Meloni writes to von der Leyen calling for greater flexibility: “Household incomes are being hit hard by inflation”

Dear President, Dear Ursula, as we enter the fourth quarter of the year, hopes for a swift resolution to the crisis in the Middle East have been dashed and the energy markets remain extremely tense. The price of crude oil in euros is almost 80 per cent higher than at the start of the year; natural gas is 156 per cent more expensive. Although most Member States have taken action to curb rising fuel and utility prices, households’ real disposable income is taking a heavy hit, with headline inflation reaching a new high in September. Furthermore, the competitiveness of European businesses has been severely undermined by rising energy costs. Against this backdrop, the net expenditure paths agreed under the European fiscal framework leave limited scope to mitigate the impact on households and businesses without resorting to tightening measures at a time characterised by significant downside risks to the economy. As you know, the short-term increase in indirect tax revenue resulting from rising inflation cannot be used to finance compensatory fiscal support measures unless a Member State has room for manoeuvre within its agreed net expenditure path.

In fact, these support measures are classified as discretionary changes in revenue. Although this feature of the EU’s budgetary rules aims to ensure the soundness of public finances in the medium term, we should nevertheless seek ways to use at least part of the additional revenue to mitigate the rise in energy costs in a temporary and targeted manner. However, when updating our budgetary plans for 2027, another issue related to the budgetary rules comes to light. Indeed, the ceiling on net expenditure growth is set in nominal terms and, as such, may not fully take into account the budgetary impact of inflation significantly exceeding the projections underpinning the agreed net expenditure path, or the fact that public expenditure may rise due to market mechanisms and processes beyond the government’s control.

The most significant example is pension payments, which are linked – albeit with a certain delay – to consumer prices. This has a considerable impact: in Italy’s case, the expenditure directly affected by inflation that significantly exceeds the projections underlying the budget plan amounts to 20.4 per cent of GDP. Other expenditure components that will be affected by higher inflation as early as 2027 amount to 12.0 per cent of GDP.

We are aware of the risk involved in amending the recently introduced budgetary rules, which pursue an objective we all share, namely debt sustainability. We are also fully aware of the commitments undertaken by Italy under the ongoing excessive deficit procedure and of the need to adhere to the corrective path for net expenditure. However, we believe that the budgetary framework leaves the European Commission the necessary leeway to take into account the relevant factors I have just highlighted when assessing, ex ante, compliance with the expenditure rule during the examination of forthcoming draft budgetary plans.

This is considered an urgent matter that can no longer be postponed and is expected to be discussed by the finance ministers at the next Ecofin meeting.

I, together with my staff, remain at your disposal to explore in greater depth the issues I have briefly touched upon in this letter and to give concrete form to our joint response.

Best regards,

Best wishes with your work.

Giorgia Meloni