What are Ways and Means Advances to HM Government?

Ways and Means Advances to HM Government is an entry that appears on the Bank of England’s Balance Sheet. As of the end of 2008, the figure stood at £369,847,840. Prior to 2000, this was basically the Government’s overdraft facility. The Bank of England provided a short term loan to balance the governments day to day spending.

An extract from the Treasury archives says:

When daily central government expenditures, receipts and net borrowings produce an end-of-day shortfall, the fine-tuning is provided by overnight borrowing from the Bank. Essentially this ‘Ways and Means’ advance is made by running down other assets held by the Bank that back the note issue. A daily surplus in turn reduces outstanding Ways and Means borrowings. (If there were no Ways and Means borrowing outstanding, a surplus would be put on deposit with Banking Department). Changes in the level of the Ways and Means advance happens automatically at the end of each day as the Bank calculates central government’s final cash position and adjusts the Ways and Means advance accordingly. Both borrowing and lending is done at the Bank’s 14-day repo rate.

In April 2000 the responsibility for government cash management moved from the Bank of England to the Debt Management Office. The balance of the “Ways and Means” account was frozen and is gradually being repaid. More info can be found in the 2008 Debt and Reserves Management Report:

The Ways and Means Advance is the Government’s overdraft facility from the Bank of England. Before the responsibility for Government cash management was transferred to the DMO, in April 2000, the Bank of England managed the daily changes in the Government’s net cash position by varying the Ways and Means overdraft. To finance changes in the level of this overdraft, the Bank undertook daily operations in the short-term money markets.

However, once the DMO assumed the role of Government cash manager, it no longer needed to use the Ways and Means Advance for this purpose, as the DMO uses market instruments to manage the Government’s cash position. At the time of transition, the outstanding balance of this overdraft was £13.4 billion.

The amount of the Ways and Means Advance was frozen (as announced in 1997 ) at the time of the transition to the new cash management system. At the same time, the Government also expressed its intention to repay the balance of the Ways and Means Advance. This balance was left effectively unchanged at £13.4 billion until January 2008.

In 2007-08, the Government made a partial repayment of £6 billion of the Ways and Means Advance. The rationale for repaying part of the Advance was to provide the Bank of England with additional flexibility to manage its own balance sheet. From the Bank’s perspective, the presence of a large asset that cannot be traded limits its flexibility to manage its balance sheet.

The interesting part is that the BoE uses this asset to back it’s bank note liabilities. So when the government repays the money, it must switch to other assets. This is described in a treasure note as:

Prior to the transfer of cash management from the Bank of England to the Debt Management Office the Ways and Means facility had two functions. It was an overdraft facility for the Government’s cash management function. But it was also an asset backing the Bank’s note issue. The Bank still require assets to back the note issue and would replace a shortfall below £17 billion in the Ways and Means facility with other assets.

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