This article throws light upon the top three theories for the analysis of public expenditure growth. Government expenditure and economic growth in the eu long. A disaggregated analysis for developing countries article pdf available in manchester school 755. 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. 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. Wagners law versus keynesian hypothesis in malaysia. The public expending is one of the main factors to increase the expense of the private costs. However, the proportion of public expenditure to gross national income is a very rough measure of the governments activities in a form of economy. Different economists have looked at public expenditure from different point of view. The second school of thought is the keynesian whose view is the direct opposite of the wagners law. 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. The study uses the recently developed autoregressive distributed lag model ardlbounds testing approach to examine this linkage. In short the rise in government expenditure is the outcome of economic growth and causality should run.
Wagners law is the fi rst model of public expenditure in the history of public fi nance. Wagners hypothesis or wagners law, and the keynesian hypothesis. An econometric investigation into the wagners law african. This paper builds on the existing literature studying the longterm determinants of government expenditure and makes a step forward in two respects. Nexus between public expenditure and economic growth by. Testing the validity of wagners law in the namibian context. The following classification is a based on these different views.
In relatively developed and less developed states, a causal flow exists from real. Law of increasing state activities adolph wagner bba. The results of the granger causality analysis indicates that there is a bidirectional. 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. Wagner believed that increased public expenditure was the natural result of economic growth and the continued pressure for social progress.
Adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 thcentury. 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. This study empirically tests if the wagners law stands for the nigerian economy using data for the period 19812015. It has generally been believed that the share of government expenditure in gnp tends to rise along with gnp per capita. Import tariff reduction impact on macro economy and fiscal. Wagner law states that an increase in economic activity would lead to an increase in public expenditure while keynesian law states. Public expenditure in real terms can be used as an indicator for government activities are financed by the government itself. The public expending is one of the main factors to. Review of theories on government expenditure economics essay. Adolph wagner, the german economist made an in depth study relating to rise in government expenditure in the late 19 th century.
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. 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. A test of wagners hypothesis for the ghanaian economy. The wagners law theory of increasing state activities wagners law is a principle named after the german economist adolph wagner 18351917. To find out the impact of trade costs on export performance of ethiopia. 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. He said this based on a comprehensive comparisons of different countries. Although the wagner hypothesis has many attributes, it also has several defects. 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.
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. However, the endogenous growth theories posit that public sector either has direct or. Wagners law, known as the law of increasing state spending, is a principle named after the german economist adolph wagner 18351917. Recent decades have seen the escalation of this debate as increased government size and low economic growth rates have become. Wagner law of increasing state activity public expenditure. Wagnar s law states that as the economy develops over time, the activities and functions of the government increase. 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. Wagner was, however, sceptical of attempts to specify in advance what. 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. Adolf wagner a noted german political economist 18351917 propounded an empirical law to analyses and explains the trend in the growth of public expenditure. Wagners hypothesis, output growth, public expenditure, cointegration, vecm, causality. Rising public expenditure and economic growth, was wagner. Wagners law has been statistically tested not only from a crosscountry perspective but also.
Investigating the keynesian view and wagners law on the size. Nevertheless, peacock and scott in 2000 wrote a paper entitled the curious attraction of wagners law, explaining the reasons for why this. The empirical evidence provides indication of a structural positive correlation between public spending and per. Wagner identified three main factors behind the increase in government spending. Peacock and wiseman 1961, interpreted the law to imply that public expenditures should increase by a higher rate than gdp. The causal relationship between public expenditure and economic growth in turkey. Keyness view and on the other hand, this kind of expenditure as an exogenous factor may be the result of growth wagner s law. 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. Keynes and wagner on government expenditures and economic. Wagners law and peacock and wisemans displacement effect. It suggests that during the process of economic development the share of public spending in national income tends to expand wagner, 1883. 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. Wagners law is a principle named after the german economist adolph wagner 18351917.
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. The impact of government expenditure on economic growth. Public expenditure refers to government expenditure i. Indeed, the significance of this paper is that it is the first one to assess the applicability of wagners law to zambia. The relationship between public expenditure and economic. The law further argues that a rise in public expenditure can. The theory holds that for any country, that public expenditure rises constantly as income growth expands. The wagner s law theory of increasing state activities. Thus, the keynesians see public expenditure as an exogenous factor, which could be used as a policy instrument to influence growth. Firstly, government expenditure has been classified into revenue expenditure and capital expenditure. This paper investigates the keynesian view and the wagners law on the role of public expenditure on economic growth for malaysia 19702004. Findings confirm wagners law through the existence of a long term relationship between the variables, while public expenditures display a. Between 1960 and 1980 the vision of the government. They explained that during normal periods, the rise in public expenditure depends on revenue collected.
Wagners hypothesis sage journals sage publications. 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. 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. Keyness view and on the other hand, this kind of expenditure as an exogenous factor may be the result of growth wagners law. His view subsequently became a law, known as wagners law. In the paper we do not investigate the implication of wagners law about the sustainability of growing public expenditure. In order to address the omission of variable bias, the study incorporates. Going by adolph wagners theory, increased in public expenditure would have a significant influence growth. Since the wagners law suggests that economic growth should rise with increasing public spending, tests for wagners law is also relevant. 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. Conflicting empirical findings of various crosssection studies of wagners law of public expenditures are examined. Government expenditure and economic growth in south africa.
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. A var approach economia pubblica, 56, ottobredicembre, 2009, 3156, issn. Finally, the budget stickiness hypothesis argues that public spending should not change since public expenditure policies are targeted in a longrun perspective. These critics view wagners predictions as essentially explaining causes of increase in expenditure and argue that the relationship lacks a firm theoretical basis. Wagners hypothesis of public expenditure growth a re. The theory holds that for any country, that public expenditure rises constantly. The later of the two parts may also be conceived in terms of allocation of the.
The effect of public expenditure on the economic growth. Knowledge of precise direction of causality has important policy implications. Therefore, although the economic growth had increased, the government expenditure on making regulations had not increased and even decreased. 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.
Public expenditure has been classified into various categories. Wagnars law states that as the economy develops over time, the activities and functions of the government increase. 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. Wagners model, while containing many insights, suffered from different criticisms. Government expenditure and economic growth in the eu longrun. The keynesian economists see causal relationship running from government expenditure to economic growth. Determinants of the size of public expenditure in nigeria. Looking at public expenditure through this perspective gives a new insight of the patterns of public expenditure growth in the twentieth century. In short the rise in government expenditure is the outcome of economic growth and causality should run from national income to gov. The model for the development of the public expenditure growth the models of musgrave and rostow are generalizations obtained as a result of. 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.
It focuses on public expenditure on education, health and capital goods. Wagners law wagner, 1883, 1912 suggests that during the process of economic development, the share of public spending in national income tends to expand. Wagners law, that is, public expenditures outpacing economic growth. He gave a relationship between level of development and public expenditure. Testing the validity of wagners law in the namibian. 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. In an attempt to establish longrun relationship between public expenditure and economic growth, the. Wagners law in oecd countries the paper proposes a panel cointegration analysis of the joint development of government expenditure and economic. A conceptual picture of the wagners law and keynesian hypothesis can be analytically depicted by adas framework. According to wagner 1890 public expenditure rises as a results of rise in real per capita income known as wagners law. Wagners law, public sector patterns, and growth of public.
Does the relationship between government expenditure and economic growth follow wagners law in nigeria. Wagner was, however, sceptical of attempts to specify in advance what that limit would be. Aggregate consumption expenditure and economic growth. 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. In relatively developed and less developed states, a causal flow.
The theory holds that for any country, that public expenditure rises. Classification of public expenditure refers to the systematic arrangement of different items on which the government incurs expenditure. Wagner advanced his law of rising public expenditures by analyzing trends in the growth of public expenditure and in the size of public sector. In the case of wagners law, evidence of cointegration is sufficient to establish a longrun relationship between public expenditure and income. 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. This criticism is based on the view that for some within endogenous. According to wagner as an economy develops overtime, the activities and functions of the state government increase. Impact of expenditure on economic growth in pakistan. 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.
Empirical evidence based on public expenditure patterns over a 24year. Article information, pdf download for wagners law, public sector patterns, and. Investigating the keynesian view and wagners law on the. Wagners hypothesis or wagners law highlight that public expenditure is an endogenous factor that is driven by the growth of national income. He first observed it for his own country and then for other countries. Abstractmain purpose of this study is to identify the impact of government expenditure on economic growth in asian countries. Public expenditure has shown a significant relationship with the gross domestic product.
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. The keynesian view states that public expenditure is an exogenous factor that influences economic growth and can be used as a policy instrument. Investigating the keynesian view and wagners law on the size of government and economic growth in iran. The empirical results using the autoregression distributed lag ardl model and the bounds test pesaran et al.
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. Displacement effect hypothesis of peacock and wiseman pdf. It is incurred by central, state and local governments of a country. Based on his study, he propounded a law called the law of increasing state activity. Apr 14, 2011 the empirical evidence provides indication of a structural positive correlation between public spending and per.
Contrary to wagners view, keynesian hypothesis keynes, 1936 stressed that public expenditure is seen as an exogenous factor that can be used as. Adolf wagner 1883 realized the positive relationship between public spending and. 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. Theory of development of public expenditure no theoriesmod els. 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.
The starting point of my study is therefore to reject a priori any notion of an optimal size of government. However, to support wagners law would require unidirectional causality from income to. 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. However, the proportion of public expenditure to gross national income is a very rough measure of the government s activities in a form of economy.
1195 1293 957 308 999 194 684 1529 828 270 1025 878 1312 1198 1534 437 642 270 1115 668 1143 158 473 480 1447 888 732 1387 1418 1362 1186 1631 572 705 1260 408 1469 370 1082 1445 1282 1109 502 634