Policymakers shouldn’t overreact to perceptions of corporate dead money, finds a C.D. Howe Institute report.
In It’s Alive! Corporate Cash and Business Investment, author Finn Poschmann points out corporate cash holdings, as a share of output, have not grown since 2010 and that, contrary to popular opinion, business sector investment Canada-wide is growing at roughly the same pace as the economy.
Read: Why companies hoard cash
Indeed, nationally, the investment share of output is just above its 30-year average, as is typical of an economic recovery period. In recent years, capital spending has been the strongest in the energy and mining sectors – where cash holdings had grown the most.
“Ever since Mark Carney uttered the words ‘dead money,’ policymakers have routinely used this view to advocate for heavier taxation, which is worrisome,” says Poschmann. “Not only are investment levels normal but large corporate cash holdings reflect long-term changes in business practices and uncertainty about the future.”
In the wake of the recession that ended in Canada five years ago, businesses shored up their balance sheets overall, so that current assets would more safely exceed current liabilities. They steadily trimmed the share of current assets held in relatively unproductive inventories, and similarly trimmed accounts receivable. They began accumulating more liquid financial assets, cash and cash-like instruments, to be deployed as investment opportunities arose. This indicates prudent balance sheet management, and perhaps caution with respect to investment commitments, likely owing to market uncertainty.
Poschmann concludes that government concerns over business investment would be better handled through improvements to market certainty and the investment environment through, for example, stable fiscal planning aimed at building investor confidence.