The Government said it has expanded its overdraft with the Bank of England to ensure it has sufficient cash to cope with disruption caused by coronavirus.
It said the central bank will directly finance the extra spending the Government needs on a temporary basis.
The Treasury and the Bank of England said, in a joint statement, that it would minimise the need to raise additional funding from bond markets or currency markets.
The Government’s bank account at the central bank, historically known as the Ways & Means Facility, will rise to an undisclosed amount.
Ministers will be able to spend more in the short term without having to tap into the bond markets, as a result of the move.
Any money drawn from the facility, which usually stands at around £400 million, will be paid back as soon as possible before the end of the year, the Treasury said.
The measure was last used during the 2008 financial crisis, which saw its value increase briefly to £19 billion.
In a statement, the Bank of England said: “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 Government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations.”
Downing Street said the Bank of England’s temporary extension of the use of Ways & Means is to smooth Government cash flows.
The Prime Minister’s official spokesman said: “The Bank of England will temporarily extend use of the Government’s long-standing ways and means facility to help Government cash flows and provide a temporary short-term source of additional funding.”
Pressed if the Government was running out of money, he said: “The Government will be raising the finance through the debt markets and continues to use the markets as a source of financing.
“For example, there have been four debt auctions this week and they all have been successful.”
Fran Boait, executive director of Positive Money, said: “It is welcome that the Bank of England is using its power to create money to directly finance Government spending, after denying that such a tool was on the table.
“Direct monetary financing allows the Government to deliver the necessary spending to save lives, while reassuring the public that they will not be overburdened with future debt repayments.
“It also ensures that the Treasury has access to funding even if Government debt markets are disrupted, as we have seen signs of during the coronavirus crisis.”