Mr. Paul Johnson:

It depends what one is trying to achieve in the end. For welfare benefits and pensions, for example, if what we want to achieve is that those who are not in work share in the changes in living standards of those who are in work, then earnings is the appropriate measure to use. If, on the other hand, we believe we have them at some form of subsistence level, or at a level that we think is the appropriate absolute level over a period of time, then prices might be right. I think it is quite hard to justify price indexation over very long periods because we lose that link between the real living standards and what we are paying the payments for.

That is where we got with pensions in the UK by the early 2000s and it is where we are today on at least some welfare benefits.

When it comes to tax thresholds, again it depends on what one is trying to achieve. If thresholds are increased only in line with prices and in normal times, when earnings are going up faster than prices, the tax burden will be gradually increased. Given demographic pressures, pressures on spending on health and so on, one may want to increase the tax burden. That is politically a relatively easy way to increase the tax burden but, again, there is a lot to be said for transparency in that regard. Broadly speaking, the neutral method of indexation is probably to increase that in line with earnings or incomes such that the tax burden is not gradually increased. As I said, that is a clear policy option.