The most significant fact in today’s national accounts numbers is not the trivial downward revision to GDP growth. It is instead the fact that the UK’s fundamental economic problem - capitalists’ reluctance to invest - is as acute as ever.
My chart shows that, last year, non-financial firms capital spending was equivalent to just 65.7% of their retained profits - the lowest share ever*. To put this another way, firms’ desire to build up cash and/or reduce debt is at a record high - despite negative real interest rates.
Now, you might expect investment to be low, given weak aggregate demand and spare capacity. But my chart shows that capital spending as a share of retained profits was trending downwards before the recession. This suggests the reluctance to invest is a longish-term problem, reflecting the dearth of investment opportunities, and not just a cyclical one.
That said, I suspect this aggregate picture hides three separate things:
- Some firms are generating cash but lack investment opportunities - for either cyclical or secular reasons.
- Some, smaller, firms are forced savers, in that they’d like to invest but lack access to finance - though the Bank‘s credit conditions survey suggest this problem has declined since 2009.
- Some firms have been highly indebted and thus unable or unwilling to borrow; the corporate debt-income ratio is still above its long-term average.
I say this is our fundamental problem simply because it is capitalists’ spending decisions that largely determine growth and employment. Also, the counterpart of firms being large net savers is that someone has to be a borrower - and that someone is the government; the public deficit is, to a large extent, the counterpart of this corporate surplus.
You can read this chart as a refutation of neoliberalism. Neoliberals thought that if only taxes could be cut and labour’s bargaining power weakened, that capital spending would rise and economic growth follow. This has not happened. And it is, surely, unlikely that the corporate tax cuts Osborne announced in the Budget will significantly turn things around.
The question is: what, if anything, would turn it around? Yes, looser fiscal policy might give a cyclical kick to spending. But this doesn’t address the long-term secular downtrend in companies’ propensity to invest.
It might instead be that something more profound is happening. The difficulty of monetizing new innovations means that the profit motive is no longer sufficient to promote investment. This would be consistent with (though not proof of!) Marx’s prediction that capitalism would eventually retard economic growth:
At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production…From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution.
* My chart shows a small rise in this share recently. This is because retained profits fell in Q3, rather than because investment is picking up significantly. In Q4 alone, capital spending accounted for only 60% of retained profits, the third-lowest proportion on record.