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No money left? UK corporations are sitting on a £600bn surplus

The Government claims “there is no money left” when making the case for immediate and deep spending cuts. Not true.

The Government likes to claim that “there is no money left”, a crucial component of its “there is no alternative” case for immediate and deep spending cuts.

In reality, though, this claim is hollow. For a start it relies on comparing the UK government to a household – an analogy most economists reject.

One trend affecting the British economy over the past 30 years as been a very low rate of investment by private businesses. Although profits have risen as a share of GDP (that is to say profits have increased and wages have fallen as a share of national income) much of this profit has not been reinvested in new plant, equipment and machinery.

This “surplus” has to go somewhere and much of it has been invested in government debt. The chart below shows corporate sector savings and public sector borrowings expressed as a percentage of GDP. As can be seen the two track and offset each other.

Financial balances - % of GDP

In the UK, since 2003, this “corporate surplus” has been growing. In 2009 it reached £64.7 billion – so at the height of the recession, UK‑based non-financial companies were making profits £64.7 billion higher than the amount they were investing. By the end of 2009 (the latest available data), UK non-financial corporations were holding cash and bank deposits worth £652.4 billion pounds with UK banks (page 129 of this pdf).

Policies designed to “unlock” this surplus – such as tax breaks on investment (eg increased capital allowances for companies) or direct subsidies to investment – would increase investment and hence demand in the economy. This leads to higher tax revenues, lower unemployment and a lower welfare bill.

There is a role, too, for public sector investment to “crowd in” private investment. If, for example, transport links are improved, then companies may be more willing to invest in better-connected areas. Social housing can help attract workers to previously unaffordable locales.

Rising corporate investment would reduce the deficit in a “growth and employment friendly” manner.

The claim that “there is no money left” is abject nonsense – there is over £600bn sitting in corporate bank accounts, waiting to be invested.

Duncan Weldon is an economist and blogger. Download a pdf version of his longer article for Red Pepper magazine, published December 2010.

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.


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