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.
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, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.”
The statement 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.”
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”.
Thinktanks such as the Institute of Fiscal Studies say it is hard to estimate the financial price the government will pay as a result of mothballing large chunks of the economy, but even a relatively short lockdown will send public borrowing to at least £200bn this year.