Adolf wagner 1883 realized the positive relationship between public spending and rates of economic growth based on diachronical tendency. In other words, the causality between public expenditure and national income runs from national income to public expenditure. Wagner 1883 positedan interesting development thesis, which became known as wagners law. Wagner s law was the prediction that this trend would continue. The growth of public expenditure in the united kingdom, nber books, national bureau of economic research, inc, number peac611, january. Eccb staff research paper the relationship between. Wagners law and different variants of the ratchet effect. Wagners law stipulates that public expenditure is a natural consequence of economic growth demirbas, 1999. World war i and the rise of the welfare state1 leonard dudleyand ulrich witt. Earlier works on wagners law include musgrave 1969, goffman and. Wagners law of expanding state expenditures, while the second is associated with keynesian countercyclical policy intervention theory.
Conflicting empirical findings of various crosssection studies of wagners law of public expenditures are examined. Economic growth and wagners hypothesis the nigerian. Dec 15, 2005 an evaluation of wagners law on public expenditure and economic growth in nigeria 1980 2011. In part this may reflect the prediction in economic. Adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 thcentury. We use 5 different formulations of wagners law the long run tendency for government expenditure to expand relative to economic growth and find that empirical results are supportive for wagners law. The efficiency of public healthcare spending in latvia. Dimitrios sideris,2006, wagners law in i gth centry greece. In a loose sense, wagners law points to a positive longrun comovement between government expenditures and economic growth, while in a strict sense, it postulates a longrun elasticity of public spending above unity.
Macroeconomic variables and the dynamic effect of public. Although the wagner hypothesis has many attributes, it also has several defects. This paper carries out a critical reappraisal of the two contending theories purporting to explain longrun government spending. He published his book titled law of the increase of state activities. In what has become known as wagners law, he theorized that growth in industrial progress and economic growth in a nation will necessarily be accompanied by an increased share of public expenditure relative to economic output. The displacement hypothesis and government spending in. Revisiting the wagners law for indian states using second. Fiscal decentralization and publicdecentralization and public sector employment. Table 2 shows the empirical findings of the test of wagners law. Of the two main branches of public finance, namely, public revenue and public expenditure, we shall first study the public expenditure.
Development in the americas better spending for better lives. Each of them agreed with the necessity of public expenditure to push a country in to the path of development. This article throws light upon the top three theories for the analysis of public expenditure growth. Testing for wagners law on greek economy bigben chukwuma. Growth effects of government expenditure and taxation in. Peacock and wiseman 1961, interpreted the law to imply that public expenditures should increase by a higher rate than gdp. This relationship weakens with an advanced stage of development because the requirement of basic public infrastructural expenditure declines in the process of. Wagners law is confirmed in iran during the period of this study. According to wagner, the reason behind the expansion of state. D student of economics in igbinedion university okada, edo state, nigeria. The variables included in the research are public expenditure and economic growth. Investigating the keynesian view and wagners law on the. Among other results, i find a new explanation for wagner s law, widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in.
Many developing countries including ghana in their attempt to increase growth have increased public expenditure but not been able to match it with revenue mobilization through taxation and has resulted in huge budget deficit. Fiscal decentralization and publicdecentralization and. Wagners law states that the share of government expenditure in gross national product gnp will increase with economic development. The classical economists did not analyse in depth the effects of public expenditure, for public expenditure throughout the nineteenth. Investigating the keynesian view and wagners law on the size. Folster and henrekson 2001 study the relationship between government. Theoretical framework and hypothesis development keynesian proponents emphasize the role of the government in promoting growth. A study of the relationship between government expenditure and na.
Wagners law of expanding state activity article pdf available in public finance finances publiques 261. University of groningen determinants of public capital. In particular, we study the nonstationarity and cointegration properties between statelevel government expenditure and statelevel income. Income elasticity and increase in per capita income 2. He first observed it for his own country and then for other countries. As countries become wealthier, the demand for public services tends to go up also known as wagners law. In this paper we investigate the longrun relationship between national income and government spending by using greek data from 1833 until 2010. Wagner s law of increasing state activity was criticized by allan.
Wagners law in oecd countries serena lamartina a, andrea zaghinib, aeuropean central bank, kaiserstrasse 29, 60311 frankfurt am main, germany bbanca ditalia, via nazionale 91, 00184 rome, italy abstract the paper proposes a panel cointegration analysis of the joint development of. Meaning, importance, classification and other details. Of course, a positive relationship would imply a similar development in the asset side of the public balance sheet and an the strict law would lead to an implausible explosive path for the share of public spending over gdp. Wagners hypothesis or wagners law, public expenditure is an endogenous factor that is driven by the growth of national income. Growth effects of government expenditure and taxation in rich.
Finally, the authors found the existence of feedback relationship between government expenditure and economic growth for a group of four countries. Development in the americas better spending for better. Some of the main causes of public expenditure growth are. In the paper we do not investigate the implication of wagners law about the sustainability of growing public expenditure. His idea is also known as wagners growth of public expenditure. The displacement hypothesis and government spending in the united kingdom. The expenditure data are annual and cover the period from 1836 to 1995, and are net of interest payments. Empirical finding from the study indicates that there is a positive and significant relationship between public expenditure and economic growth in zambia both in the shortrun and the longrun. Moreover, public expenditure is a consequence rather than cause of national income. Waec gce past questions and answers free download pdf all. Wagners law, the rentseeking hypothesis, and the social insurance. The first strand of literature relates to wagners law of expanding state expenditures, while the second relates to the keynesian.
The idea behind wagners law is that goods and services provided by. Wagners hypothesis of public expenditure growth a re. In other words, the percentage share of public expenditure increases with an increase in gross domestic product. Testing wagners law for pakistan 157 where ge represents nominal government expenditure, pop denotes total population, and gdp and rgdp are nominal and real national output, respectively. The results of the causality test indicate that there is no evidence to support either wagners law or keyness hypothesis for greek economy. Public expenditure is the expenditure incurred by the central, state and local govt. Wagners hypothesis of increasing government expenditure wagners hypothesis of rising state activities as put forward by adolf wagner 18351917, a german economist built his hypothesis of rising government involvement in state on past perspectives. Both variables were stationary at first difference. In contrast, keynesian theory keynes, 1936 states economic growth occurs as a result of rising public expenditure, and considered as an independent exogenous variable to influence the economic growth.
This theory, which predicts that the income elasticity of demand for public goods is greater than unity, underlies the. This paper is an attempt to test the existence of wagners law in pakistan. That is, the growth elasticity of public expenditure is greater than one. Surprisingly, government spending on defense or transportation displays no. Thus, the causality according to wagners law runs from economic growth to government spending. This paper investigates the keynesian view and the wagners law on the role of public expenditure on economic growth for malaysia 19702004. This finding validated the fact that the zambian fiscal environment is aligned to the keynesian theory as opposed to wagners law.
However, under what has since become known as wagners law, public goods are thought to be luxury goods, increasing their expenditure share when percapita income levels rise. In his hypothesis, he analyzes the relationship between public expenditure and growth of. Testing wagnerss law at different stages of economic. The theory holds that for any country, that public expenditure rises. A formulation of wagners law, mentioned by bird 1971 is as follows. There have been two main bodies of literature that have explored the relationship between government expenditure and economic growth. Traditionally wagner s law has been modelled in two ways. The futile quest for a grand explanation of longrun. Wagners law, known as the law of increasing state spending, is a principle named after the german economist adolph wagner 18351917. Course aims and objectives the course attempt to explain the concepts and conceptual framework of public sector. The idea behind wagners law is that goods and services provided by the government. A number of crosscountry comparisons do not find a robust negative relationship between government size and economic growth. Among other results, i find a new explanation for wagners law, widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in. However, some other studies in testing wagners law utilized the following formulation goffman and mahar, 1971.
According to barro 1991, investment expenditure, especially in stateowned. In essence, the study recommended more allocation of resources towards public expenditure, including exploiting publicprivate partnerships as a way of increasing expenditure towards social sectors and. Jul 31, 2017 public expenditure theories are dealing with the role of public expenditure for the economic growth and development. This paper empirically examines the wagners law of expanding public sector using a long annual time series data for the u. The peacockwiseman hypothesis further contextualised wagners law by proposing that a periodical sharp increase in the size of the public sector resulting from upheavals can help in boosting economic growth.
The empirical results using the autoregression distributed lag ardl model and the bounds test pesaran et al. Figures 1 and 2 show central government capital expenditure as a share of gdp for respectively 123 and 37 countries over the period 19701998. Using musgrave 1969 specification, this study has tested the longrun. In this connection the johansen and juselius 1990 cointegration approach has been used to test the longrun relationship between government. The validity of wagners law in greece during the last 2.
It has generally been believed that the share of government expenditure in gnp tends to rise along with gnp per capita. Long wave patterns of absolute and relative government. Understand the wagners law of increasing state activities and wisemanpeacock hypothesis define and understand the meaning of. Define and understand the meaning of public expenditure know the causes of increase in public expenditure know the principles of governing public expenditure and importance of public expenditure understand the wagners law of increasing state activities and wisemanpeacock hypothesis. As per capita income increases, the share of public sector expenditure rises to meet the increased protective, administrative and educational functions of the state. As mentioned above, there are three basic theories in public expenditure. According to the spirit of wagners law, an expanding government accompanies social progress and rising incomes. The most common is a linear model of the logarithm of government expenditure ge on the left hand side and the logarithm of real gross domestic. An observation made in the 19th century by adolph wagner 18351917 that the share of the public sector in gross domestic product had increased over time. Wagner believed that increased public expenditure was the natural result of economic growth and the continued pressure for social progress. Wagners law stated that there is a positive link between the size of governments and economic growth. A case study of d8 member countries naved ahmad and fareed ahmed abstract. The theory holds that for any country, that public expenditure rises constantly as income growth expands. Use the free adobe acrobat reader to view pdf files.
In this paper, we examine if the wagners law, that indicates a longrun economic relationship between government expenditure and income, holds across 15 nonspecial category states of india post the 1991 liberalization era. Selected empirical findings on wagners law athours countrys method main results oxley 1994 britain granger causality test support wagners law during. Ju huang2006, government expenditure in chain and taiwan. Adolf wagner a noted german political economist 18351917 propounded an empirical law to analyses and explains the trend in the growth of public expenditure. Public goods, public debts, budgeting and lastly, public expenditure, externalities. In simple terms, wagners law states that the government sector has a. The law essentially states that government expenditurethe share of to increases more than. In this version, support for wagner s hypothesis requires that the parameter, which represents the elasticity of government expenditures with respect to output, exceeds unity. Knowing the factors that have an impact on the efficiency. Positive values point to high preferences for public spending, as the observed expendituretogdp ratio lies above that predicted given a countrys level of development.
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