Recently there have been a number of reports and articles saying companies are holding back on investment and are sitting on piles of cash totalling £750 billion. A couple of questions need to be asked and answered before this figure is continued to be used.
Firstly, is it true?
Non-financial companies in the UK did hold £750 billion in currency and deposits in 2011. Total currency and deposits have more than doubled since 2002. This figure comes from the Government's economic accounts and shows that currency and deposits held on the balance sheets of non-financial corporations has been increasing and growing fast since 2002.
Crucially, not all this money is available to spend on investment in the UK
There are a few more relevant facts that need to be understood about this number:
- Most of the growth occurred in deposits held with foreign banks. The ONS and OBR think a minimum of 20% (and most likely more) of overseas deposits are held by financial companies and are therefore funds that are not held by companies for investment.
- Non-financial companies include UK owned corporations, foreign controlled corporations and public corporations. Public and foreign corporations are likely to be subject to a different set of investment decisions – they may have more investment options overseas and may be influenced by the investment environment in the UK relative to opportunities elsewhere.
So, how much cash might be available for investment in the UK?
It is hard to say but (very) rough estimates suggest cash available for investment is likely to be less than £660 billion and could be as low as £400 billion – a significantly lower amount from the headline number.
- Upper bound scenario: Adjusting only for cash held by financial institutions would reduce cash reserves by £90 billion.
- Lower bound scenario: Assuming all deposits prior to 2002 were held by non-financial institutions, had these deposits grown in line with domestic deposits since 2002 cash reserves could be up to £350 billion lower.
Is it only happening in the UK?
UK companies are not the only ones increasing cash on balance sheets. Manufacturers worldwide have been increasing their cash reserves over the past five years.
Sourced from: WEF report on the future of manufacturing
A recent report by Standard and Poor's suggested this trend is the result of “companies … strengthening balance sheets and liquidity in order to counter any systematic shocks or contagion”.
So, are businesses really sitting on piles of cash?
Maybe – the more important question is why? Higher cash on balance sheets suggests companies are reacting to the economic challenges they continue to face, including the aftermath of the financial crisis and the weak and uncertain demand outlook. More cash on their balance sheets places them in a more secure position to react to changes in the current economic climate. Investing all of this cash may not necessarily be the right move for all.
Perhaps a better question might be: How do we address the long-standing underinvestment in the UKs economy?