UK central bank becomes first in the world to adopt direct monetary financing to fund government spending during the coronavirus crisis. This move demonstrates once and for all that the government need not depend on private markets to finance its spending.
This morning the Bank of England made the welcome announcement that it would expand the government’s pre-existing overdraft at the Bank, known as the Ways and Means facility, to provide the government with additional spending power for its Covid-19 response. The Bank was already indirectly financing the Treasury through its quantitative easing (QE) programme, but today’s step represents more direct coordination.
For years politicians used high levels of public debt as an excuse to justify brutal spending cuts. But now, by allowing the Treasury to spend without even increasing public debt, such excuses are well and truly shattered. Politicians will be left with no recourse to claw coronavirus spending back with draconian austerity measures once this crisis is over. We already knew that austerity was a deeply misguided economic project, this move further strengthens the argument that it should never be considered an economic necessity, while conclusively proving the existence of a magic money tree once and for all.
Governor Andrew Bailey had denied contemplating such a move at the start of the week, and in its statement the Treasury said the measure would only be “temporary and short-term”. But the Ways and Means mechanism, which we first called attention to nearly seven years ago, allows the government to spend without having to rely on private financial bond markets. This will ensure continued access to funding even if private debt markets are disrupted in the coming months which, given the economic fallout of the current crisis, they very well could be.
In being able to bypass the private bond market until the Covid-19 pandemic subsides, the UK public can rest safe in the knowledge that the government will not struggle to finance the costs of its new coronavirus response programs, such as the job retention scheme.
Positive Money has been campaigning for public money creation since our inception and we applaud the Bank’s announcement today as a sign that it is finally embracing all powers at its disposal to help the UK public during our greatest hour of need. We strongly encourage the Bank and the Treasury to continue using this facility in the long-term to support the public’s needs.
The levels of public spending needed to fight coronavirus, support businesses and protect people’s livelihoods during this crisis are necessary and unprecedented in living memory. This move by the Bank of England today thankfully confirms what we knew all along: the UK government faces no budgetary constraints in fighting Covid-19 – and it never did. Rather than an economic necessity, austerity was always a destructive political choice and today marks another nail in its coffin.