Is It Time For Another Windfall Tax?

Just over a week ago, the FT reported that corporations across the world were sitting on record amounts of cash. By the end of 2012, the non-financial members of the global S&P 1200 index, which comprised 975 of the world’s biggest companies, including household names like Apple, Pfizer, Toyota, Google and Microsoft, had accumulated $3.2tn in cash. This was 62% up on the $1.95tn they held in 2008. Goodness knows what the figure would have been if financial firms had been included. Various figures get quoted for the size of UK firms’ cash piles, but £440bn seems to be a fair assessment. To put this figure in some context, the British Government’s annual deficit is around £100bn, while the national debt weighs in at about £1,200bn.

What’s going on?

The economist Richard Koo coined the phrase ‘Balance Sheet Recession’ having looked at corporate behaviour in Japan during the 1990s. He observed that when debt gets so large a crisis occurs that forces companies to address their liabilities. In these circumstances businesses cease to behave like the profit maximisers of standard economic theory. Instead, the focus of their operations becomes the generation of cash to pay down their debt to what they consider safer levels. The Great Recession appears to be this type of recession, with companies, and indeed consumers trying to hoard cash to reduce their debts and form a safety barrier to protect against further economic bad news.

UK Business investment

Source: Quarterly Survey of Capital Expenditure - Office for National Statistics

The fact that companies have ceased to be profit maximisers in the conventional sense is borne out by the figures for business investment. Although this rose 1.4% between Q2 2013 and Q3 2013, it’s lower than it was a year ago. In fact it’s been pretty flat for 4 years and would need to increase by over 25% to get back to the level it was at the beginning of the crisis at the start of 2008. Clearly, although we saw modest growth return to the UK economy in 2013, private sector investment played no role in this. We can’t say we have balanced, sustainable growth until it does. Projections for rising growth in 2014 and beyond appear to be based on an assumption that it will. It remains to be seen whether such a belief proves to be well-founded.

Keynes famously wrote about the ‘animal spirits’ that were necessary to generate confidence, optimism and the investment and risk-taking that were essential to propel growth in a capitalist system. He argued that when the ‘animal spirits’ of the private sector failed, as manifested in recession and depression, they had to be replaced by the sober resolve of the public sector to spend to restore growth and generate employment. So far, it would appear that the ‘animal spirits’ of UK Plc are flagging and this at a time of record low interest rates. Essentially the private sector is saying that for 4 years they haven’t been able to find enough profitable projects to invest in, even though their captial is free. Instead they would prefer to sit on it and see its value eroded by inflation. This is hardly a ringing endorsement of free market captialism.

Indeed this unwillingness by the private sector to invest lies behind the idea recently popularised by the economist Larry Summers that perhaps the world economy has entered a period of ‘secular stagnation’. If businesses cannot or will not raise their investment spending, then there is no foundation to the belief that capitalist economies will, if left alone, return to levels of full employment following a crisis.

We know that the UK economy is around 15-20% smaller than it would be if it had grown at its pre-crisis trend rate and that we still have high levels of unemployment and underemployment. Yet companies are sitting on large quantities of unemployed capital. In these circumstances hasn’t the time come for us to start to consider levying some form of windfall tax on corporate cashpiles? In 1997 the new Labour Government raised a windfall tax on the privatised untilities that raised around £5bn. This was used to fund the New Deal which was a successful welfare-to-work programme designed to tackle long term unemployment. It was also used to fund captial investment for schools. If the case for a one-off levy was compelling then, it must be even more so today.