UK government gets a bigger overdraft to help pay the bills

Apr 9, 2020

The British government is getting a bigger overdraft at the Bank of England, a further sign of the severe strains on its finances caused by the economic fallout of the coronavirus pandemic

LONDON (AP) — The British government is getting a bigger overdraft at the Bank of England, a further sign of the severe strains on its finances caused by the economic fallout of the coronavirus pandemic.

In a joint statement Thursday, they said the government's so-called “Ways and Means” facility will be temporarily expanded to give the government “a short-term source of additional liquidity .... if needed to smooth its cashflows and support the orderly functioning of markets through the period of disruption from COVID-19.”

The facility currently stands at 400 million pounds ($495 million) but it could rise to tens of billions if the experience of the global financial crisis is anything to go by. In 2008, the British government increased its use of the facility to 19.9 billion pounds.

The move is ostensibly designed to help the government pay its bills in a smooth manner over the months to come, given the deterioration in its public finances. And to subsequently pay the money back.

As a result of the lockdown, government revenue will fall sharply as firms go bust and many people lose their jobs and stop paying taxes. Meanwhile, immediate expenses, such as paying benefits to the newly unemployed have swelled.

Usually, the government can easily manage its day-to-day expenses by regularly issuing debt in bond markets. However, in the current extraordinary times it could need the extra space for its finances.

The prime minister's official spokesman, James Slack, said the government will continue to raise money in debt markets and noted that there have been four successful debt auctions this week. He said the overdraft is intended to "help government cash flows and provide a temporary short-term source of additional funding.”

The move has stoked talk that the Bank of England may end up directly funding the government through the crisis — a move considered anathema by many economists because it could fuel inflation.

James Smith, developed market economist at ING Bank, says that the bigger question is whether the Bank of England gets involved if the government refinances its overdraft. “For the moment, the Bank is keen to make clear its independence means such policies are not on the cards.”