Overview

  
Indexation is a key tool used by governments to adjust the value of government programs for changes in the level of prices, living costs or wages. In general, indexation aims to maintain the relative value or real value of policy settings over time – for example, to ensure that recipients of the Age Pension can continue to afford the same amount of goods and services as prices increase.

Wages generally grow faster than prices.  As a consequence, payments indexed to changes in wages increase more than payments indexed to a measure of prices. If prices grew faster than wages, the opposite would occur.

The choice of indexation parameter and how it operates is usually outlined in the enabling legislation for the program. While payment levels may be originally chosen relative to the payment levels of comparable programs, different indexation arrangements can result in significant divergences over time in both payment levels and overall program expenditure.

This has implications for program effectiveness, distributional outcomes and the overall budget bottom line. For instance, the difference between the single rate of Age Pension and the single rate of JobSeeker Payment has grown from a $16 per week (10%) gap in 1998 to a $174 (51%) gap per week in 2023, largely due to differing methods of indexation.

The majority of government revenue programs are not indexed. However, inflationary conditions may lead to improvements in the Commonwealth’s fiscal position, as revenue received from the increase in taxable income, predominantly from ‘bracket creep’, is likely to more than offset the increase in payments from indexation.

Inflation can significantly affect the Budget. For more insight into the budget impacts of changes in indexation arrangements, the PBO’s Build your own budget tool allows users to adjust indexation parameters to test their impact on the Commonwealth’s fiscal position. For example, the tool estimates that if the Consumer Price Index (CPI) was one percentage point higher than forecast in each year total government expenses would be around $29 billion higher over the 2022-23 forward estimates period, primarily due to the impacts of indexation arrangements.

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