Source · Select Committees · Treasury Committee
Recommendation 11
11
Accepted
Paragraph: 65
Revisit arrangements for future Quantitative Easing considering value-for-money, public spending, and Bank independence.
Recommendation
We recognise that QE and QT are processes already well in train, and it may not be possible to make large changes to the arrangements made in 2009 and 2012 without impacts on the credibility of the UK macroeconomic framework. However, as we have noted, the Bank is undertaking QT in part to create space should it need to undertake QE or another form of balance sheet expansion in future. Given what we now know, any future QE should not proceed automatically under the existing arrangements. Instead, the arrangements should be revisited in the light of the implications for value-for-money, public spending and Bank independence that we outline below.
Government Response Summary
The government clarifies that future QE would not proceed automatically, as the Chancellor must authorise APF increases based on value-for-money assessments and Accounting Officer advice. It commits to keeping its approach to managing cashflows under review and considering lessons learned should QE be deployed again.
Paragraph Reference:
65
Government Response
Accepted
HM Government
Accepted
The Chancellor may authorise increases to the maximum size of the APF under the indemnity, being ultimately responsible to parliament for the spending implications. Each increase during successive rounds of QE was accompanied by Accounting Officer advice assessing the change against the Managing Public Money framework given the potential direct implications for public funds through the contingent liability created by the indemnity. This includes assessments for regularity and propriety, and assessments of the expected fiscal and macro-economic impact. This rightly reflects the responsibility on HM Treasury to properly assess the case for committing new public expenditure through expanding the APF indemnity and the associated contingent liability. The assessment does not assess decisions taken by the MPC in the first instance, but the increased contingent liability for the exchequer of an expanded APF. The Chancellor supports the MPC’s independence to achieve its monetary policy objectives, and each increase in the contingent liability from the maximum authorised size of the APF supported the MPC using QE to achieve those objectives. Since the MPC voted to unwind the APF in February 2022, the maximum authorised size of the APF indemnity has been reduced accordingly. As agreed in an exchange of letters between the Chancellor and the Governor, this takes places every six months. Reductions to the maximum size of the indemnity similarly reduce the size of the contingent liability for government. As such the Chancellor’s decision does not require the same risk assessment during unwind. The Committee also asked whether there is a threshold at which the indemnity would not be provided. It is important to note that each decision by successive Chancellors to increase the maximum authorised size of the APF was done on a case-by-case basis. Each MPC decision to implement QE, for example in response to the pandemic and following the global financial crisis, was made in the context of Bank Rate already close to or at the effective lower bound. It was open to the Chancellor, and would be open to future Chancellors not to approve increases to the maximum authorised size of the APF under the indemnity if they did not consider the expansion value for money. The Treasury will of course keep under review its approach to best manage cashflows and consider any lessons learned in the future should QE be deployed again.