As profits grew through the 1990s and in the new millennium (until the recession hit in 2008), companies were able to benefit from higher retained earnings. They used these internally generated funds to help build their businesses either through expansion of existing facilities, by updating plant and machinery or through mergers or acquisitions.

The chart below (see Chart 15.3) compares companies' retained income with the amount of money which companies spend on investment, both fixed capital investment (plant and machinery and buildings) and stock building.

The bars represent the difference between the two flows, the net borrowing requirement.

• Following the trough of the recession in 1992, investment grew steadily through the 1990s, mirroring the improvement in the economy generally and the improvement in retained earnings.
• The slow down in the global economy in the early 2000s brought a levelling off in investment spending for a time.
• Uncertainty led many companies to reconsider their capital spending programmes even though profits and, therefore, retained earnings were growing relatively strongly. As these uncertainties waned the investment path returned to one of steady growth at least until 2008 when uncertainty and a squeeze on retained earnings once again caused companies to reconsider their investment programmes.
• On balance, retained earnings are more or less sufficient to cover capital spending.
• The net borrowing requirement averaged less than £2 billion a year between 1990 and 2002 and since 2002, retained earnings have more than covered investment so that companies as a whole have been able to reduce their net financial liabilities, either by reducing their external debt, by increasing their financial assets or by a combination of the two.

Source: ONS