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.

What is the Cash Ratio Deposit Scheme?

As part of my ongoing research into money I’ve been trying to understand the Bank of England’s balance sheet, and while looking through it I noticed an account called Cash ratio deposits.

At first I thought this was something to do with Reserve Requirements (sometimes known as the cash asset ratio or liquidity ratio), where banks need to keep a certain amount of their assets as cash reserves in their vaults or with the central bank in order to be able to service withdrawal demands. However, although the name sounds similar, it is actually something entirely different.

The Cash Ratio Deposit (CRD) Scheme was set up in 1998 as part of the Bank of England Act that passed into law during that year. The purpose of the CRD scheme is described by the Treasury as follows:

Under the cash ratio deposit (CRD) scheme, institutions place non-interest
bearing deposits at the Bank of England. The Bank of England invests these deposits
and the income earned is used to fund the costs of its monetary policy and financial
stability operations, which benefit sterling deposit takers.

It only applies to Banks who’s elligible liabilities exceed £500 million. They must place assets equivalent to 0.11% of these liabilities as non-interest bearing deposits with the Bank of England. As of the end of 2008, the total CRDs listed on the BoE’s balance sheet (the Bank Return) were worth about about £2.5 billion. They aim to make about £100 million a year from investing these funds in order to pay for their financial stability operations.

So why do we have this somewhat complicted scheme instead of a simple fee or using seigniorage income? The Treasury attempt to answer this in a review document from 2003.

Almost universally, central banks fund their activities from general income including that arising from seigniorage (no interest is paid to holders of banknotes) and foreign exchange reserves. In the United Kingdom the income from both these sources passes to the Government: theprofits of note issue are paid in full from the Bank of England to the Treasury, and the Exchange Equalisation Account belongs to the Government, not the Bank of England.

Interesting, the government takes all the profits from printing money in the UK. It would prefer the private banks to pay for these financial stability operations.

A change from cash ratio deposits to a fee-based scheme would require primary legislation.

Is it really that hard?

The BoE looks to make about 6% a year (good luck in 2009!) from investing their CRDs. Why not simply charge institutions with more than £500 million in eligible liabilities – 0.11% * 0.06% of that amount as a fee?

I’m sure it would be a lot less effort than than trying to invest these funds successfully.

The Obama Apollo Project

Although I’m fundamentally a capitalist, and a strong believer in the power of free markets to allocate capital effectively, I’m not an absolute market libertarian. So whilst I’m convinced that an economy based on competition and creative destruction is far more able to generate productivity growth and technological advance than one that’s centrally planned, I do recognise that there are certain areas of industry that are often neglected or even avoided by the private sector.

Companies are bound by their shareholders to seek a profit, and so they are less inclined to invest in areas of ambitious scientific research where returns are neither immediate nor guaranteed, or in blue sky projects where the route to profit is not even apparent. It is in these areas, where the private sector is unwilling or unable to invest, that a government can in a way that’s beneficial to the long term success of an economy.

Although there have no doubt been many failures, there are numerous examples of government-led research projects that have changed society for the better, e.g.

  • The Internet (US Government – DARPA)
  • Moon Landings (US Government – Apollo Program)
  • Radar (British Air Ministry in World War 2)
  • GPS (US Government – Department of Defense)

It’s because of this, that I’m optimistic that if (when?) Barack Obama becomes President he is going to support a government-led, apollo-like, energy project to rapidly accelerate the world’s transition to renewable fuels, whilst turbo charging the economy and weaning us off our dependancy for cheap credit at the same time. And I’m optimistic that it could succeed.

According to Time Magazine:

He wants to launch an “Apollo project” to build a new alternative-energy economy. His rationale for doing so includes some hard truths about the current economic mess: “The engine of economic growth for the past 20 years is not going to be there for the next 20. That was consumer spending. Basically, we turbocharged this economy based on cheap credit.” But the days of easy credit are over, Obama said, “because there is too much deleveraging taking place, too much debt.” A new economic turbocharger is going to have to be found, and “there is no better potential driver that pervades all aspects of our economy than a new energy economy … That’s going to be my No. 1 priority when I get into office.”

If Obama really does make it his number one priority when he gets into office, and he has the electoral mandate behind him, then that political will could make a huge impact.

The New Apollo Program from the Apollo Alliance

The idea for a new Apollo program to build a new energy economy has been around since the Apollo Alliance was founded in 2004. According to their website, the program calls for investing $500 billion over 10 years on steps to:

  • Generate clean power (25% from renewable sources by 2025)
  • Improve energy conservation and efficiency
  • Cut energy bills
  • Improve US technological and industrial capabilities
  • Create 5 million green-collar jobs

These are pretty ambitious targets, particularly as they want to cut energy bills at the same time as raising the amount of power from renewable sources, but so was putting a man on the moon!

So how much is $50 billion a year?

10 Years, $500 Billion, 5 Million Jobs
The program would generate and invest $500 billion over 10 years. An annual investment of about $50 billion a year, the Alliance notes, is a smaller share of the gross domestic product than what was spent on the Apollo space program, about one-third of current spending in Iraq, and roughly half of what was just lent by the federal government to insurance giant AIG.

Could it be that by backing this project, Obama has the answers to see us out of the financial crisis and solve global warming simultaneously? If we can put a man on the moon, we can certainly hope so.


– Time.com: Why Barack Obama is Winning

– Apollo Alliance: The New Apollo Program

Fidler’s castle

I have just seen a fantastically creative scheme to get round the restrictive planning laws that we have in the UK.

Fiddlers castle

On New Homes From Hell (on ITV1) a farmer called Robert Fidler described how he built a house in secret, surround by massive haystacks, and then kept it hidden for four years.

He owned some green belt land, but knowing that he wouldn’t get planning permission to build a house on it, he decided to try to exploit a loop whole in the law which states that if a council doesn’t object to a new build property after four years, then planning is not required.

So all Robert needed to do was hide his house for 4 years.



Then once the time had passed, he pulled down the bales of hay to reveal his very own castle.


Fiddlers castle 

Robert has lived there since August 2006, but he is not in the clear yet. The council are trying to have it demolished saying that, since no-one was given a chance to see the house, the 4 year exemption is invalid.