Fiscal hawks dislike the idea, but indexing is very popular in Belgium, where both public and private sector wages are tied to inflation.
Workers there could see automatic pay rises of close to 8pc next year as a result of spiking prices.
But economists and employers say ‘indexation’ – where wages rise in lockstep with inflation – is flawed and disproportionately benefits high earners, while harming Belgian firms.
“It’s a complicated system,” says Xavier Debrun, an adviser at the National Bank of Belgium and a member of the European Fiscal Board, the bloc’s budget watchdog.
“You have to put in place a very complicated mechanism to make sure that if you have indexation, on the one hand, you must also have some protection of competitiveness on the other hand.”
The system is backward-looking, with most sectors awarded pay rises in January based on the previous year’s inflation rate (minus alcohol, tobacco and petrol costs). This year, it worked out at just over 3.5pc.
Public sector employees – along with welfare recipients and pensioners – also see automatic hikes when inflation rises above 2pc.
Built in to the system is what Mr Debrun calls an “extremely centralised” process of annual pay negotiations, which he says leads to a lack of “differentiation” between sectors, firms and regions.
“Historically, it’s a kind of sacred cow, so you can’t touch it,” he says. “But it’s a pretty regressive way to protect people against inflation.
“Indexation certainly does not protect fully the [people on a] lower income. People who are in the higher end of the income distribution are certainly over-compensated because they have a high salary.”
Nine out of 10 employers surveyed recently by Unizo, the association of Flemish businesses, say the system is “untenable”, with 32pc set to postpone investments and recruitment in anticipation of automatic wage increases.
But Philippe Lamberts, a Belgian Green MEP and co-chair of the EU green coalition in the European Parliament, has little sympathy for them.
“When companies are saying, yes, this hurts competitiveness, what they mean – but they don’t dare to say – is it hurts profits and dividends. But you know, I am not concerned that capital owners suffer a bit. It’s their turn. These are not ones who need to be protected.”
Belgium is one of only three eurozone countries – alongside Cyprus and Luxembourg – that applies automatic wage indexation in the private sector.
France, Malta and Slovenia index social or minimum wages only, covering a small proportion of the workforce.
In Spain, most private sector wages are hiked retroactively if inflation jumps above 2pc.
Public sector wages are partly or fully linked to inflation in only a handful of countries, apart from Belgium.
In Ireland, there has been increasing talk about how to shield welfare payments – and wages more generally – from spikes in the cost of living.
The consumer price index hit 7.8pc in May, and is predicted to average 7.1pc for the year, according to the Economic and Social Research Institute.
As a result, it would cost the Government €2bn to fully link public sector wages and welfare to inflation this year, the Irish Fiscal Advisory Council estimated recently.
While that is affordable this year, it won’t be next year, the Fiscal Council said – unless the Government is prepared to raise taxes or cut spending elsewhere.
Tánaiste Leo Varadkar hopes to use “tax indexation” – changes to tax bands and credits – to shield private sector workers from rising prices.
The US has a similar system in place to prevent “bracket creep”, where inflation pushes people into a higher tax band or erodes the value of tax credits.
Tax bands were already widened by more than a €1,000 in Budget 2022, while the main tax credits were bumped up by €50.
“Workers should not have to rely on their employer being profitable enough to get a pay increase,” Mr Varadkar told the National Economic Dialogue this week, calling for a “comprehensive anti-inflation strategy” that also includes cheaper childcare and a welfare boost.
But calls for more equity in the private and public sectors have grown after last week’s revelation that highly paid civil servants are in line for pay hikes of up to 15pc under a pay restoration deal, almost twice the current rate of inflation.
Earlier this month, Mr Varadkar outlined plans for a new living wage, to be phased in from next year and set at 60pc of the Irish median salary, or €12.17 per hour in 2022.
That is less than the €12.90 recommended by the independent Living Wage Technical Group, and well below what opposition parties want.
For now, indexation is still an academic discussion here.
Niels Thygesen, the head of the European Fiscal Board, advised against it this week, saying it can’t fix the current inflation crisis, which is a result of pandemic and war-induced shortages.
“It would make our crisis look more like the 70s,” he said, referring to the oil price shock that caused a worldwide recession.
“One reason why the 70s was much worse, and developed into true stagnation, was that a number of European countries at the time had quite complete indexation mechanisms.
“There was no acceptance that this was a terms-of-trade loss and could not be compensated in this way.”
