plan A of deficit reduction, with little room for government-funded investment. Even the token allocation of capital for infrastructure investment, made in the autumn statement, is not expected until 2015 and remains vague on detail.
However, there were bright spots in most recent budget. A lower corporate tax rate should provide some boost to business investment in the UK, giving it joint-first place as the most competitive country among the G20.
Other recent tax changes, such as offering a preferential rate of corporation tax for profits generated from patents, will also help, while the removal of stamp duty on shares for SMEs will also nurture confidence. Changes to the national insurance allowance are also designed to incentivize hiring.
What’s more, in former budgets Osborne offset his headline-grabbing corporate tax rate cuts with more cuts to capital allowances that encourage corporates to invest in technology by allowing them to offset these investments against their tax bill.
This time around he refrained from repeating the trick, so gets some credit for not reducing investment incentives, but an increase in these allowances would have been better.
Overall, though, “there isn’t much to see at the macro level for capital investment in housing construction companies”, says Oxford Analytica’s Rossi. There were indications of infrastructure investment but this is expected to be coming from foreign investors, with UK-funded investment coming in below levels required to make a substantial difference.
“It’s hard to generate more action until there are stronger signs of renewal in consumer and export demand,” she says.
Encouraging corporates to reallocate the cash they have built up in reserve to investment would be a difficult task in the current economic climate. Crises typically encourage businesses down the opposite path, as Asian corporates did after the crisis there in 1997-98, where the focus became exports and capital accumulation.
“Fifteen years later their excess reserves have them looking to invest abroad and have claims on companies and national treasuries of their former creditors,” says Bill Simpson, senior economist at the Confederation of British Industry (CBI).
There are rational reasons for such a response, not least to free them from reliance on risk averse, capital-hungry banks. Having a cash pile also offers the flexibility to take advantage of opportunities that arise in recession, particularly investments in, or acquisitions of, distressed rivals.
It also makes it easier to weather uncertain economic conditions or buy back shares if needed, and, ultimately, results from incentives on boards to maximize share prices, and avoid malinvestment.
Then there is the pension problem: a lot of corporates had an asset liability mismatch on their books, and this has only increased with quantitative easing.
Some corporates might be hoarding cash to plug their own pension shortfalls.
“These are defensive postures but defensible,” says Simpson. “Investment is lumpy. It takes a lot of confidence to do it and it swings the business cycle.”
However, there is a more optimistic assessment of the UK economy to be made with reference to the corporate birth rate. “What can Osborne do to give corporates more confidence? Very little,” says Legal & General’s Carrick. “The UK already has one of the best economies in the world in terms of corporate start-ups.”
This should give confidence that, for all its problems, the UK is not on the same path Japan travelled in its lost decade, where the corporate birth rate has been persistently low.
“The measures Osborne took will have an impact,” says Patrick Newton, senior policy adviser at the CBI, which supports the government’s determination to stick to its deficit reduction plan.
Summing up the bullish but outlier opinion of supply-side Osborne economics, he says: “He has been operating in an increasingly narrow fiscal space and these measures will help ensure the UK remains one of the most competitive places in the G20 to do business, a strong foundation for future growth.”