UK Government Asks Bank of England to Increase its Overdraft

- Overdraft facility expanded for first time since crisis of 2008
- Govt. commits to repaying loan by year-end
- Comes amidst surge in demand for cashflow
- Job retention scheme currently being rolled out

Image © Gov.uk

The UK's Treasury has agreed with the Bank of England to increase its overdraft, known as the Ways and Means facility (W&M), in order to meet a surge in funding commitments to soften the economic impact of the coronavirus pandemic.

The W&M facility is the government’s pre-existing overdraft at the Bank and the Treasury says any drawings will be repaid as soon as possible before the end of the year.

Typically the government borrows by offering bonds on the financial markets, but this process can be lengthy and the government needs to immediately increase its income to fulfil commitments to businesses and staff that have been hit hard by the lockdown aimed at stemming the spread of Covid-19.

By going directly to the Bank of England the Government can borrow money in the present and repay it through the rollout of bond issuances over the course of 2020.

"The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations. Any use of the W&M facility will be temporary and short-term. As well as temporarily smoothing government cash flows, the W&M facility supports market function by minimising the immediate impact of raising additional funding in gilt and sterling money markets," read a statement by the Treasury.

The Treasury announced the overdraft extension as it begins to start funding a multi-billion pound programme to protect jobs, by offering to make available to employers up to 80% of the salary of any staff they would have looked to make redundant.

Jim Harra, permanent secretary and chief executive at HM Revenue and Customs (HMRC), told City AM the system was now being tested by a small number of employers and that it should be open by 20 April so companies are compensated by the end of the month.

The Institute for Fiscal Studies says the total financing needs of the government in the current financial year will amount to over £290BN, or around 13% of economic output.

Historically, the W&M account played a daily role in the government’s cash management, executed by the Bank.

When the Debt Management Office took on responsibility for the government’s cash management in 2000, the need for daily use of the W&M fell away. However, the facility remains available and has been used on a number of occasions since 2000.

The previous high for use of the W&M account was £19.9BN in 2008.

Ordinarily a standing balance of around £0.4 billion is maintained to support Exchequer cash management.

As of 8 April 2020, drawings under the W&M facility remain at £0.4BN.