Companies—both here and abroad—have accumulated billions. How do we get them to spend it?by George Magnus / May 24, 2016 / Leave a comment
Read more by George Magnus: Michael Gove misunderstands
On 21st May, Shadow Chancellor John McDonnell spoke at a State of the Economy conference organised by the Labour Party. His talk was a wide-ranging pitch about “we can start to transform how capitalism in Britain works,” and how Labour could become a credible alternative government. He also stated, in a rather threatening way, that the UK’s “giant corporations are sitting on giant cash piles—perhaps up to £700bn.” He went on to note that “instead of investing money productively, creating new jobs and opportunities, our corporations are hoarding cash.”
McDonnell is certainly right that UK companies are sitting on a mountain of cash. According to Bank of England economists Katie Farrant and Magda Rutkowska, over the last decade, private non-financial companies in the UK have been accumulating a higher proportion of cash on their balance sheets than before, and the estimated total at the end of 2014 was about £500bn. As a share of GDP, corporate cash has risen from about 20 per cent in 1987 to about 30 per cent today.
But McDonnell got other facts wrong. According to the National Income Accounts, UK companies have been investing at a rate of about 6-7 per cent per year since the financial crisis—a rate faster than GDP growth—in spite of the retrenchment in financial services and the oil industry. Moreover, labour market data shows that the UK has the highest level of employment on record.
McDonnell has a point, but it should have been delivered in a more considered fashion, for three reasons. First, the build-up in cash on corporate balance sheets is something that’s been going on for some time. Second, it is a global phenomenon. Recent estimates put the cash reserves of US non-financial companies at $1.7 trillion, a third of which is accounted for by just five tech giants: Apple, Microsoft, Alphabet (Google’s parent company), Cisco and Oracle. Moody’s, the credit rating agency, issued a report last year suggesting that 672 major European companies were together holding about €870bn at the end of 2014. And the worst offenders are in Japan, with listed companies sitting on about…