This article throws light upon the top three theories for the analysis of public expenditure growth. The model for the development of the public expenditure growth the models of musgrave and rostow are generalizations obtained as a result of. Revenue expenditure is a current or consumption expenditure incurred on civil administration i. Adolph wagner a german economist propounded the law of increasing state activities. The study recommends the need for appropriate policies on effective utilization of public fund knowing that it has positive effect on the level of economic growth in the country. Wagners hypothesis, output growth, public expenditure, cointegration, vecm, causality. The impact of government expenditure on economic growth. It has even been acknowledged in wagners law that public sectors spending is regarded as endogenous factor which is being influenced by the rise in national income and not a factor that causes the growth in national income. The empirical evidence provides indication of a structural positive correlation between public spending and per. In short the rise in government expenditure is the outcome of economic growth and causality should run. Although the wagner hypothesis has many attributes, it also has several defects.
Adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 thcentury. The theory of public expenditure may be discussed in the context of increasing public expenditure, the range of public expenditure andor in terms of the division of a given amount of public expenditure into different items like recurrent and capital expenditure. The starting point of my study is therefore to reject a priori any notion of an optimal size of government. The following classification is a based on these different views.
Wagners law is the fi rst model of public expenditure in the history of public fi nance. These critics view wagners predictions as essentially explaining causes of increase in expenditure and argue that the relationship lacks a firm theoretical basis. The causal relationship between public expenditure and economic growth in turkey. The public expending is one of the main factors to increase the expense of the private costs.
The second school of thought is the keynesian whose view is the direct opposite of the wagners law. Keynes and wagner on government expenditures and economic. Public expenditure can be defined as, the expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public. Keyness view and on the other hand, this kind of expenditure as an exogenous factor may be the result of growth wagner s law. This paper builds on the existing literature studying the longterm determinants of government expenditure and makes a step forward in two respects. It is incurred by central, state and local governments of a country. Public expenditure refers to government expenditure i. 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. It focuses on public expenditure on education, health and capital goods. Recent decades have seen the escalation of this debate as increased government size and low economic growth rates have become. Government expenditure and economic growth in south africa. 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. The results of the granger causality analysis indicates that there is a bidirectional.
He first observed it for his own country and then for other countries. This paper investigates the keynesian view and the wagners law on the role of public expenditure on economic growth for malaysia 19702004. The theory holds that for any country, that public expenditure rises constantly. Wagners law wagner, 1883, 1912 suggests that during the process of economic development, the share of public spending in national income tends to expand. It has generally been believed that the share of government expenditure in gnp tends to rise along with gnp per capita. Adolf wagner 1883 realized the positive relationship between public spending and. A var approach economia pubblica, 56, ottobredicembre, 2009, 3156, issn. Knowledge of precise direction of causality has important policy implications.
This paper examines the validity of wagners 1883 hypothesis on the direction of causality between sectoral public expenditures and economic growth in namibia for the period 1991 20. The earliest theory of public expenditure could be traced to adolph wagner one of the leading german economists of his time who in 1883 propounded an interesting development thesis, which loosely held that as a nation develops its public sector and consequently public spending will grow in importance. Import tariff reduction impact on macro economy and fiscal. Wagners law, that is, public expenditures outpacing economic growth. Wagners law is often considered as a long run relationship, which is ex pected to apply to countries during their early stages of growth and devel opment ansari, 1993, p. Wagners law is not really a theory of public expenditure growth but, rather, a generalisation concerning the secular trend of public spending goffman and mahar. This paper analyses the relevance of wagners law to zambia with a view to provide some additional knowledge about the relationship between government expenditure and economic growth. Therefore, although the economic growth had increased, the government expenditure on making regulations had not increased and even decreased. The theory holds that for any country, that public expenditure rises. Wagners law is a principle named after the german economist adolph wagner 18351917. Conflicting empirical findings of various crosssection studies of wagners law of public expenditures are examined. Peacock and wiseman 1961, interpreted the law to imply that public expenditures should increase by a higher rate than gdp. Public expenditure has shown a significant relationship with the gross domestic product.
Wagner law states that an increase in economic activity would lead to an increase in public expenditure while keynesian law states. Since the wagners law suggests that economic growth should rise with increasing public spending, tests for wagners law is also relevant. Wagner law of increasing state activity public expenditure. A test of wagners hypothesis for the ghanaian economy. The theory holds that for any country, that public expenditure rises constantly as income growth expands. Adolf wagner a noted german political economist 18351917 propounded an empirical law to analyses and explains the trend in the growth of public expenditure. Rising public expenditure and economic growth, was wagner. This point of view is in contrast to the wagner view that the public expenditure is seen as an endogenous factor or an outcome, not a cause, of economic growth. The keynesian view states that public expenditure is an exogenous factor that influences economic growth and can be used as a policy instrument. Wagners law has been statistically tested not only from a crosscountry perspective but also. Public expenditure should actually be a desirable phenomenon, but in the case of nigeria, it has been more of a bitter pill, especially with the nonsignificant nature of most of the explanatory variables, public expenditure components. The earliest theory of public expenditure could be traced to adolph wagner one of the leading german economists of his time who in 1883 propounded an interesting development thesis, which loosely held that as a nation develops its public sector and consequently public spending will grow in.
Wagnar s law states that as the economy develops over time, the activities and functions of the government increase. He, in his comprehension comparisons of different countries at different times shows that among progressive people, public expenditure increases regularly takes place in the activity of both the central and local government. In this study, the dynamic causal relationship between government expenditure and economic growth is examined using data from south africa, the most advanced economy in africa. This study empirically tests if the wagners law stands for the nigerian economy using data for the period 19812015. The later of the two parts may also be conceived in terms of allocation of the. Following wagners law, peacock and wiseman 1967suggested that the growth in public expenditure does not occur the way the wagners law describes, but in response to the fluctuations of booms and busts the economy may experience. The study uses the recently developed autoregressive distributed lag model ardlbounds testing approach to examine this linkage. Public expenditure in real terms can be used as an indicator for government activities are financed by the government itself.
Nexus between public expenditure and economic growth by. Nevertheless, peacock and scott in 2000 wrote a paper entitled the curious attraction of wagners law, explaining the reasons for why this. Different economists have looked at public expenditure from different point of view. Wagner was, however, sceptical of attempts to specify in advance what that limit would be. Wagner identified three main factors behind the increase in government spending. Adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 th century. Wagners hypothesis sage journals sage publications. The effect of public expenditure on the economic growth. Wagners hypothesis of public expenditure growth a re. Between 1960 and 1980 the vision of the government. The relationship between government size and economic growth has been a topic of discussion more than a century ago, when wagner 18831958 came up with wagners law, which places importance on economic growth as a driver of government size. Indeed, the significance of this paper is that it is the first one to assess the applicability of wagners law to zambia.
To find out the impact of trade costs on export performance of ethiopia. He gave a relationship between level of development and public expenditure. This criticism is based on the view that for some within endogenous. Does the relationship between government expenditure and economic growth follow wagners law in nigeria. In order to address the omission of variable bias, the study incorporates. Investigating the keynesian view and wagners law on the size. Wagnars law states that as the economy develops over time, the activities and functions of the government increase.
The law further argues that a rise in public expenditure can. Wagners law, public sector patterns, and growth of public. Keyness view and on the other hand, this kind of expenditure as an exogenous factor may be the result of growth wagners law. Article information, pdf download for wagners law, public sector patterns, and. In an attempt to establish longrun relationship between public expenditure and economic growth, the. Contrary to wagners view, keynesian hypothesis keynes, 1936 stressed that public expenditure is seen as an exogenous factor that can be used as. Using univariate and multivariate time series analysis, like panel unit root test and panel cointegration, and the todayamamoto causality test, the causal relationship between economic development and public expenditure is examined in 28 states of india at different stages of development from 2003 to 2015. An econometric investigation into the wagners law african. Feb 11, 2011 adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 th century. The wagners law theory of increasing state activities wagners law is a principle named after the german economist adolph wagner 18351917. Consequently, main objective is to analyze whether government expenditure causes economic growth in asian countries vice versa and then scrutinizing longrun equilibrium relationship exists between them.
Firstly, government expenditure has been classified into revenue expenditure and capital expenditure. In the case of wagners law, evidence of cointegration is sufficient to establish a longrun relationship between public expenditure and income. According to wagner 1890 public expenditure rises as a results of rise in real per capita income known as wagners law. Investigating the keynesian view and wagners law on the size of government and economic growth in iran. In contrast, the keynesian view keynes, 1936 hypothesized that the public expenditure is an exogenous factor that can be used as a policy variable, and which can impact upon growth and development in the shortrun. Testing the validity of wagners law in the namibian context. Public expenditure has been classified into various categories. Wagner advanced his law of rising public expenditures by analyzing trends in the growth of public expenditure and in the size of public sector. Testing the validity of wagners law in the namibian. Determinants of the size of public expenditure in nigeria.
Thus, the keynesians see public expenditure as an exogenous factor, which could be used as a policy instrument to influence growth. Testing the wagners hypothesis on public expenditure and. However, the endogenous growth theories posit that public sector either has direct or. Second, wagner considers that when per capita income increases, it will also increase public sector demand such as education, health, culture, and other services bird. Finally, the budget stickiness hypothesis argues that public spending should not change since public expenditure policies are targeted in a longrun perspective. In the paper we do not investigate the implication of wagners law about the sustainability of growing public expenditure. Wagners law, known as the law of increasing state spending, is a principle named after the german economist adolph wagner 18351917.
Wagners hypothesis or wagners law, and the keynesian hypothesis. Adolf wagner 1883 realized the positive relationship between public spending and rates of economic growth based on diachronical tendency. Wagners model, while containing many insights, suffered from different criticisms. They explained that during normal periods, the rise in public expenditure depends on revenue collected. Classification of public expenditure refers to the systematic arrangement of different items on which the government incurs expenditure. The keynesian economists see causal relationship running from government expenditure to economic growth. Investigating the keynesian view and wagners law on the. The relationship between public expenditure and economic. Also, wagners law imply that the income elasticity of the demand for public goods and generally for government expenditures is more than unity akpan 2011. According to wagner as an economy develops overtime, the activities and functions of the state government increase. Going by adolph wagners theory, increased in public expenditure would have a significant influence growth. A conceptual picture of the wagners law and keynesian hypothesis can be analytically depicted by adas framework. Wagner s law of public expenditure using time series data drawn from the g7 industrialized countries which provides evidence on both the shortrun and longrun effects of growth in national income on government expenditure. Wagners law and peacock and wisemans displacement effect.
Form the results, economic, social and community services expenditure show highly significant values suggesting that these sectors are very much needed and still adds value to the economy. He said this based on a comprehensive comparisons of different countries. Wagners hypothesis or wagners law highlight that public expenditure is an endogenous factor that is driven by the growth of national income. Government expenditure and economic growth in the eu longrun. A disaggregated analysis for developing countries article pdf available in manchester school 755. Government expenditure and economic growth in the eu long. Empirical evidence based on public expenditure patterns over a 24year. Displacement effect hypothesis of peacock and wiseman pdf. Apr 14, 2011 the empirical evidence provides indication of a structural positive correlation between public spending and per.
In contrast, keynesian hypothesis emphasizes that economic growth occurs as a result of rising public expenditure and is considered as an independent exogenous variable to influence the economic growth. In view of the aformentioned, this paper considers the relationship between public expenditure and economic growth in the context of wagners law for the period. The wagner s law theory of increasing state activities. It suggests that during the process of economic development the share of public spending in national income tends to expand wagner, 1883. Also revealed by this study is that of the four views on the causality between government size and economic growth, the most prominent one is the second view, the wagners law, which validates unidirectional grangercausality from economic growth to government size, followed by the bidirectional grangercausality category. Abstractmain purpose of this study is to identify the impact of government expenditure on economic growth in asian countries.
The empirical results using the autoregression distributed lag ardl model and the bounds test pesaran et al. Following wagners law, peacock and wiseman 1967suggested that the growth in public expenditure does not occur the way the wagners law describes, but in response to the. However, the proportion of public expenditure to gross national income is a very rough measure of the governments activities in a form of economy. 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. Aggregate consumption expenditure and economic growth. Law of increasing state activities adolph wagner bba. In relatively developed and less developed states, a causal flow.
Wagner was, however, sceptical of attempts to specify in advance what. Wagners law in oecd countries the paper proposes a panel cointegration analysis of the joint development of government expenditure and economic. Based on his study, he propounded a law called the law of increasing state activity. Wagners law versus keynesian hypothesis in malaysia. However, to support wagners law would require unidirectional causality from income to.
The public expending is one of the main factors to. Impact of expenditure on economic growth in pakistan. Looking at public expenditure through this perspective gives a new insight of the patterns of public expenditure growth in the twentieth century. Wagner believed that increased public expenditure was the natural result of economic growth and the continued pressure for social progress. His view subsequently became a law, known as wagners law. In short the rise in government expenditure is the outcome of economic growth and causality should run from national income to gov. In relatively developed and less developed states, a causal flow exists from real. Review of theories on government expenditure economics essay. Theory of development of public expenditure no theoriesmod els. Findings confirm wagners law through the existence of a long term relationship between the variables, while public expenditures display a. Legge di wagner e spesa pubblica italiana disaggregata.
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