PF-Wagner's Theory of Public Expenditure.pptx

Theory of public expenditure - Wagner

1. Wagner’s Theory of Public Expenditure

2. Adolph Wagner, the German economist made an in depth study relating to rise in government expenditure in the late 19 th century. He published a book titled “Law of the Increase of State Activities”. In this book he analyzes the relationship between public expenditure and growth of an economy.

3. 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 who constantly undertake new functions, while they perform both old and new functions more efficiently and more completely .” STATEMENT OF THE THEORY

4. Wagner's law states that "as the economy develops over time, the activities and functions of the Government increase ".

5. Thus Wagner’s Hypothesis of increasing state activity holds that as per capita income and output increases in the industrial nations, the public sector of these nations necessarily grows as a proportion to total economic activity.

6. Wagner has divided public expenditure into two parts: (a) expenditure for internal and external security. (b) expenditure for culture and welfare which implies health, transport, education, banking and the like.

7. Expenditure for external security will increase due to change from simple aggression to prevention of attack and use of sophisticated weapons. Similarly, the expenditure for internal security would increase due to greater fiction between economic units and urban people .

8. Causes of Relative Growth of Government Expenditure Wagner argues that the causes of relative growth of government expenditure is due to the following reason: Social Progress : . To maintain law and order in the society and due to the participation of state in the production of “ social product”, government needs to spend more. Expanding of Economy : Wagner talks about the expanding economy during the period of industrialization and the economic growth. In both situations, government expenditure increases.

9. The Income Effect As the real income increases , the effective demand for all kinds of goods and services also increases. And hence, public demands for more social goods and service and it creates increase in government expenditure resulting in social imbalances.

10. The Population Effect .With the growth of population and increases in the flow of real income occurring to individuals, the pace of urbanization has also increased at a rapid rate. This has necessitated an increasing rate of outlay on the provision of public services to the urban areas, as the population is growing up.

11. Wagner's Statement Indicates Following Points In progressive societies, the activities of the central and local government increase on a regular basis. The increase in government activities is both extensive and intensive.

12. The governments undertake new functions in the interest of the society. The old and the new functions are performed more efficiently and completely than before.

13. The purpose of the government activities is to meet the economic needs of the people. The expansion and intensification of government function and activities lead to increase in public expenditure. Though Wagner studied the economic growth of Germany, it applies to other countries too both developed and developing.

14. Graphic Presentation of the Wagner Hypothesis :

15. The modern formulation of Wagner’s law is that “as per capita income rises in industrializing nations, their public sector will grow in relative importance”. The Wagner’s hypothesis of increasing state activity is illustrated in Figure. In this graph the real per capital output of public goods (PG) is measured on the vertical axis and real per capita income (Y) is mea­sured on the horizontal axis. Time is an important third dimension implicit in the graph, because the growth in the real per capita output of public goods and in real per capita income is realistically assumed to take place on a historical basis over an extended period of time.

16. Line PG 1 represents a circumstance in which the public sector maintains a constant proportion of the total economic production of the society over time. In other words, as real per capita income increases, due to economic development of the society, the real per capita output of public goods remains at the same proportion of total economic activity. The constant proportion line, PG 1 , can be used as a reference point to the graphical presentation of Wagner hypothesis as depicted by the line PG 2 . All along the PG 2 the proportion of resources devoted to the output of public goods is expanding overtime.