Budget 2014: Why Are Businesses Still Sitting On Billions In Cash Reserves?

Why Are Firms Still Sitting On Billions In Cash?
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George Osborne's economic recovery is far from secure as firms are still sitting on billions of pounds they have hoarded in cash reserves.

The Office for Budget Responsibility warned in its latest analysis today that firms' "real level of investment remains around 20 per cent below its pre-crisis peak at the end of 2013". Business investment is now "weaker and significantly more volatile", the OBR said, issuing a chart showing how volatile it has been over the last few years.

UK firms are sitting on anywhere between £69 billion in cash reserves to £729 billion. The Bank of England puts it at £284 billion, which does not include what firms store in assets like bonds, but is already much higher than £69 billion.

"It remains to be seen whether the recent pick-up in business investment indicates a turning point in investment spending," the OBR wrote.

The OBR upgraded its forecast for business investment to grow by 8% this year, up from 5.1%, and averaging 8.4% per year between 2015 and 2018. This means it will be nearly three years before business investment has returned to its 2008 peak.

The OBR also expects no contribution to growth from net trade and for UK to keep losing export market share, despite Osborne's promises to get Britain exporting.

"There is a long way to go before our investment spending levels (in relation to GDP) match those in our competitors," blogs Tony Dolphin, senior economist at the IPPR think-tank.

Samuel Tombs, UK economist at Capital Economics, told HuffPostUK that factors including the upcoming General Election, the Scottish referendum and the UK's referendum on its place in the European Union could make firms think twice before breaking into their reserves to invest.

"Those factors are perhaps making some businesses more reluctant to make the more long term investment decisions at the moment," he said.

George Osborne may have billed his Budget as pro-business, but he may have to do more to get investment back to its pre-recession peak in less than three years.

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