• The objective is to contribute to price stability from the central, regional and local Administration
  • The general norm is the non-update based on inflation to avoid effects of ‘second round’ on the economy

The Council of Ministers approved today the Draft Law on the Deindexation of the Economy, as provided for in the National Reform Plan. The objective is to contribute from the public sector to price stability and the improvement of competitiveness, in line with the wage moderation agreement between social agents and other reforms such as pensions. The general principle is to disconnect the updates of income, prices and other concepts of the Public Administrations from the Consumer Price Index (CPI) and promote the adoption by the private sector of the same practice. The entry into force is scheduled for January 2014.

The new law will apply to all Public Administrations (central, regional and local) and will have a broad effect on family economies. It is estimated that the expenses of regulated goods and services that affect households account for 7% of the total, about 36,000 million euros per year, 3.5% of GDP. As for the private sector, adoption will be voluntary although, if there is no explicit agreement, non-indexation will be applied automatically.

Collective wage bargaining (both in the private sector and in the public sector labor staff), pensions and financial instruments are excluded from this standard. For everything else there will be no indexing to general price indices. Any revision of regulated prices must be justified by the evolution of costs and not by inflation. This is about avoiding the so-called second round effects in the economy, one of the elements that has generated the most inflationary tensions in the past. Price revisions must be related to the direct costs of the service and not to other external elements. As for public contracts, the current norm is modified so that the general guideline is also non-indexation. Exceptions in this regard will have to be authorized and justified by the costs.

The Draft Law on Deindexation also creates a Competitiveness Guarantee Index (IGC), as a residual form of price updates. It will be applicable to contracts between private parties that voluntarily agree to it and in those cases in which they have agreed to a review clause but have not specified it. The formula takes into account the inflation of the euro zone corrected by a part of the competitiveness lost since 1999. It will, in any case, have a ceiling of 2% and a floor of 0%.



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