Businesses stockpiling deposits including wage subsidies while making strong profits
Wednesday, 9 December 2020
Businesses are hoarding cash raising questions about how many really needed the wage subsidy – and whether any more will pay it back.
By October 2020 New Zealand businesses had $104.5 billion in bank deposits, $16b more than in February, ASB Bank chief economist Nick Tuffley said.
The stockpiling of cash was likely to be a combination of retained earnings and Government stimulus in the form of wage subsidies that had been paid out.
Businesses’ appetite for borrowing was weak, and they had been stockpiling deposits in banks, waiting for any further impacts on the economy. Businesses were also paying off debt and were wary of taking on any more, Tuffley said.
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The bulk of the $16b growth, about $12b, had happened by the end of April, when the wage subsidies were being paid out. The $16b growth in eight months was the equivalent of three years’ growth in normal times, Tuffley said.
With hindsight, perhaps not as many businesses needed the wage subsidy to survive, but it gave businesses the confidence to keep going, Tuffley said.
Auckland University professor of financial accounting, Jilnaught Wong, has been studying the 50 largest companies on the New Zealand sharemarket who took the wage subsidies.
“My argument is while they met the drop in revenue criterium when you look at their total performance over their financial year they didn’t need it.”
Wong said in times of crisis government came up with simple solutions. The Government did the right thing to support businesses but it was rushed and the ramifications not thought through.
“I think it should have been a forgiveable loan.” Companies in strife would not have to pay it back but big, profitable companies paying dividends like the 50 largest on the NZX should have had to return the subsidies.
Wong had heard that companies applied for the wage subsidy and received the money the following day.
There were other conditions as well to qualify for the wage subsidy, like businesses using their cash reserves and engaging with their banks for help.
“If these guys are stockpiling cash they have not exhausted their cash reserves,” Wong said.
About $14 billion in wage subsidies have been paid out and only $510.4m has been paid back.
Finance Minister Grant Robertson has said that no one could say what would have happened if the subsidy support had not been put in place at a time when businesses were having to make hurried decisions in the face of a global pandemic.
PwC executive director of strategy and digital transformation Andrew Jamieson said the purpose of the wage subsidy was to help businesses retain jobs and that had worked brilliantly.
One of the questions was whether the qualifications for the subsidy were stringent enough. Jamieson said “given the circumstances they probably had it just about exactly right”.
PwC was seeing a lot of businesses with very healthy balance sheets but that was not equally distributed and depended on sectors they were in. There was still a number of areas where businesses were “in real pain”.
He did not think all the uncertainty had “washed through” yet and businesses with healthy balance sheets was not a bad position for a country to be in as it progressed through the pandemic and waited to see what the long term economic impacts would be.
What would be hard to unpick now was how much confidence did the wage subsidy create in the community to allow the volume of business trading to continue and how did the backstop of the wage subsidy affect people and businesses’ propensity to keep spending.
Charity and not-for profit adviser Dr Michael Gousmett, an adjunct fellow at the University of Canterbury, said the huge growth in business deposits indicated businesses had been rorting the system.
“The good faith I understood Government expected businesses to apply if they were in trouble, clearly there has been a breach of that good faith on the part of those businesses, and I think that is an absolutely appalling situation.”
It would be multiples of that amount that had to be paid back over many years by the Government.
“If businesses are holding cash to that extent and crying that they are struggling because of the economy, somebody’s telling porkies.”
“Now that they are going and are hoarding cash they should be paying it back,” Gousmett said.
Stuff claimed $6.2m in wage subsidies for 907 staff.