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Companies' dependency culture

UK company profits have become more dependent on what governments and households do, and less dependent on what companies themselves do
Companies' dependency culture

Both main parties are promising to raise public spending after the election. This matters for company profits, because these are more dependent on government action than you might think.

To see this, we need to understand the circular flow of income and how it affects profits in aggregate, what follows is a story about total profits, not those of an individual company.

The key thing here is that one person's spending is another's income, and vice versa. This means that wages, in aggregate are not a cost to companies as long as workers spend them on UK-produced goods and services. If this happens, what firms lose at the back door in costs they recoup through the front door in revenues. In the same way, capital spending adds to profits to the extent that investment goods are made in the UK, because this means that one company’s capital spending is another’s orders. Similarly, government spending adds to profits unless it is offset by taxes. So too do exports, unless offset by imports.

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