Source · Select Committees · Treasury Committee
Recommendation 17
17
Accepted
Paragraph: 76
Clarify whether Chancellor’s APF authorisation is substantial or formal and explain macro-economic impacts
Recommendation
The Treasury should clarify whether the Chancellor’s authorisation of changes to the APF involves a substantial decision or is only a formal endorsement of the MPC’s decision, and explain the extent of the assessment of macro-economic and fiscal impacts that accompanies each authorisation. In particular, the Treasury should confirm whether or not there was a threshold at which the indemnity would not be provided.
Government Response Summary
The government clarifies that the Chancellor's authorisation of APF changes focuses on the increased contingent liability and supports MPC independence, with risk assessment differing for expansion versus unwind. It confirms that decisions to approve indemnity increases are made case-by-case based on value-for-money assessments, implying no automatic threshold.
Paragraph Reference:
76
Government Response
Accepted
HM Government
Accepted
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.