• The prices of public services will stop rising automatically according to the CPI
  • The Law will contribute to maintaining the purchasing power of citizens

The Council of Ministers today approved the Draft Law for the Deindexation of the Spanish Economy, for submission to the Cortes, as provided for in the National Reform Program. The ultimate objective is to contribute from the public sector to price stability and improve competitiveness by eliminating the practice of automatic price increases based on the CPI. The increases must be exclusively justified by the increase in service costs.

In a context of price stability and belonging to the single currency, automatic indexing leads to losses in competitiveness, with an impact on growth and employment. The Draft Law foresees the creation of a framework, mandatory for the Administration and indicative for the private sector, that favors price stability. Collective wage bargaining (both in the private sector and for public sector workforce), pensions and financial instruments are excluded from the scope of application.

The general rule of thumb for the public sector will be that indexing will not be possible. Price increases must be exclusively justified by the evolution of service costs. This breaks the inertia of automatic price increases, regardless of costs, and avoids the so-called second-round effects (price increases of certain products that directly affect others without any relation to each other).

In the private sphere, updates will be subject to the free will of the parties and if there is no explicit agreement, the update will not be carried out. If the agreement between the parties does not specify the reference index, the update rate proposed in this Law, the Competitiveness Guarantee Index (IGC) will be used. The variation of the IGC will be equal to the inflation in the euro zone less a correction factor that will allow to recover the lost competitiveness. It will have a 2% ceiling (ECB inflation target in the medium term) and a 0% floor.

The Law will contribute to maintaining the purchasing power of citizens. The basic public services covered by the rule represent approximately 7% of the Spanish family budget (about 36,000 million euros per year). A moderate evolution in the prices of these services reinforces the purchasing power of Spanish families, especially if their incomes have in some way been unrelated to the evolution of the CPI.

The Government has already foreseen, by means of an amendment introduced in the Budget Law, a transitional regime until the Law is approved by the Cortes. Thus, for contracts and parcels of the public sector, the revision of prices based on a general index is prohibited. The reviews will be carried out on specific indices that reflect the evolution of costs. Furthermore, the Project has eliminated the retroactivity initially foreseen for certain contracts.

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