Wagner's law explained

Wagner's law, also known as the law of increasing state activity,^[1] is the observation that public expenditure increases as national income rises.^[2] It is named after the German economist Adolph Wagner (1835–1917), who first observed the effect in his own country and then for other countries.^[3]

Industrialization

The principle is closely tied to industrialization. It predicts that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product:

Welfare states

Wagner's law suggests that welfare states evolves from free-market capitalism because the population votes for ever-increasing social services as income grows. In spite of some ambiguity, Wagner's statement in formal terms has been interpreted by Richard Musgrave as follows:

Empirical evidence

Evidence for Wagner's law has been mixed.^[2]

A 1961 study by the British economists Alan T. Peacock and Jack Wiseman found that Wagner's Law aptly described public expenditure in the United Kingdom in the period between 1891 and 1955.^[4] They further stated:

• There has been a considerable increase in revenue to the governments due to the economic developments over the years, thereby leading to a boost in public expenditure;
• The government simply cannot ignore the demands that people make regarding various services, especially when there is an increase in revenue collection at a constant rate of taxation;
• During times of war, tax rates are increased by the government to generate more funds to meet the increase in defense expenditure. This is known as the displacement effect.^[5] Such "displacement effect" is created when the earlier lower tax and expenditure levels are displaced by new and higher budgetary levels. But it remains the same even after the war as people get used to them. Therefore, the increase in revenue results in a rise in government expenditure.

Other studies have likewise found a strong relationship between public expenditure and per-capita gross domestic product.^[6] Studies have tended to show support for Wagner's law in developing countries, though some have found only weak support.^[7]

There have been a variety of studies testing Wagner's law in individual countries:

• South Africa: "Wagner's law finds no support in South Africa."^[8]
• Turkey: "The results of this study do not support the empirical validity of Wagner's law for Turkey for the period 1960-2000."^[9]
• Nigeria: "There exists no long-run relationship between government expenditure and output in Nigeria."^[10]
• Taiwan: "There exists no long-run relationship between government expenditures and output in...Taiwan."^[11]
• China: "There exists no long-run relationship between government expenditures and output in China."^[11]
• New Zealand: Study finds "support for Wagner's Law" in New Zealand.^[12]
• Greece and Portugal: Study finds mixed evidence.^[13]
• India: Study finds "strong evidence of Wagner's law" in India.^[14]
• Sri Lanka: "The long-run results showed no strong evidence in support of the validity of the Wagner's law for Sri Lankan economy."^[15]
• Iraq: "There is some evidence for the existence of Wagner's Law when income and several forms of expenditure are denoted in nominal terms. When expenditure in real terms is examined the chain of causality runs in the opposite direction."^[16]

Notes and References

1. Peacock . Alan . Scott . Alex . January 2000 . The Curious Attraction of Wagner's Law . Public Choice . 102 . 1–17 . 10.1023/A:1005032817804 . 153011143 . SpringerLink. subscription.
2. Wagner . Richard E. . Weber . Warren E. . March 1977 . Wagner's Law, Fiscal Institutions, and the Growth of Government . National Tax Journal . 30 . 1 . 59–68 . 10.1086/NTJ41862113 . 232214302 . The University of Chicago Press Journals. subscription.
3. Wagner, A. 1890 Finanzwissenchaft, Winter, C. F., Leipzig
4. Book: Peacock . Alan T. . The Growth of Public Expenditure in the United Kingdom . Wiseman . Jack . . 1961 . 0-87014-071-X . Alan T. Peacock . Jack Wiseman (economist).
5. Jaén-García . Manuel . January 2021 . Displacement Effect and Ratchet Effect: Testing of Two Alternative Hypotheses . SAGE Open . 11 . 10.1177/21582440211003577. 232484583 . free .
6. Lamartina . Serena . Zaghini . Andrea . April 2011 . Increasing Public Expenditure: Wagner's Law in OECD Countries . German Economic Review . 12 . 2 . 149–164 . 10.1111/j.1468-0475.2010.00517.x . 54048249 . DeGruyter. subscription.
7. Akitoby . Bernardin . December 2006 . Public spending, voracity, and Wagner's law in developing countries . European Journal of Political Economy . 22 . 4 . 908–924 . 10.1016/j.ejpoleco.2005.12.001 . ScienceDirect . subscription.
8. Ziramba . Emmanuel . February 2009 . Wagner's Law: An Econometric Test for South Africa, 1960–2006 . South African Journal of Economics . 76 . 4 . 596–606 . 10.1111/j.1813-6982.2008.00218.x . Wiley . subscription.
9. Halicioĝlu . Ferda . 2003 . Testing Wagner's law for Turkey, 1960-2000 . Review of Middle East Economics and Finance . 1 . 2 . 129–140 . 10.1080/1475368032000139279 . Taylor & Francis . subscription.
10. Babatunde . M. Adetunji . 2011 . A bound testing analysis of Wagner's law in Nigeria: 1970–2006 . Applied Economics . 43 . 21 . 2843–2850 . 10.1080/00036840903425012 . 154509989 . Taylor & Francis . subscription.
11. Huang . Chiung-Ju . December 2006 . Government Expenditures in China and Taiwan: Do They Follow Wagner's Law? . Journal of Economic Development . 31 . 2 . 139–148 . https://web.archive.org/web/20171203085520/https://core.ac.uk/download/pdf/6338652.pdf . December 3, 2017.
12. Saten . Kumar . Webber . Don J. . Fargher . Scott . 2012 . Wagner's Law revisited: cointegration and causality tests for New Zealand . Applied Economics . 44 . 5 . 607–616 . 10.1080/00036846.2010.511994 . 38664672 . subscription . Taylor & Francis.
13. Courakis . Anthony S. . Moura-Roque . Fatima . Tridimas . George . 1993 . Public expenditure growth in Greece and Portugal: Wagner's law and beyond . Applied Economics . 25 . 1 . 125–134 . 10.1080/00036849300000121 . 10362/84952 . subscription . Taylor & Francis. free .
14. Narayan . Seema . Rath . Badri Narayan . Narayan . Paresh Kumar . September 2012 . Evidence of Wagner's law from Indian states . Economic Modelling . 29 . 5 . 1548–1557 . 10.1016/j.econmod.2012.05.004 . subscription . ScienceDirect.
15. Kesavarajah . Mayandy . 2012 . Wagner's Law in Sri Lanka: An Econometric Analysis . International Scholarly Research Notices . 2012 . 1–8 . 10.5402/2012/573826 . 573826 . free .
16. Asseery . A. A. . Law . D. . Perdkis . N. . 1999 . Wagner's Law and public expenditure in Iraq: a test using disaggregated data . Applied Economics Letters . 6 . 1 . 39–44 . 10.1080/135048599353852 . Taylor & Francis.