Debate resurfaces on automatic pay indexation

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Belgium is one of the few EU countries where pay is automatically linked to the cost of living, and in late January 2002 the slumbering debate on the issue flared up again. The cause was the abolition of the TV and radio licence fee in the Flanders and Brussels regions. Employers and trade unions discussed the way in which the abolition of this fee should be worked into the consumer prices index, which in turn influences increases in pay and social security benefits. With the social partners failing to agree, the federal Minster of the Economy decided that the effect of the fee's abolition would not be taken into account immediately.

With the introduction of a consumer prices index in 1920, Belgium was one of the first countries to register the consumption patterns of its households and the changes in prices of products and goods. Over the years, the indicator has been refined and today the index is an indicator of the change in price levels and inflation.

It is impossible to closely monitor all of the goods and services on the market, so a representative 'basket' of products and services has been put together that is assumed to reflect the spending patterns of the average household. Every month a team of 20 people, the so-called 'index officers', look at the prices of the approximately 500 goods in the basket. Their calculations ultimately result in the monthly index figure. Inflation is calculated on the basis of that figure. Inflation is the percentage rise of the index of a particular month with respect to the value of the index 12 months ago.

Index-linked pay

Together with Luxembourg, Belgium is the only country in western Europe that still has automatic index-linking. This means that pay and social security benefits are linked to the consumer prices index. The philosophy behind this linkage is to prevent the erosion of purchasing power by inflation. In practice, this indexation means that for every 2% rise in the cost of living, there is an automatic increase of pay and social security benefits of 2% (the so-called 'over-run' of the 'spilindex' or central index).

Abolition of TV and radio licence fee

The TV and radio licence fee was introduced by the Act of 26 January 1960 and was initially presented as a tax on the possession of luxury goods. Today radios and televisions are common items which means that a tax on them as luxury goods can no longer be maintained. At the end of 2001, the Flemish regional government, and later the Brussels regional government, decided to abolish this tax. As the TV and radio licence fee is one of the components making up the consumer prices index, its abolition has an impact on the index and thus also on changes in pay and social security benefits.

Effects on the index

The Index Commission (Indexcommissie/Commission de l'Index), a joint advisory body consisting of employer and employee representatives, had to look into the way in which the abolition of the TV and radio licence fee would be worked into the index. The calculation of the index for January 2002 turned out to be difficult. If the abolition of the radio and TV licence fee was taken into account, the central index would not be exceeded (ie prices would not have increased by 2% and there would be no resulting increase in pay and benefits).

The trade unions wanted to prevent the abolition of the radio and TV licence fee being incorporated into the indexation calculations for the month of January in one go. In order to safeguard purchasing power as efficiently as possible, the unions proposed including the abolition in the index as of April 2002, with the effect spread over six months. In fact, the TV and radio licence fee will not be abolished in one go for the entire Flemish population. It is being conducted in alphabetical order, which means that half of Flanders will feel the financial effect of the abolition as of April, while the other half will have to wait until October. The employer representatives stressed the precarious competitive position of Belgium due to high wage costs, and accused the unions of wanting to manipulate the index.

The two sides in the Index Commission could not reach an agreement and it was ultimately the federal Minister of the Economy, Charles Picqué of the French-speaking Socialist Party (Parti Socialiste, PS), who had to 'cut the Gordian knot'. He decided that the TV and radio licence fee would still be included in the index for the month of January, thereby exceeding the central index. With the central index being exceeded in January, social security benefits and civil service pay will rise by 2% in February and March respectively. This means a significant additional outlay for the government and employers of around EUR 130 million.

Reaction of the social partners

The decision of Minister Picqué brought a sharp response from the employers' organisations. The Federation of Belgian Enterprises (Verbond van Belgische Ondernemingen/Fédération des Entreprises de Belgique, VBO/FEB) had no hesitation in using the dispute to reopen the debate on the system of index-linked pay. According to the central employers' organisation, measures and decisions that increase wage costs are harmful to Belgium's competitive position and lead to a reduction in employment. The automatic linking of pay to the index is one of the causes of high wage costs.

The unions said they were satisfied with Minister Picqué's decision. Their argument that the financial benefit of the abolition of the TV and radio licence fee would only be felt later in the year was accepted by the Minister, resulting in the central index being exceeded and thus in the pay increase.

Commentary

The system of automatic index-linking of pay and benefits has often come under fire from employers. Past governments have never gone further than temporary manipulations of the indexing system. That was the case in 1981, for example, after a currency devaluation. In 1994, a 'health index' was also brought into being alongside the consumer prices index. This index does not take the prices of alcohol, petrol and tobacco into account, and thereby neutralises the sometimes sharply fluctuating oil prices. It also avoids increased government-imposed taxes on alcohol, tobacco and petrol leading to a 'wage-price' spiral.

The recent index incident was seized on by employers to open again the debate on indexation. It will nevertheless be particularly difficult to abolish the system. Index-linked pay is sacred to the unions and in their view cannot be touched. It is a breaking point around which their members can easily be mobilised. (Jürgen Oste, TESA-VUB)