Linking tax and welfare changes to inflation will make budgets less ‘ad hoc’, says committee

An Oireachtas committee has recommended that the Irish taxation and social protection system should be formally linked to inflation to make annual budgets less “ad hoc” and help reduce income inequality.

The committee on budgetary oversight said the establishment of formal indexation would improve transparency and limit the potential for “fiscal drag”. This is the phenomenon whereby tax bands, means-tested thresholds and welfare rates are frozen or fail to keep pace with price or wage inflation — making people worse off in real terms.

The committee said it was “cognisant” of the “additional costs” that would likely result from indexation but was calling on the relevant government departments to examine the issue further.

Green Party TD Neasa Hourigan, who chairs the committee, said concerns had been raised in its report on Budget 2022 about the introduction of “what seemed to us fairly arbitrary €5 increases to social protection payments”, prompting it to explore the merits of percentage increases instead.

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“Indexation can provide greater certainty and planning for fixed and low-income households as welfare changes and taxation levels can be known in advance,” Ms Hourigan said.

“The committee saw no grounds for excluding any particular payment or personal taxation measure for consideration.”

Its report on indexation, published on Thursday, comes soon after the Government indicated in its summer economic statement that it would consider indexing income tax bands in Budget 2023.

Speaking as the Central Statistics Office released new data showing Irish consumer prices rose to a 38-year peak of 9.1 per cent in the year to June, Ms Hourigan noted the subject had “taken on an even greater significance due to the continued increase in the cost of living”.

While indexing can be based on either price or wage growth — or both in some cases — the committee acknowledged there was a preference in some quarters for indexation linked to wage growth as it would have “the potential to have the greatest impact on limiting the growth in income inequality”.

People Before Profit TD Richard Boyd Barrett, deputy chairman of the committee, said it was asking the Government to take the issue “seriously” in light of surging price inflation.

He cited the failure to increase income thresholds for social housing as one example of the impact that the absence of indexing could have on people’s lives.

An Economic and Social Research Institute (ESRI) report published in May estimated that the share of households eligible to apply to their local authority for support with housing costs fell from 46.8 per cent in 2011 to 33.9 per cent in 2019.

“That’s a very big impact, and we don’t really discuss it. It hasn’t really been discussed until relatively recently,” Mr Boyd Barrett said, adding that the committee was aiming to “create a baseline of fairness”.

ESRI director Alan Barrett, who attended the launch of the report, said the ESRI had long used indexation as the “appropriate” starting point for modelling budgetary processes, but that this practice had not always gone down well with government ministers.

“In my years as director of the institute, this was one of the most problematic and contentious issues ever,” he said. Politicians “used to get extremely frustrated when we talked about indexation”, because it had the capacity to make their budget day largesse “look less generous”.