Human Services Economic Paper 1: What is Indexation?

This paper is a resource designed to provide information and commentary on the topic of indexation in human services systems. In it we consider the importance of indexation, and the impact poor indexation policy has on human services’ sustainability. We want to increase readers’ knowledge of this important area of sustainability management. To that end, we discuss:
• What indexation actually is;
• How appropriate indexation helps to support sustainability in the short- and medium-terms;
• What appropriate indexation models consist of; and
• What happens if the indexation model used is inappropriate.
Service procurement by governments is done via contracts which are agreed at a point in time and are funded as agreed at that point in time. Appropriate indexation is a short-term funding increase designed to support the purchasing power of funding in the face of cost increases experienced after the funding agreement has been implemented and which are part of the normal operation of the economy. These cost increases would threaten service sustainability if they were not met by indexation. Therefore, indexation is intended to support the consistent quality and quantity of service provision until a new contract for services is negotiated between the service provider and the funding agency. It is not usual for indexation to consider future changes in costs or to be used to support service providers where abnormal economic shocks (e.g. COVID-19) increase the costs of operation significantly. Therefore, indexation is one element required for service sustainability while regular and timely recontracting processes (e.g. tendering) combined with capital injections into the sector in the case of economic shocks (e.g. JobKeeper in the case of COVID-19) are also critical. Therefore, appropriate indexation does not solve the problem of cost increased but delays their impact.