As per capita income increases, the share of public sector expenditure rises to meet the increased protective, administrative and educational functions of the state. Folster and henrekson 2001 study the relationship between government. Eccb staff research paper the relationship between. The results of the causality test indicate that there is no evidence to support either wagners law or keyness hypothesis for greek economy. That is, the growth elasticity of public expenditure is greater than one. Wagner s law was the prediction that this trend would continue. A number of crosscountry comparisons do not find a robust negative relationship between government size and economic growth. Meaning, importance, classification and other details. A formulation of wagners law, mentioned by bird 1971 is as follows. The theory holds that for any country, that public expenditure rises. Peacock and wiseman 1961, interpreted the law to imply that public expenditures should increase by a higher rate than gdp. In this connection the johansen and juselius 1990 cointegration approach has been used to test the longrun relationship between government. 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. In his hypothesis, he analyzes the relationship between public expenditure and growth of.
The law essentially states that government expenditurethe share of to increases more than. The empirical results using the autoregression distributed lag ardl model and the bounds test pesaran et al. Growth effects of government expenditure and taxation in. It has generally been believed that the share of government expenditure in gnp tends to rise along with gnp per capita. Some of the main causes of public expenditure growth are. He published his book titled law of the increase of state activities. A study of the relationship between government expenditure and na. University of groningen determinants of public capital. 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. This finding validated the fact that the zambian fiscal environment is aligned to the keynesian theory as opposed to wagners law. Wagner s law of increasing state activity was criticized by allan. He first observed it for his own country and then for other countries. Fiscal decentralization and publicdecentralization and public sector employment. This paper is an attempt to test the existence of wagners law in pakistan.
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. 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. Wagners law stipulates that public expenditure is a natural consequence of economic growth demirbas, 1999. The displacement hypothesis and government spending in the united kingdom. Jul 31, 2017 public expenditure theories are dealing with the role of public expenditure for the economic growth and development. Income elasticity and increase in per capita income 2. Growth effects of government expenditure and taxation in rich. D student of economics in igbinedion university okada, edo state, nigeria.
As mentioned above, there are three basic theories in public expenditure. His idea is also known as wagners growth of public expenditure. 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. Thus, the causality according to wagners law runs from economic growth to government spending. In particular, we study the nonstationarity and cointegration properties between statelevel government expenditure and statelevel income. In part this may reflect the prediction in economic. Wagners law is confirmed in iran during the period of this study. Development in the americas better spending for better.
Knowing the factors that have an impact on the efficiency. Wagners law of expanding state expenditures, while the second is associated with keynesian countercyclical policy intervention theory. Traditionally wagner s law has been modelled in two ways. Both variables were stationary at first difference. This article throws light upon the top three theories for the analysis of public expenditure growth. Surprisingly, government spending on defense or transportation displays no. According to barro 1991, investment expenditure, especially in stateowned. Fiscal decentralization and publicdecentralization and. This paper investigates the keynesian view and the wagners law on the role of public expenditure on economic growth for malaysia 19702004. 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.
Public goods, public debts, budgeting and lastly, public expenditure, externalities. The displacement hypothesis and government spending in. The first strand of literature relates to wagners law of expanding state expenditures, while the second relates to the keynesian. According to the spirit of wagners law, an expanding government accompanies social progress and rising incomes. This paper carries out a critical reappraisal of the two contending theories purporting to explain longrun government spending. Wagners law and different variants of the ratchet effect. Dimitrios sideris,2006, wagners law in i gth centry greece. Of the two main branches of public finance, namely, public revenue and public expenditure, we shall first study the public expenditure. Adolf wagner a noted german political economist 18351917 propounded an empirical law to analyses and explains the trend in the growth of public expenditure. The expenditure data are annual and cover the period from 1836 to 1995, and are net of interest payments. Investigating the keynesian view and wagners law on the size.
Wagners law stated that there is a positive link between the size of governments and economic growth. Wagners law, known as the law of increasing state spending, is a principle named after the german economist adolph wagner 18351917. The idea behind wagners law is that goods and services provided by. The variables included in the research are public expenditure and economic growth. Using musgrave 1969 specification, this study has tested the longrun. Use the free adobe acrobat reader to view pdf files. Positive values point to high preferences for public spending, as the observed expendituretogdp ratio lies above that predicted given a countrys level of development. Waec gce past questions and answers free download pdf all. 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. In the paper we do not investigate the implication of wagners law about the sustainability of growing public expenditure. This paper empirically examines the wagners law of expanding public sector using a long annual time series data for the u. The growth of public expenditure in the united kingdom, nber books, national bureau of economic research, inc, number peac611, january.
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. As countries become wealthier, the demand for public services tends to go up also known as wagners law. Investigating the keynesian view and wagners law on the. The futile quest for a grand explanation of longrun. Wagner 1883 positedan interesting development thesis, which became known as wagners law. Wagner believed that increased public expenditure was the natural result of economic growth and the continued pressure for social progress. This theory, which predicts that the income elasticity of demand for public goods is greater than unity, underlies the. Each of them agreed with the necessity of public expenditure to push a country in to the path of development. A case study of d8 member countries naved ahmad and fareed ahmed abstract. Table 2 shows the empirical findings of the test of wagners law. 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. Moreover, public expenditure is a consequence rather than cause of national income. 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.
In simple terms, wagners law states that the government sector has a. 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. 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. Wagners law, the rentseeking hypothesis, and the social insurance. Dec 15, 2005 an evaluation of wagners law on public expenditure and economic growth in nigeria 1980 2011. Long wave patterns of absolute and relative government. 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. Although the wagner hypothesis has many attributes, it also has several defects. 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. 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. Adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 thcentury. 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. According to wagner, the reason behind the expansion of state. Course aims and objectives the course attempt to explain the concepts and conceptual framework of public sector.
Theoretical framework and hypothesis development keynesian proponents emphasize the role of the government in promoting growth. 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. Adolf wagner 1883 realized the positive relationship between public spending and rates of economic growth based on diachronical tendency. Testing for wagners law on greek economy bigben chukwuma. Wagner law of increasing state activity public expenditure. Selected empirical findings on wagners law athours countrys method main results oxley 1994 britain granger causality test support wagners law during. Wagners hypothesis or wagners law, public expenditure is an endogenous factor that is driven by the growth of national income. Economic growth and wagners hypothesis the nigerian. Among other results, i find a new explanation for wagners law, widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in. Wagners law of expanding state activity article pdf available in public finance finances publiques 261.
Macroeconomic variables and the dynamic effect of public. In other words, the percentage share of public expenditure increases with an increase in gross domestic product. This relationship weakens with an advanced stage of development because the requirement of basic public infrastructural expenditure declines in the process of. The efficiency of public healthcare spending in latvia. The theory holds that for any country, that public expenditure rises constantly as income growth expands. Figures 1 and 2 show central government capital expenditure as a share of gdp for respectively 123 and 37 countries over the period 19701998. In this paper we investigate the longrun relationship between national income and government spending by using greek data from 1833 until 2010. In other words, the causality between public expenditure and national income runs from national income to public expenditure.
Finally, the authors found the existence of feedback relationship between government expenditure and economic growth for a group of four countries. Wagners law states that the share of government expenditure in gross national product gnp will increase with economic development. World war i and the rise of the welfare state1 leonard dudleyand ulrich witt. Revisiting the wagners law for indian states using second. Wagners law perceived that public expenditure played no role in economic growth, and did not qualie as development finance. However, some other studies in testing wagners law utilized the following formulation goffman and mahar, 1971. Public expenditure is the expenditure incurred by the central, state and local govt. Earlier works on wagners law include musgrave 1969, goffman and. Henrekson, 1988, especially in the version that stresses the fact. The validity of wagners law in greece during the last 2. Testing wagnerss law at different stages of economic. Wagners hypothesis of public expenditure growth a re.
Development in the americas better spending for better lives. Ju huang2006, government expenditure in chain and taiwan. Conflicting empirical findings of various crosssection studies of wagners law of public expenditures are examined. The classical economists did not analyse in depth the effects of public expenditure, for public expenditure throughout the nineteenth. The idea behind wagners law is that goods and services provided by the government.
318 975 1622 1236 1169 1077 1398 1011 954 1522 954 956 214 350 561 1274 313 1191 174 1514 1086 886 279 1369 1106 934 21 366 686 782 38 1400 609 425 1326 236 596 889 444 354 1406 375 140 567 1008