Economists say firms’ savings hold back GDP

Tim Wallace
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BRITAIN’S companies are failing to take their responsibilities to the rest of society seriously and must start spending instead of saving if they want to see the economy growing, according to a damning report out today from Ernst and Young’s Item Club.

The extraordinary attack on firms’ savings saw companies accused of “adding to the dole queue by making staff redundant at the same time as the government,” and called on businesses to “put back into the economy what they take out,” to help bring down the government deficit.

Overall, the think-tank forecast GDP growth of just 0.4 per cent this year down from 0.7 per cent in 2011, due to a combination of cuts to government spending, weak consumer spending growth and low business investment.

The report pointed to the contrast between corporate cash balances, which stand at over £750bn, and business investment, which rose just 1.2 per cent in 2011.

Ernst and Young forecasts another 1.2 per cent rise this year, leaving investment spending 12 per cent below its 2008 level.

“Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list,” said chief economic adviser Peter Spencer.

“It is high time that these individuals began to take corporate social responsibility seriously.”

The report argues the government has tried to help with “three business-friendly budgets and more tax cuts in the pipeline,” and now it is down to companies “to grasp this opportunity quickly or face the consequences after the next general election.”

In contrast, the report praised household savings, arguing that consumers had lived beyond their means for many years and need to rebalance.

Nonetheless, a “surplus” of £21bn combined with high unemployment and falling real wages will continue to hit consumer spending.