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In final draft, the phrase "years may be substituted for 'fiscal years and calendar year such that Section 1 (a) would read '... in the last year.'. or '... in the last year ending prior to the beginning of the year.' ... in the preceding year.' ... in the imediately preceding year.'

In this context, 'increase is to be interpreted in its technical sense of having the capacity to be positive, zero, or negative. A "negative increase", which normally would be called a decrease", would arise if nominal gross national product declined from year to year.

"Percentage increase in nominal gross national product" may be expressed symbolically as:

NGYP (1):: [NG (1) - NGNP (0)/NGNP (0)) (100) or as

• ([NSNP (11/NGNP (0) - 1) (1) where NGNP n) refers to nominal gross national product in the Yth year. The percentage increase will be positive, zero, or negative as NGNP (1) is greater than, equal to, or less than NGNP (0).

Percentage increase in the total outlays similarly may be expressed symbolically as:

TO(1)% = ([TO(1) - TOOO) - 1) (100)
Where TOY) refers to the total outlays in the Yth year.

The Limit states that the TO (Y)% must be less than or equal to the
NGNP (Y-2)% since, by current convention, TO (Y) refers to outlays for the
fiscal year began in the (Y-1) th year, for which the last calendar year
ending prior to the beginning of said fiscal year would be the (Y-2)th
calendar year. Thus, for example, the percentage increase in nominal
SNP during the calendar year 1980.

The Limit incorporated into the proposed Amendment may be called a "linked limit", in contrast with a "base-year limit". Under a baseyear limit approach, the maximum outlay in any year is independent of the level of outlays actually recorded in any year after the initial or base year. Such an approach has the potential for generating a limit at variance with experience such that the maximum permissible increase is significantly above the current normal outlay total. Under a linked limit, the maximum outlays in one year are related directly to the actual outlays of the prior year. Should a series of Congresses fail to provide maximum appropriations over time, the outlay limit automatically is adjusted downward.

This difference may be illustrated by Table III where, by Year 5, the maximum permissable percentage increase in total outlays under a baseyear limit is three times that of a linked limit.

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Linked Limit

NA

NA

5.0 5.0 5.0 5.0 5.0 5.0

*Assumes inflation rate is less than 3%

NA stands for Not Applicable.

54-2670 - 80 - 25

25-yar T: does izre ze caracteristic 32: stessa sercat *****'s Nerza. Since the absence of spending is one year 48 sej itects the maize spending se sert 2 aty sabsentert pa, nei ter ize sagrass ne? tie lamisistration as any acastai) tuckatire to set to the atmam alioed. Onder a linea , e fallure to ssed in one year reduces that total weich may be spest is the Meit 24 all sasenent gears. Looking to the future, è congress e as com n'stration may come to feel that the maxime permissable speeding is, effectively, its mais permissable spending. Forever, recent experience 445 few years characterized by outlay increases below those which would have been available under a lisit, base-year of linked.

There is the possibility that the linked limit will provide greater stability, year-to-year, in Federal spending than would a base-year lirit. This, in turn, would tend to lend greater stability to the underlying economy

"Spendability" does pose a potential problem for the funding of large projects for which spending normally would occur in the initial years. Construction of a new building would be an example. Stable budgeting would reserve funds over a series of fiscal years until sufficient funds had accumulated to complete the project. Spending then would be concentrated in the one or two or three year construction period.

Under a base-year limit, the absence of outlays during the accumulation period would provide some allowance within the limits of the construction period, as shown in Table III, on the previous page. Under a linked limit, no such allowance would develop. To the contrary, the accumulation period would be a period in which the dollar total of permissable spending would be falling relative to that of a base-year limit. At the point of construction, other fiscal programs in an amount equal to the project's initial costs would be eliminated.

While of potential significance to a given bureau or department treated in isolation, the sheer size and diversity of Federal spending would suggest that "spendability" would be of little practical importance. The Drafting Committee, therefore, provided no automatic exceptions to its Limit.

Should an issue of significance be perceived, one approach available is incorporated into the current California "Proposition Four" initiative amendment to be voted on November 6. There, explicit provision is made for the creation of reserve or contigency funds.? Contributions to the funds may be within the outlay limit of the year of contribution. Subsequent spending of the funds in future years would be ex-limit. Such an approach removes any incentive to spend now to maintain spending tomorrow. It also provides an incentive to stabilize funding from year to year.

If incorporated into the Amendment, such funds must be clearly and severly restricted. That is, the purpose of a fund must be reasonable and the accumulations therein must be reasonable in the light of this purpose. The primary purpose cannot be simply to reserve "spendability" within the Limit. Moreover, any contributions to the fund must represent a (tax) burden on the people in the year in which such contribution is made.

2. Sec. 5. Each entity of government may establish such contingency, emergency, unemployment, reserve, retirement, sinking fund, trust, or similar funds as it shall deem reasonable and proper. Contributions to any such fund, to the extent that such contributions are derived from the proceeds of taxes, shall for purposes of this Article constitute appropriations subject to 1 imitation in the year of contribution. Neither withdrawals from any such fund, nor expenditures of (or authorizations to expend) such withdrawals, nor transfers between or among such funds, shall for purposes of this Article constitute appropriations subject to limitation. Cf., Proposed Article XIIIB (1978) to amend the Constitution of the State of California.

Section 1.

(a), 2nd Sentence.
If the inflation rate for that calendar year is more than three
percent, the permissable percentage increase in total outlays
during such fiscal year shall be reduced by one-fourth of the
percentage by which the inflation rate exceeds three percent.

Under the first sentence of this Section, total outlays are limited by the percentage change in nominal gross national product. The second sentence provides a further limitation during periods when inflation, as measured, exceeds three percent. This further limitation may be expressed symbolically

as:

IL (Y)% = (0.25) (IR(Y-2)% - 3%] where Il(Y)% is the further Inflation Limitation in the (Y)th year and IR(Y-2)% is the inflation rate of the (Y-2)th year. If, for example, the inflation rate were 9 percent, the further inflation limitation would be 1.5 percent.

Just as the first sentence of this section provides a constraint on Federal powers to increase the burden of government as a share of gross national product, the second sentence provides an incentive for the Congress to seek out and to adopt policies which will promote a stable economy, characterized by stable prices, stable employment, and stable growth. The further inflation limitation reduces the permissible increase from year to year in nominal and real total outlays and leads to a declining share of gross

national product. Without off-setting revision of the tax laws, it also tends

to reduce the budget deficits which themselves tend to fuel the inflation. Unlike the pre-Amendment setting, the Congress could not seek to satisfy both taxpayers and beneficiaries of government spending by inflationary budgets incorporating low taxes and high spending. Within the Limit, the Congress will be increasingly unable to satisfy any interest group as an

inflation proceeds.

The end result, however, is not the collapse of government, but restoration of stable prices, employment and growth.

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