Dr. Karina Doorley:

To answer the Deputy’s first question, the lower number, the 10%, was for price indexation, and the 29% was for wage inflation. We indexed all the parameters of the tax benefits system that are currently in the model. There are some smaller benefits that we cannot model but, by and large, the tax benefits system is modelled. We included all of it. We also included indirect taxes. We should keep in mind that when we talk about indexing the tax and benefits system, we should also be thinking about the indirect tax system because excise rates that are set as a proportion of the unit of a commodity sold are not increased in line with inflation automatically. Indexing the indirect tax system in line with inflation actually results in an Exchequer gain, whereas indexing the rest of it, the direct tax and welfare system, results in an Exchequer loss.

We did the whole tax benefit system. If we were to index the welfare system in line with price growth, we would see welfare recipients receiving relatively less in real terms than workers. That should actually increase the incentive to work but it is also going to have an impact on poverty and inequality. That is because wage growth tends to be higher than price growth due to economic growth. From year to year there can be differences but in the long term, wage growth tends to be higher than price growth. If we were indexing the welfare system in line with price growth, we would see an increase in income and equality because those who are receiving welfare are seeing lower real income gains compared to those who are in work.