With lockdown likely to be extended, Treasury can draw on billions in extra funds to support cashflow

The Treasury has announced it is to extend its overdraft facility at the Bank of England in a fresh sign of the mounting financial pressure on the government caused by the Covid-19-enforced lockdown of the economy.

Amid growing speculation that the quarantining will be extended next week, the Treasury said it needed extra firepower to support its cashflow and to ensure financial markets ran smoothly.

The Treasury has a long-established overdraft facility at the Bank through the “ways and means” facility. It currently stands at £400m but at times of crisis the chancellor can draw on it as a source of cash, and during the 2008 recession it rose to £19.8bn.

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The sudden closure of businesses and the furloughing of workers has resulted in the drying up of tax revenues, forcing the Treasury to call on its overdraft facility to supplement the money it raises from the sale of government bonds.

The prime minister’s official spokesman said: “The Bank of England will temporarily extend use of the government’s longstanding ways and means facility to help government cashflows and provide a temporary short-term source of additional funding.”



Pressed if the government was running out of money, he said: “The government will be raising the finance through the debt markets and continues to use the markets as a source of financing. For example, there have been four debt auctions this week and they all have been successful.”

In a joint statement, the Treasury and the Bank said they had agreed to extend the use of the ways and means facility as a temporary measure during the disruption caused by Covid-19.

They said the government would continue to use the markets as its main source of financing, and its response to Covid-19 would be fully funded by additional borrowing through normal debt management operations, under which government gilts are sold to investors.

“Any use of the W&M facility will be temporary and short term. As well as temporarily smoothing government cashflows, the W&M facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets.”

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By stressing that the use of the overdraft facility will be short term and that any extra borrowing would be repaid as soon as possible this year, the government has sought to reassure financial markets that the spiralling cost of Covid-19 will not be met by the Treasury ordering the Bank to print money to finance its spending.

Both the chancellor, Rishi Sunak, and the Bank’s governor, Andrew Bailey, are keen to quash speculation that the cost of the lockdown will eventually force the government into monetary financing, also known as “helicopter money”.

In the short-term, the financial markets were reassured by the insistence by the Bank and the Treasury that the overdraft was temporary, with little movement in the pound or the yield – interest rate – on government debt.

But some analysts believe that the cost of the lockdown – likely to involve a minimum of £200bn of borrowing in the current financial year – will eventually force the government to embrace monetary financing.

Fran Boait, executive director of the campaign group Positive Money said: “It is welcome that the Bank of England is using its power to create money to directly finance government spending, after denying that such a tool was on the table.

“Direct monetary financing allows the government to deliver the necessary spending to save lives, while reassuring the public that they will not be overburdened with future debt repayments.”

David Owen, chief European economist at Jefferies investment managers, said: “To be clear, at this stage we do not view the announcement that the UK government is set to tap the ways and means overdraft facility it has at the Bank of England as part of an inexorable move towards longer-term monetary financing of the UK’s budget deficit. But it is another indication of the unprecedented scale of what is happening all around us.”