Calling it “the biggest business tax cut in modern history” in his budget speech, Rishi Sunak, the UK’s chancellor of the exchequer, announced a “super-deduction” for companies, inviting them to spend the mountains of cash they’re sitting on.
The super-deduction will allow businesses to deduct up to 130% of new capital investment from their overall taxable income. An auto-parts manufacturer buying new plant machinery for £1 million, for example, will be able to deduct £1.3 million from taxable income. The super-deduction regime, which will run until March 2023, will let companies cut their tax bill by up to 25p for every £1 they invest. In total over the next two years, companies are expected to benefit to the tune of £25 billion ($35 billion).
Sunak was clear about why he was introducing the super-deduction. “While many businesses are struggling, others have been able to build up significant cash reserves,” he said. “We need to unlock that investment, we need an investment-led recovery.” Sunak would rather see revived economic growth, rather than continued fiscal relief, repair the damage wrought by the pandemic.
In aggregate, the UK’s non-financial companies have been been building their cash holdings steadily since 2009-10—from 15% of GDP in that year to nearly 25% today, according to an analysis by a think-tank called the Resolution Foundation. The pandemic is unlike previous recessions in one key way, the report found: “In all the past four recessions, firms have drawn down their cash buffers by an average of around £40 billion in current prices. In stark contrast, money holdings have increased in the four quarters since the onset of Covid-19 by around £118 billion.”
In part, this is because the pandemic made it impossible to spend or invest meaningfully through most of 2020; in part also, the government’s relief measures have meant that companies haven’t had to draw on their reserves. The surge in cash holdings can also likely be ascribed to firms that could conduct some form of business-as-usual through the pandemic. In a government survey in January, a third of firms reported that their cash would last them less than three months. In contrast, Amazon UK registered a 51% rise in sales last year, to a record £19.4 billion.
But British companies were hoarding cash even before the pandemic—and they weren’t the only ones. Non-financial US companies had more than $4 trillion on cash in hand last January, before the coronavirus swept the planet. Indian firms held trillions of rupees in cash. Companies in Europe, the Middle East and Africa were doing the same. They didn’t pay shareholders, and they didn’t invest the cash. They kept it deep in their pockets, worried that the world was an uncertain place—that rainy days would come and they’d have to buy umbrellas.
In the UK, before the coronavirus, the chief uncertainty that companies feared was Brexit. That phase of uncertainty has now arrived compounded by the even greater uncertainties of the pandemic. The effects of both of these will still take years to play out; by no means, for instance, will British businesses return to a more certain world as soon as the country is all vaccinated.
Unfortunately for them, Sunak has a timeline in mind. In 2023, the super-deduction will end, and corporation taxes will rise to 25%, so that the government can begin earning back some of the money it has spent during the pandemic. Over the next two years, companies will have to conquer their instinct to hoard cash in this time of flux, putting their money to work before the super-deduction window slams shut.