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A base-year limit does have the characteristic that the issue of "spendability" is minimized. Since the absence of spending in one year in no way affects the available spending in the next or any subsequent year, neither the Congress nor the Administration has any (additional)

incentive to spend to the maximum allowed. Under a linked limit, the

failure to spend in one year reduces that total which may be spent in the next and all subsequent years. Looking to the future, a Congress or an Administration may come to feel that the maximum permissable spending is, effectively, its minimum permissable spending. However, recent experience finds few years characterized by outlay increases below those which would have been available under a limit, 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 limit. 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,

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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 stgnificance 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 limitation 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.

.

(â), 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.

The Amendment does not seek to prescribe the set of policies which would generate stability. The appropriate mix of policies well may vary from generation to generation. Any such prescription therefore is inappropriate to a Constitution.

The two sentences of section 1(a), taken together, imply a Limit of the following form:

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Given the definition of inflation, the maximum permissible dollar spending in the (Y)th year, TO(Y), would be equal to:

TOKY-1)(0,75[NGNP(-2)/NGNP (Y-3)]

+ 0.25[RGNP (Y-2)/RGNP (Y-3)] + .0075)

where RGNP (Y) is the real gross national product of the Yth year.

If, for example, total outlays in 1979 were $505.4 billion, maximum total outlays for. 1980 would be $558 billion under the Limit. This may be contrasted with the $543.5 billion now being proposed. 3

3558 = (505.4)(0.75(1.116) + 0.25(1.038) + .0075)

(T079) (0.75(NGNP 78%) + 0.25(RGNP 78%) + .0075) where % % divided by 100 to shift the decimal.

Initial Simulation

From 1970 through 1978, the year-to-year percentage increase in actual Federal outlays exceeded the permissible percentage increases under the Amendment in six of the nine fiscal years. These data are shown in Table IV. Sunwing the respective differences between percentage increases, the cumulative excess of actual over permissible increases was 26.8 percentage points, while the excess of permissible over actual increases was only 3.6 percentage points. Excessive spending, therefore, was on the order of seven times more powerful than restraint in leading the nation to its present circumstance. By contrast, beginning with Fiscal Year 1979, actual or planned increases in Federal outlays are less than the Limit permissible increases. Perhaps this reflects the sense of fiscal frugality and responsibility spawned by Califomia's "Proposition 13".

Initial simulation of the Federal Spending Limit Amendment for various effective years beginning with 1970 are presented in Table V through Table IX. These simulations are "initial" in the sense that the Amendment's adoption is assumed to have no other repurcussions on the economy. That is, these simulations assume that Federal revenues, nominal GNP, and real GNP - and, hence inflation rates and the Limit pemissible percentage changes remain as they were on or estimated late in 1978.

For fiscal years to the left of the dashed line in each of these Tables, the outlay limit would have constrained the growth of Federal spending. For fiscal years to the right of the same dashed line, the outlay limit for a given fiscal year exceeds actual or planned outlays for that year.

If it is tempting to argue that the post-"Proposition 13" mood evidenced in the Tables obviates the need for the Federal Spending Limit Amendment, it is well to consider two facts. First, the inflation rates

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