The ways and means account

The government banks at the Bank of England, and the Ways and Means account is the overdraft on that account. It has been there since 1694, when lending to the Crown was the entire purpose of the Bank. There is a balance on it today, published every week. It was extended in April 2020 to smooth government cash flow if needed. It was never drawn on. The fact that it was there was enough.¹

We know that no one will invest in building a factory until they are certain they can sell its output. The programme in this report provides the order book. But the money for that investment arrives in chunks. Pension trustees meet quarterly. An ISA season runs to the tax year. If you’re waiting for the money before commissioning an order, you’re letting money be the constraint. We have spent this whole report freeing us from that constraint. That freedom uses Britain’s overdraft.

Here is what happens when it is used, and it is duller than it sounds.

The Treasury draws the money. The Bank credits the government’s account. At this stage, it’s just an electronic line on a spreadsheet. No real money has gone into the economy, and no interest is paid.

Then the government uses the overdraft money to pay a public body or a private contractor. At that point it enters the real economy. The contractor banks with Barclays, say. So the Ways and Means overdraft goes down, the contractor deposits their money in their bank account at Barclays, and so Barclays’ reserve account at the Bank of England goes up by exactly the same amount. That is the whole operation. The money did not appear from nowhere and vanish into the economy. It moved from one account at the Bank of England to another.

The Bank pays interest on reserves at Bank Rate, which is where the twenty-five billion a year figure in the previous chapter comes from. So a drawing costs the government Bank Rate in interest for as long as it is outstanding. That’s about the same rate the government normally pays for short term borrowing.

“This is not free money. It is an overdraft, priced at Bank Rate, from a bank the public owns.”

We have run the operation before. Between 2009 and 2021 the Bank created just under £900 billion of reserves and used them to buy government bonds that had already been issued, from people who already owned them. Nobody called that printing money. They called it monetary policy. So the argument that you can’t just create central bank reserves has not been credible since 2009.²

Except that time Britain came out of it with no additional houses, no additional generating capacity and no additional engineers.

What the Ways and Means account gets you is control.

A gilt is a promise you must persuade a trader to accept on a particular morning, at a price that the bond market chooses. Chapter 2 described a morning that went rather badly. The government’s Bank of England reserve balance is a government promise to an institution the government owns, at a rate set in accordance with a government mandate.

That doesn’t mean there is no market influence. It moves to the interest rate, which is set by the Bank. But the interest rate has an effect on sterling, albeit amongst other factors, which Chapter 9 deals with. That constraint is real. If Britain needed to defend sterling, raising rates might be the method chosen to do it, and those rates are what sets the price of this overdraft. If Bank Rates fall, the overdraft gets cheaper. It is still borrowing, but the cost is set by the Bank Rate, which moves slowly, and under the mandate to meet the government’s economic objectives.

The account is a buffer and not a source. It is there to smooth the release of capital to fund the programme, so that the constraint is real resources – skilled labour, building materials, production lines.

The instruments are built to clear it. A National Infrastructure ISA is the account a saver holds. National Development Stock, in a range of term lengths, is what that account buys. We propose using an instrument called an Exchequer Note to record a drawing on the overdraft. This is simply an instruction from the Chancellor to the Bank to deposit money in the Ways and Means account. Then when Stock is issued, the proceeds retire the Note, and a liability at the central bank changes to a liability owed to a saver. Tax receipts could do the same job, or the rent from the homes built, or the bills from the grid the drawing paid for. Which route to take is an ordinary Treasury debt management decision. But our industry, our social housing, our cheap renewable energy no longer stalls for lack of investment.

The Bank is publicly owned and the facility is statutory, so a drawing cannot be refused — and that is precisely what critics of this mechanism worry about. So publish each one. Dated, termed, with a stated retirement. Currently, the government doesn’t have to, but we advocate transparency.

This smoothing facility gives us control over investment. Certainty has a value of its own. No one builds a factory with stop-start demand. Sure, people want homes, people want better transport. But there’s a coordination problem – the money and the supply are out of kilter. So by guaranteeing demand, we can guarantee that an increase in supply capacity will follow.

Without this guarantee, we keep importing. We don’t train engineers. We don’t build enough social houses. With the guarantee we build the homes, the grid, the transport and generate the long term returns. That’s supply right here, improving our balance of payments, strengthening sterling.

The state can coordinate this because it can act in a way that individual commercial actors cannot. It can create the demand, and because it collects around 40p of taxes for every pound it spends, physical projects can be viable for the state when they are not for commercial investors.

It’s worth being open and clear: Article 123 of the European treaties exists to prevent exactly this, and Britain negotiated an explicit exemption from it. The objection has a name: fiscal dominance. A government borrowing from a central bank whose mandate that government writes.³

The answer is not that the risk is imaginary. It is that the constraint is physical, the guardrail is published, the balance has to clear, and every drawing can be seen.

None of this needs legislation. The account exists. It was drawn six years ago and repaid. It is the smallest instrument in this section, and the only reason it gets a chapter is that it is the one that’s most misrepresented.

Footnotes