Federal briefing deflates claim of inappropriate hoard of corporate cash

OTTAWA – An internal briefing for Finance Minister Jim Flaherty deflates repeated claims that corporations are irresponsibly sitting on a hoard of idle cash rather than injecting it into the economy.

“While Canadian non-financial corporations are holding more cash than ever before, they appear to have legitimate business and economic reasons for doing so,” says a summary.

“The transition towards higher cash holdings and liquidity … has not come at the expense of lower capital investment or dividend payments to shareholders.”

The Feb. 20 briefing for Flaherty came several months after Mark Carney, then Bank of Canada governor, endorsed the criticism that cash-fattened firms were not shouldering their responsibilities.

In an unusual appearance at a Canadian Auto Workers convention last August, Carney referred specifically to corporate “dead money.”

“If companies can’t figure out what to do with it, then they should give it to shareholders and they’ll figure it out,” he said in answer to a question at a news conference.

The question was prompted by a CAW convention document that cited an “enormous pile of idle cash, hoarded by private companies who literally are making more profit than they know what to do with.”

Flaherty later backed Carney, saying “at a certain point, it’s not up to government to stimulate the economy, it’s up to the private sector, and they have lots of capital.” The episode sparked a minor backlash on Bay Street.

But skeptical analysts at the Finance Department pushed back, arguing in a 21-page PowerPoint deck for Flaherty there’s no reason to pillory corporate Canada.

“It is not clear that firms are holding ‘excessive’ amounts of cash,” says the presentation, obtained by The Canadian Press under the Access to Information Act.

“The rise in corporate cash holdings is likely due to a variety of factors, all of which reflect sound decision-making. … the healthy state of corporate balance sheets is a positive sign.”

By April this year, Carney had retreated from his earlier statements, telling an audience in Washington, D.C., that capital is “dead no longer. Resurrected.”

Carney’s replacement in the job, Stephen Poloz, took a laissez-faire approach on the issue of corporate cash in his first public speech last week.

Poloz preached patience, praising healthy balance sheets in the private sector and sympathizing with skittish firms wanting to delay investment in a sputtering economy.

His remarks seemed to align with Prime Minister Stephen Harper’s view at a G20 summit in November in France.

“There’s a lot of money sitting on the sidelines, looking for opportunities,” he said in Cannes. “And I see every indication that markets are constantly searching for good news and opportunities.”

Estimates of the size of the so-called “cash hoard” vary, depending on what’s counted. A revised Statistics Canada estimate last week put it at about $544 billion in the first quarter this year; most economists also put it at well over half a trillion dollars.

All sides acknowledge that cash holdings have been steadily rising for a decade, starting well before the 2008 recession. The notable exception is in the hard-pressed manufacturing sector, which has been challenged by a high Canadian dollar.

“The amount of cash held on the balance sheets of non-financial corporations more than doubled over the last decade,” says a summary of the Finance Department briefing, by Michael Horgan, deputy minister.

“Increased cash holdings and overall liquidity in part reflects changes in the way that firms operate rather than a reluctance to invest.”

Jim Stanford, an economist with the CAW, traces the rise in corporate cash to higher profits in a pro-business climate and to dramatic cuts in corporate taxes.

“Companies have more money than they know what to do with,” he said in an interview.

“I wish the bureaucrats at Finance spent more time trying to get companies to boost their investment, instead of arguments to justify why their cash hoard is legitimate.”

Stanford argues for rescinding recent corporate tax breaks and spending the resulting government revenue on infrastructure if big business fails to invest.

But a spokeswoman for Flaherty says corporations have indeed begun to invest again.

“Canadian businesses are increasingly making competitiveness-enhancing investments as a result of the tax-relief measures provided by our government and others,” Kathleen Perchaluk said in an email.

“Real business investment is now above its pre-recession level, with the best performance in the G7 — by far.”

Referring to the “dead money” issue, Flaherty told a Senate committee on May 22: “We have had a bit of a Lazarus-like reawakening. Investment in machinery and equipment has gone up quite significantly.”

— With files from Bruce Cheadle