Committee on Budgetary Oversight has published the Report on Indexation of the Taxation and Social Protection System

Launching the report, Deputy Neasa Hourigan, Cathaoirleach of the Committee said “In the Committee’s post-budget 2022 report, concerns were raised about the inadequacy of the present ad-hoc system for setting Social Protection payments – usually an additional €5 per week – and how these flat-rate increases may not necessarily address the needs of the recipients. In that report, the Committee recommended that “consideration be given to percentage increases in payment levels.”

Deputy Hourigan said “It was on this basis that the Committee agreed to examine further the potential impacts and benefits of the benchmarking and indexing of the taxation and social protection systems, and how such a system might operate in Ireland. In light of the recent surge in the cost of living driven by levels of inflation not seen in decades, this topic took on even greater significance as the need to find ways to prevent further growth in income inequality and poverty levels came to the fore.”

The Deputy also stated “The Committee met with stakeholders in January and February 2022 to discuss how an indexing system might operate, the benefits which may accrue, and potential issues associated with indexation. The Committee discussed what type of payments, benefits or credits might be suitable for indexing; whether percentage price or wage growth was the most appropriate to link index rates to; how benchmarking payments would work in practice; the potential downsides to an indexed system; and the impact indexation may have on national budgetary sustainability.”

The Deputy noted that “Since the meetings were held, the issue of indexation has become more central to the Government’s plans to address the impact of high inflation. The Minister for Social Protection has acknowledged that the examination of the benchmarking and indexing of working age payments was now being considered. At the National Economic Dialogue 2022 a broader discussion of the topic took place, while in the Summer Economic Statement it was referenced that the Government will look to progress with the indexing of income tax bands in Budget 2023. It is intended that this report will add to, and further, those discussions.”

Read the full report here

Among the recommendations made in the report include:

1.     The Committee notes the ad-hoc nature of the current system of welfare and taxation and notes that at times of high inflation or wage growth it has the potential to further grow inequality which may be caused as a result in general at times of high inflation or wage growth.

2.     The Committee further notes that the current system of taxation and welfare may potentially result in disproportionate percentage changes and do not systematically account for price (or wage) inflation in a consistent manner.

3.     The Committee is of the opinion that indexation can provide greater certainty and planning for fixed and low-income household as welfare changes and taxation levels can be known in advance.

4.     The Committee notes the potential for “fiscal drag” when tax bands, means tested thresholds, and welfare rates are frozen or fail to keep pace with price or wage inflation, resulting in an increased burden of taxation, reduced purchasing power, and the potential loss of eligibility for supports (e.g., medical cards, housing subsidies, childcare subsidies, student grants etc.).

5.     The Committee is of the opinion that the establishment of an indexation system has potential for improved transparency around the process of identifying and setting the annual increases to welfare rates and other parameters selected for indexation.

6.     The committee believes that separately benchmarking each indexed parameter is necessary to develop a properly functioning indexation system in order to achieve policy goals.

7.     The committee welcomes the commitment in the Programme for Government that income tax credits and bands will be indexed linked from Budget 2022 onwards.

8.     The Committee notes that benchmarking and indexation can aid in providing an evidence-based analysis in setting welfare and taxation payments.

9.     The Committee notes the additional measures which may be used by Government to alleviate cost of living issues for the public, namely, greater spending on universal basic services such as affordable childcare, housing, public transport etc. However, the Committee shares the stakeholder view that additional spending on such services should be done in tandem with a system of indexation.

10. The Committee acknowledges the complexities around introducing a system of indexation acknowledges the need for access to timely and accurate data from Government Departments. The Committee further believes that this increased cooperation and data sharing practices would benefit the effective operation of the State, beyond the system of indexation.