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WAGNER’S LAW
Wagner's law, also known as the law of increasing state spending, is a principle named after the German economist Adolph Wagner (1835–1917).Over one hundred years ago a German economist, Adolph Wagner in his classic book, Grundlegung der Politischen Ökonomie (1883) observed that there exists a relationship between economic growth and public spending. Based on his study, he propounded "The Law of Increasing State Activity". Wagner’s ‘law’ is not really a theory of public expenditure growth but, rather, a generalisation concerning the secular trend of public spending. Wagner’s contribution to public expenditure theories is particularly significant when we consider that before Wagner made his observations, the prevailing view was the notion that as a country grows richer, government activities would have a tendency to decline. He asserted that there is a long run propensity for the scope of government to increase with higher levels of economic development. The fundamental idea behind this relationship is that the growth in public expenditure is a natural consequence of economic growth. The law predicts that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product. In other words, the percentage share of public expenditure increases with an increase in gross domestic product. That is, the growth elasticity of public expenditure is greater than one. Wagner’s Law was based upon historical facts. It emphasized on the long term trend rather than short term changes in the public expenditure. He assumed that the economy functions smoothly without social disturbances. He first observed it for his own country and then for other countries. He not only mentioned the United Kingdom which had completed her industrial revolution before Wagner’s time but also nations such as the USA, France, Germany and Japan whose industrial revolution were contemporary to Wagner’s time. Wagner, undoubtedly, was influenced by the historical events that surrounded him. The ‘law’ was formulated in Germany in the late nineteenth century, a period characterised by expansion of the German empire and the fall of the Ottoman Empire. At this time, incomes in Germany were rising as a result of rapid growth in technology. According to Adolph Wagner, "Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the Central Government and Local Governments, constantly undertake new functions, while they perform both old and new functions more efficiently and more completely. In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the Central and Local Governments." Thus, “The advent of modern industrial society will result in increasing political pressure for social progress and increased allowance for social consideration by industry.” Firstly, as nations develop they experience increased complexity of legal relationships and communications, as a result of the immense division of labour that accrues with industrialization. Because of this, Wagner envisaged an enlarged role for the state in the form of public, regulatory and protective activity. Further, increased urbanization and population density would lead to greater public expenditure on law and order due to the associated risk of more conflict in densely populated urban communities as well as external expenditure on sophisticated weapons and preventive attack. Also, as nations become more advanced the number and/or magnitude of market failures would force the state to become more regulatory in nature, thereby expanding its role and this would inevitably involve higher public expenditures. Wagner predicted the expansion of ‘cultural and welfare expenditures’ based on the presumption that as income rises, society would demand more education, entertainment, health, transportation, banking and a more equitable distribution of wealth and income. Wagner cited education and culture as areas in which collective producers were more efficient than private producers.

It lacks interdisciplinary relationship. expanding over time. Rising public sector 9. Nitti who suggested these factors are responsible for rise in expenditure by collecting empirical evidence of different types of government. 1. economics and sociology must be involved in any theory of public expenditure.S. Great depression REAL PER CAPITA OUTPUT OF PUBLIC GOODS (Rupees) . 4. Economic Planning 2. Wagner’s hypothesis ignores the influence of war on government’s spending activities which play a vital role in public expenditure in modern times. 1. Although it possesses the accumulating and explaining of crucial historical facts Wagner’s hypothesis lacks a comprehensive analytical framework. Such theories take into consideration the cultural characteristics of a society. Wagner's law thus suggests that a welfare state evolves from free market capitalism due to the population voting for ever-increasing social services. Inflation CRITICSMS Criticisms of Wagner hypothesis came from Allan Peacock and Jack Wiseman on the following grounds. the real per capita output of public goods remains at the constant proportion X of total economic activity. Other sciences like political science. Not comprehensive analysis. Democratic Government 3. Growing Population 6. For some economic activities the required scale of capital was so large Y that the only way these capital A2 projects could be financed was if the state participated in the activity. Extension of social activities 7. Line A1 represents a situation in which the public sector maintains a constant proportion of A1 the total economic production of a society over time. Not acceptable to Western countries. The O REAL PER CAPITA INCOME (Rupees) constant proportion line may now be used as a reference point to the graphical representation of Wagner’s law as shown by the line A2. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden. It ignores the influence of war. DIAGRAMMATIC REPRESENTATION The real per capita income is shown on the X axis and the real per capita output of public goods is shown on the Y axis. the proportion of the total resources devoted to the output of public goods. In other words while the real per capita income increases due to the economic development of the country.Wagner’s final suggestion was that the dynamic nature of technology and increasing scale of investment required in many activities would bring the development of large private monopolies whose domineering effects on the market would have to be neutralised by the state or alternatively the monopolies would have to be taken over by the state in the interest of economic efficiency. Modern complexities of life 8. Defence Expenditure 5. Wagner’s hypothesis is based on an organic self determining theory of state which is not accepted in some western countries. 3. 2. Wagner’s hypothesis was supported by F. 4.

1890-1955” The main thesis is that public expenditure does not increase in a smooth and continuous manner. Therefore. This arises from 'citizens' keener awareness of social problems' during the period of crisis. and the gap between a 'desirable' growth of public expenditures and a 'tolerable' tax burden may be narrowed. as people get used to them. Their thesis dealing with the growth of public expenditure was put forth by Jack Wiseman and Allan T. which allows governments to expand their scope of services to improve those social conditions. the increase in revenue results in rise in government expenditure. The 'inspection effect' points to the previously unidentified government spending brought into focus by crisis. when the revenue collection is increasing at constant rate of taxation.B. in a period of crisis. the new tax rates and tax structures may remain the same. some on-going government spending (related to normal times) are displaced upwards by war-related spending. which never falls back to the previous level. They derived the key concept of a 'tolerable tax burden' relying on the political propositions that governments desire to spend more (for political profit. However. the existence of a customary notion of 'tolerable burden' is likely to constrain the rate of implementation of government expenditure plans. INSPECTION EFFECT: War and other social disturbance force people and their government to seek solution to important problems which previously had been neglected or perhaps unnoticed. After the war. economic development results in substantial revenue to the governments. Government expenditure does not fall to its original level. Therefore. but in jerks or step like fashion. Peacock. governments cannot ignore the demands made by people regarding various services. They argue that shocks cause sudden increases in the size of governments. But this constraint will be weakened or destroyed during periods of social upheaval. The inadequacy of the revenue as compared with the required . Citizens’ resistance to high tax burdens was also mentioned in Wagner's work. and this acceptance remains when the disturbance itself has disappeared. Therefore. In 'normal' times. is not fully financed by taxation due to limited taxable capacity. especially. Peacock and Jack Wiseman originally derived this hypothesis from an evaluation of UK public expenditure data. the need for an interstate highway system or re-engineering of the hospital system. such as wars. At times. for example. New levels of tax tolerance (deficit tolerance) support a new fiscal plateau where tax burdens are higher. On the new plateau some old expenditure by government are eliminated and new ones are substituted for them. because a war. tax levels and methods of raising revenue that in quieter times they would have thought intolerable. They studied the public expenditure from 1891 to 1955 in the United Kingdom. the government further increases the tax rates. They further stated that during times of war. i. conducting Research & Development or providing retirement benefits. The rise in public expenditure also greatly depends on revenue collection. votes). People will accept. and enlarges the tax structure to generate more funds to meet the increase in defence expenditure. Three notions have been derived from the analysis of Peacock and Wiseman: DISPLACEMENT EFFECT: War and depression create a displacement effect by which previous (lower) tax and expenditure levels are replaced by new higher budgetary levels. in the book “The Growth of Public Expenditure in the United Kingdom. Peacock and Wiseman introduced the important notion of 'suppliers' into the public expenditure determination process. Over the years. It argues that in periods of social upheaval.e. when such notions of taxation are more easily broken down. PEACOCK WISEMAN HYPOTHEISIS Allan T. Some of the substitutes may have been produced by the private sector in the past. this enabled to increase public expenditure. Peacock and Wiseman conducted a new study based on Wagner's Law. following the crisis period. some social or other disturbance takes place. nations have to repay debts and related charges after the event. for instance. while citizens do not like to pay more taxes. For example. creating a need for increased public expenditure which the existing public revenue cannot meet.

public sector expenditure surged from the mid-1960s to the mid-1970s. 3-23 Peacock.public expenditure creates an inspection effect. (2008). New Delhi: S.. vi. T. The theory does not provide any answer. They are now ready to tolerate a greater burden of taxation and as a result the general level of expenditure and revenue goes up. & Wiseman. They need to review the revenue position and the need to find a solution of the important problems that have come up and agree to the required adjustment to finance the expenditure. ‘a’ is the first social expenditure that causes disturbance which causes an enormous increase in public expenditure. (January 1979). In many western industrialised countries. but problems remain. Chand & Co. Lekhi.K. iv. CONCENTRATION EFFECT: This effect notes the tendency for central government economic activity to become an increasing proportion of total public sector economic activity when a society is experiencing economic growth. S. No. S. iii. Once the new fiscal plateau is reached the concentration effect takes place. Public Finance. What social crises caused this as it was a relatively peaceful time? BIBLIOGRAPHY i. Approaches to the Analysis of Government Expenditure Growth. 7. Peacock A and J Wiseman. Singh. . ‘PE’ is the public expenditure increase path. J. As the crisis also leads to an increase in the concentration of power in the hands of central government and this is also not reversed after the crisis. CRITICSMS TIME PERIOD b1 a1 O a2 New fiscal plateau Social disturbance X What are these ‘social crises'? Wars and major depressions obviously qualify and Peacock and Wiseman used these to explain the increase in public expenditure in the UK in the 1930s and after World War II but how bad does a depression need to be before it qualifies as a `social crisis'. Y PE PUBLIC EXPENDITURE b2 a3 DIAGRAMMATIC REPRESENTATION On the y-axis the increase in public expenditure (as percentage of Gross National Product ‘GNP’) and on the x-axis the time period is shown. ii. Vol. Bhatia. Chand & Co. Public Finance.K (2008). They attain a new level of tax tolerance. The Growth of Public Expenditure in the United States.H. Public Finance in Theory and Practice. afterwards when the economy is about to settle the government reviews the situation and b1 is the inspection effect. New Delhi. Public Finance Review. London: Oxford University Press. (1966). Dewitt.K. 1. Modern Economic Theory. New Delhi: Kalyani Publishers. K. (1993).L. R.A certain amount of empirical evidence was produced to support the displacement effect hypothesis in a number of countries. New Delhi: Vikas Publications. (1961). A. v.

"Comprehensive comparisons of different countries and different times show that among progressive peoples (societies). a generalisation concerning the secular trend of public spending. Thus.Wagner’s contribution to public expenditure theories is particularly significant when we consider that before Wagner made his observations. and economic regulation due to the associated risk of more conflict in densely populated urban communities. government activities would have a tendency to decline. are satisfied by the Central and Local Governments. The fundamental idea behind this relationship is that the growth in public expenditure is a natural consequence of economic growth. incomes in Germany were rising as a result of rapid growth in technology." Thus. The ‘law’ was formulated in Germany in the late nineteenth century. increased urbanization and population density would lead to greater public expenditure on law and order. Adolph Wagner in his classic book. was influenced by the historical events that surrounded him. constantly undertake new functions. Wagner’s ‘law’ is not really a theory of public expenditure growth but. Wagner. the growth elasticity of public expenditure is greater than one Wagner’s Law was based upon historical facts. “The advent of modern industrial society will result in increasing political pressure for social progress and increased allowance for social consideration by industry.” Firstly. with which alone we are concerned. He assumed that the economy functions smoothly without social disturbances. He first observed it for his own country and then for other countries. the administrative and protective functions of the state would expand. regulatory and protective activity. Grundlegung der Politischen Ökonomie (1883) observed that there exists a relationship between economic growth and public spending. In other words. is a principle named after the German economist Adolph Wagner (1835–1917). Germany and Japan whose industrial revolution were contemporary to Wagner’s time.Wagner's law. rather. undoubtedly. It emphasized on the long term trend rather than short term changes in the public expenditure. Wagner envisaged an enlarged role for the state in the form of public. as nations become more advanced the number and/or magnitude of market failures would force the . he propounded "The Law of Increasing State Activity". In this way economic needs of the people to an increasing extent and in a more satisfactory fashion. Because of this.Over one hundred years ago a German economist. Because of the substitution of private for public activity. That is. as nations develop they experience increased complexity of legal relationships and communications. Further. He not only mentioned the United Kingdom which had completed her industrial revolution before Wagner’s time but also nations such as the USA. He asserted that there is a long run propensity for the scope of government to increase with higher levels of economic development. For any country the public expenditure rises constantly. while they perform both old and new functions more efficiently and more completely. as a result of the immense division of labour that accrues with industrialization. According to Adolph Wagner. a period characterised by expansion of the German empire and the fall of the Ottoman Empire. an increase regularly takes place in the activity of both the Central Government and Local Governments. also known as the law of increasing state spending. the prevailing view was the notion that as a country grows richer. the percentage share of public expenditure increases with an increase in gross domestic product. France. Based on his study. At this time. It shows an upward sloping trend. The law predicts that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product.

Wagner’s final suggestion was that the dynamic nature of technology and increasing scale of investment required in many activities would bring the development of large private monopolies whose domineering effects on the market would have to be neutralised by the state or alternatively the monopolies would have to be taken over by the state in the interest of economic efficiency. society would demand more education. For some economic activities the required scale of capital was so large that the only way these capital projects could be financed was if the state participated in the activity. Wagner cited education and culture as areas in which collective producers were more efficient than private producers. . entertainment. their income elasticities of demand exceeded unity. Public Services were seen as normal goods. Wagner's law suggests that a welfare state evolves from free market capitalism due to the population voting for ever-increasing social services. a more equitable distribution of wealth and income. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden.state to become more regulatory in nature. thereby expanding its role and this would inevitably involve higher public expenditures. Wagner predicted the expansion of ‘cultural and welfare expenditures’ based on the presumption that as income rises. and generally more public services. that is.

Defence is increasingly more expensive. Pensions. the activities of the central and local government increase on a regular basis. 1.). According to him. The governments undertake new functions in the interest of the society. The expansion & intensification of government function & activities lead to increase in public expenditure. direct provision of merit goods. L . The old and the new functions are performed more efficiently and completely than before. there are inherent tendencies for the activities of different layers of a government to increase both intensively and extensively.An expansion in the traditional functions of the state. 2. 3. bridges. 2. The increase in government activities is both extensive and intensive. . The purpose of the government activities is to meet the economic needs of the people. The expansion & intensification of government function & activities lead to increase in public expenditure. primarily of Germany. Additional factors which contribute to the tendency of increasing public expenditure relate to the growing role of the state. A number of reasons can be enumerated for this inherent long-term tendency recorded in history. 3 Expand the provision of public goods. Though Wagner studied the economic growth of Germany.BHATIA pages 219 Mushgrave and Mushgrave “ Public Finance” Adolph Wagner born in 1835 died in 1917 examined historical facts. In Progressive societies. 4.Wagner's Statement Indicates Following Points ↓ 1. There is a functional relationship between growth of the economy and the government activities with the result that the government sector grows faster than the economy. Government investment in these activities (road. investment etc. Wagner’s Law of Increasing State Activities H . State activities were increasing in coverage. subsidy. it applies to other countries too both developed and developing.

Vested interests to develop which demand an increase in public expenditure for own benefit viii.i. roads etc. Increasing urbanization – traffic. drinking water ii. iv. Public debt vi. The size and nature of public services necessitates an ever increasing specialization. health facilities. Capital accumulation vii. . iii. Growing population so make provisions for school . Protect the economy from the failures of the market economy v. Government bureaucracy has a tendency to expand.

In 2011. :he population of India has increased to 121 crores.526 % of GDP 17. the expenditure of Central and State Government’s have increased. 10.CAUSES OF INCREASE IN PUBLIC EXPENDITURE IN INDIA :During the planning period.0 Source :-Economic Survey 2010-11 2) Defence Expenditure :The defence expenditure of the Central Government has increased over the years. The Central Government’s expenditure has increased over 10 times. 90. which in turn creates a good environment for social and economic activities of the nation. 874 . health. subsidies and social security.688 crore in 2009-10.1 102.272 4.252 10.18. Crore 10.5 Source :. Crore 98. DEFENCE REVENUE EXPENDITURE (Central Govt. POPULATION OF INDIA Year 1951 2001 2011 Rs.874 crores in 1990-91 to Rs.Economic Survey 2010-11 The following are the main causes of growth of public expenditure in India :1) Growing Population :A high growth of population naturally calls for increase in public expenses as all state functions are to be performed more extensively^ Population growth has made necessary for governments of most countries to spend increasing amounts on education.9 121. Crore 36. The defence expenditure minimises the possibility of external threats. In India Defence expenditure has increased from Rs. infrastructure.98.) Year 1990-91 Rs.4 15. Lets see CENTRAL GOVERNMENTS EXPENDITURE (Revenue & Capital) Year 1990-91 2004-05 2009-10 Rs.3 15.

I. Crore 9. education etc. fuels. 6) Rise In National Income :The national income of the country has increased over the years. Central Government must make attempts to reduce subsidies. Government expenditure on courts. In order to reduce unproductive expenditure. The production cost of public goods and services has also risen due to rising prices.396 crores in 2009-10.396 Source:.581 1. From 1980-81 to 2007-08. the N. civil administration etc. have increased due to growth of towns and cities. which in turn enabled the government to increase its expenditure. INTEREST PAYMENTS (Central Govt. public parks.) Year 1990-91 2009-10 Rs.Economic Survey 2010-11 5) Administration :The Central Governments expenditure on administration has increased due to growth in population and economic development. For Eg.643 crores in 2009-10. Due to inflation the government has to revise the payscale periodically.Economic Survey 2010-11 4) Subsidies :Government of India has been providing subsidies on number of items such as food. the government expenditure has increased over the years. 2. schools and colleges. Government borrowings are on increase.498 2.498 crores in 1990-91 to Rs.a.Economic Survey 2010-11 3) Interest Payments :. Crore 21. police.2009-10 90. 21. As a result. railways. 1.23. MAJOR SUBSIDIES (Central Govt.) Year 1990-91 2009-10 Rs.643 Source :. water and electricity supply. Government incurs on law and order. Because of massive amount of subsidies. fertilizers. libraries etc. In 1990-91 the Central Government’s subsidies was Rs. has increased at the rate of 5. Percapita Income has also risen. The interest payments of Central Government has increased from Rs. The government borrows funds from domestic market and foreign sources to meet expenditure on various government activities. transport. the government has to incur huge interest payments.581 crores which increased to Rs. 7) Urbanisation :Urbanisation has led to increasing expenditure on civil administration. public health measures. .668 Source :. tax administration. The increase in national income resulted in more revenue to the government by way of tax revenue and other income.11.7% p.11.23. 9.

17) Economic Planning :To promote rapid economic development modern governments adopt economic planning. 9) Inflation :Rise in prices have caused an increase in public expenditure. bridges etc. National Food for Work Programme etc. embassies abroad etc. Such measures cause a rise in public expenditure.communication public expenditure have increased. Indira Awas Yojana. governments are spending a good amount of funds on poverty alleviation and employment generation programmes. Some of the programmes are Swarnajayanti Gram Swarojgar Yojana. subsidies to exporters. causing a rise in public expenditure. national highways. The cost of supplying public goods and services has increased.8) Rural Development :In developing countries. ministries. roadways. 11) Social Security Measures :For the welfare of the people government provides social security measures which increases its expenditure.government organisations. public works and relief programmes etc. cheap loans etc. international conferences. irrigation facilities. free education. It provides measures such as sickness benefits. Thus with growth of transport and v. 13) Development Of Agriculture :The government may develop agriculture by providing seeds. 16) Research And Development :Research and Development is important to improve quality and to reduce costs. 10) Democratic Government :A democratic government has to incur increasing expenditure on elections. medical facilities. All these will increase public expenditure. The public sector outlay on various sectors has been increasing with the increasing role of government. . modern implements. legislatures. WHO etc. universities and i other educational organisations. old . Rising prices have also necessiated the payment of higher salaries and dearness allowances. 12) Growth Of Transport And Communication :The government has to incur huge expenditure on construction of railways. to promote mobility and economic development. loans at cheap rate of interest etc. 14) Development Of Industry :The government may encourage the growth of private sector industries through protection. government has to undertake community development projects and other social measures to promote rural development. The government finances Research and Development projects undertaken by non . Public expenditure also increases when a country becomes a member of international organisations like UNO. 15) Poverty Alleviation Programmes :In developing countries.age pensions. fertilisers.

PUBLIC EXPENDITURE AS A PROPORTION OF THE GDP IN INDUSTRIALISED WESTERN COUNTRIES SINCE 1960 Bibliography Bhatia. . (1966). (1993). & Wiseman. New Delhi: Vikas Publications. Chand & Co. 3-23 Peacock. The Growth of Public Expenditure in the United States. New Delhi: Kalyani Publishers. Chand & Co.L. Lekhi. Singh. New Delhi: S. Public Finance. Dewitt. Vol. (1961). T. Public Finance. 1. Public Finance in Theory and Practice. (January 1979). R. S. 7 .H. Public Finance Review. Approaches to the Analysis of Government Expenditure Growth. K. S. No. A.. New Delhi.K (2008). Peacock A and J Wiseman.K. (2008).K. London: Oxford University Press. Modern Economic Theory. J.