Public expenditure tends to rise relative to national income as an economy develops.
Wagner proposed in 1883 that public expenditure rises relative to national income with economic development. Empirical support varies by country, period and specification, and the mechanism is disputed: whether it reflects demand for public goods or the supply-side dynamics of state growth.
In practice
- A country spending a tenth of national income through the state in 1900 is spending two-fifths a century later, having added pensions, schooling and health on the way.
- A neighbour at the same income per head sits at little more than a quarter, which is why this is a tendency rather than a rate.
- Possible explanations
- Proposed explanations include rising demand for services such as health and education as incomes rise, the administrative complexity of industrial economies, and political competition for programmes once the tax base can bear them.
- In its favour
- The long-run rise in public spending relative to income across industrialising countries is well documented.
- Against it
- Support varies by country, period and specification, the direction of causation is disputed, and several countries have held or reduced the ratio for long stretches, which a law would not permit.
- Standing
- Empirical support varies by country, period and specification, and the mechanism is disputed.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys