Canadian companies have been accumulating “dead money” — cash sitting idle in bank accounts — faster than companies in any other country in the G7, according to a report from the International Monetary Fund.
The issue of corporate cash hoards exploded in the wake of the financial crisis of 2008-09, as consumers’ advocates accused businesses of harming the economy by sitting on cash instead of investing, hiring or at least paying out dividends to shareholders.
Idle cash sitting in Canadian corporate accounts amounted to less than 10 per cent of GDP as recently as the late 1990s, but has exploded to more than 30 per cent of GDP since then, said the IMF report that came out in January and was recently flagged by PressProgress. The average cash pile among G7 countries is around 25 per cent of GDP.
Statistics Canada data released earlier this month showed Canada’s corporate cash hoard was $626 billion in the last quarter of 2013, a jump of 6 per cent over the previous quarter.
As United Steelworkers economist Erin Weir pointed out, that makes Canada’s corporate cash hoard larger than the country’s federal debt, which sat at $612 billion at last count.
“The corporate sector’s aggressive accumulation of cash helps to explain the lack of investment and employment growth,” Weir wrote.
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Some have linked growing cash piles to shrinking corporate tax rates. That’s a debatable notion, but it is noteworthy that these cash piles grew during the same period as Canada saw its corporate tax rate slashed aggressively.
Cash hoarding is hardly unique to Canada. Tech giant Apple’s cash pile was $147 billion U.S. at last count, more than the GDP of a majority of countries.
In Canada, companies’ individual cash hoards aren’t nearly as large, but they are large enough for former Bank of Canada Governor Mark Carney to worry about what it means for the economy.
If Canada’s corporations can’t figure out what to do with the money, "give it back to shareholders and they'll figure out what to do with it," Carney said in 2012.
But many in the business community say it only makes sense for businesses not to spend money in times of uncertainty.
In an internal memo prepared last year for then-Finance Minister Jim Flaherty, the government called the corporate cash piles “legitimate,” and argued they reflected “sound decision-making.”
Not everyone sees it this way. Weir argues the stockpile shows the government should reverse corporate tax cuts.