• The objective is to contribute to price stability from the central, autonomous and local Administration
  • The general rule is non-updating based on inflation to avoid 'second round' effects on the economy

The Council of Ministers today approved the Draft Law for the De-indexation of the Economy, as foreseen in the National Plan of Reforms. The objective is to contribute from the public sector to price stability and improve competitiveness, in line with the salary restraint agreement between the social partners and other reforms such as the pension one. The general principle is to de-link the updates of incomes, prices and other concepts of the Public Administrations from the Consumer Price Index (CPI) and to 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, autonomous 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 represent 7% of the total, some 36,000 million euros per year, 3.5% of GDP. Regarding the private sector, adoption will be voluntary, although if there is no explicit agreement, non-indexing will be applied automatically.

Collective wage bargaining (both in the private sphere and in that of public sector labor personnel), pensions and financial instruments are excluded from this rule. 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 to avoid the so-called second-round effects on the economy, one of the elements that has generated the most inflationary tensions in the past. Price reviews must be related to the direct costs of the service and not to other external elements. Regarding public contracts, the current regulation is modified so that the general guideline is also non-indexation. Exceptions to this will have to be authorized and justified by the costs.

The Draft Law of Desindexation also creates a Competitiveness Guarantee Index (IGC), as a residual way of updating prices. It will be applicable to contracts between private parties that voluntarily agree to it and in those cases in which they have agreed on a review clause but have not specified it. The formula takes into account inflation in the euro area corrected for 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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