Firstly, let me emphasise the important role which automatic stabilisers play in smoothing the economic cycle. In the absence of discretionary policy intervention, the fixed level of welfare payments, for example, means that the welfare system stimulates aggregate demand within the economy relatively more during a downturn than during a period of expansion. This effect is what is known as an ‘automatic stabiliser’, where the tax or welfare system effectively ‘leans against the wind’ in a counter-cyclical manner. In this regard, it is worth noting that linking welfare payments to wage developments in the economy could represent a pro-cyclical policy action, serving to reduce the operation of automatic stabilisers. This is because the level of payments would rise in line with income increases, i.e. in an upturn, and decrease as incomes fall, i.e. in a downturn.
In addition, it is important that, as Minister for Finance, I continue to have the discretion to respond to cyclical changes in the economy. A commitment to wage indexation of this nature would significantly curtail this discretion, as it would absorb substantial budgetary resources. In fact, the ESRI has examined the impact of indexing both the tax and welfare system to wage inflation, with a recently published report estimating that this would cost the Exchequer some €1.2 billion annually.
For these reasons, whilst the Roadmap for Pensions Reform includes a commitment specifically in relation to the indexation of State Pension payments, indexation is not being considered as an across the board measure to support the operation of automatic stabilisers.