A.

WAGNERS LAW
Wagner's law, also known as the law of increasing state spending, is a principle named after the German economist Adolph Wagner (18351917).Over one hundred years ago a German economist, Adolph Wagner in his classic book, Grundlegung der Politischen konomie (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". Wagners law is not really a theory of public expenditure growth but, rather, a generalisation concerning the secular trend of public spending. Wagners 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. Wagners 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 Wagners time but also nations such as the USA, France, Germany and Japan whose industrial revolution were contemporary to Wagners 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.

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

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

public expenditure creates an inspection effect. 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. They attain a new level of tax tolerance. They are now ready to tolerate a greater burden of taxation and as a result the general level of expenditure and revenue goes up. 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. 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. 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. PE is the public expenditure increase path, a is the first social expenditure that causes disturbance which causes an enormous increase in public expenditure, afterwards when the economy is about to settle the government reviews the situation and b1 is the inspection effect. Once the new fiscal plateau is reached the concentration effect takes place. 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'. The theory does not provide any answer.A certain amount of empirical evidence was produced to support the displacement effect hypothesis in a number of countries, but problems remain. In many western industrialised countries, public sector expenditure surged from the mid-1960s to the mid-1970s. What social crises caused this as it was a relatively peaceful time? BIBLIOGRAPHY i. ii. iii. iv. v. vi. Bhatia,H.L. (1993). Public Finance. New Delhi: Vikas Publications. Dewitt, K.K. (1966). Modern Economic Theory. New Delhi: S. Chand & Co. Lekhi, R.K. (2008). Public Finance. New Delhi: Kalyani Publishers. Peacock A and J Wiseman. (January 1979). Approaches to the Analysis of Government Expenditure Growth. Public Finance Review. Vol. 7. No. 1. 3-23 Peacock, A. T., & Wiseman, J. (1961). The Growth of Public Expenditure in the United States. London: Oxford University Press. Singh, S.K (2008). Public Finance in Theory and Practice. New Delhi. S. Chand & Co.

Wagner's law, also known as the law of increasing state spending, is a principle named after the German economist Adolph Wagner (18351917).Over one hundred years ago a German economist, Adolph Wagner in his classic book, Grundlegung der Politischen konomie (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". Wagners law is not really a theory of public expenditure growth but, rather, a generalisation concerning the secular trend of public spending.Wagners 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. 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 Wagners 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. For any country the public expenditure rises constantly. 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. 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 Wagners time but also nations such as the USA, France, Germany and Japan whose industrial revolution were contemporary to Wagners 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, and economic regulation due to the associated risk of more conflict in densely populated urban communities. Because of the substitution of private for public activity, the administrative and protective functions of the state would expand. Thus, 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, a more equitable distribution of wealth and income, and generally more public services. Public Services were seen as normal goods, that is, their income elasticities of demand exceeded unity. Wagner cited education and culture as areas in which collective producers were more efficient than private producers. Wagners 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. 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's law suggests that a welfare state evolves from free market capitalism due to the population voting for ever-increasing social services. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden.

Wagner's Statement Indicates Following Points

1. In Progressive societies, the activities of the central and local government increase on a regular basis. 2. The purpose of the government activities is to meet the economic needs of the people. 3. The expansion & intensification of government function & activities lead to increase in public expenditure. 4. Though Wagner studied the economic growth of Germany, it applies to other countries too both developed and developing.

Wagners Law of Increasing State Activities H . L .BHATIA pages 219 Mushgrave and Mushgrave Public Finance Adolph Wagner born in 1835 died in 1917 examined historical facts, primarily of Germany. According to him, there are inherent tendencies for the activities of different layers of a government to increase both intensively and extensively. 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.
The increase in government activities is both extensive and intensive. 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. The expansion & intensification of government function & activities lead to increase in public expenditure.

A number of reasons can be enumerated for this inherent long-term tendency recorded in history. 1.An expansion in the traditional functions of the state. Defence is increasingly more expensive. 2. State activities were increasing in coverage. Pensions, subsidy, direct provision of merit goods. 3 Expand the provision of public goods. Government investment in these activities (road, bridges, investment etc.). Additional factors which contribute to the tendency of increasing public expenditure relate to the growing role of the state.

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

CAUSES OF INCREASE IN PUBLIC EXPENDITURE IN INDIA :During the planning period, the expenditure of Central and State Governments have increased. The Central Governments expenditure has increased over 10 times. Lets see CENTRAL GOVERNMENTS EXPENDITURE (Revenue & Capital) Year 1990-91 2004-05 2009-10 Rs. Crore 98,272 4,98,252 10,18,526 % of GDP 17.3 15.4 15.5

Source :- 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, health, infrastructure, subsidies and social security. In 2011, :he population of India has increased to 121 crores. POPULATION OF INDIA Year 1951 2001 2011 Rs. Crore 36.1 102.9 121.0

Source :-Economic Survey 2010-11

2) Defence Expenditure :The defence expenditure of the Central Government has increased over the years. The defence expenditure minimises the possibility of external threats, which in turn creates a good environment for social and economic activities of the nation. In India Defence expenditure has increased from Rs. 10,874 crores in 1990-91 to Rs. 90,688 crore in 2009-10. DEFENCE REVENUE EXPENDITURE (Central Govt.) Year 1990-91 Rs. Crore 10, 874

2009-10

90,668 Source :- Economic Survey 2010-11 3) Interest Payments :, Government borrowings are on increase. The government borrows funds from domestic market and foreign sources to meet expenditure on various government activities. As a result, the government has to incur huge interest payments. The interest payments of Central Government has increased from Rs. 21,498 crores in 1990-91 to Rs. 2,11,643 crores in 2009-10. INTEREST PAYMENTS (Central Govt.) Year 1990-91 2009-10 Rs. Crore 21,498 2,11,643

Source :- Economic Survey 2010-11 4) Subsidies :Government of India has been providing subsidies on number of items such as food, fertilizers, fuels, education etc. Because of massive amount of subsidies, the government expenditure has increased over the years. In 1990-91 the Central Governments subsidies was Rs. 9,581 crores which increased to Rs. 1,23,396 crores in 2009-10. In order to reduce unproductive expenditure, Central Government must make attempts to reduce subsidies. MAJOR SUBSIDIES (Central Govt.) Year 1990-91 2009-10 Rs. Crore 9,581 1,23,396

Source:- Economic Survey 2010-11

5) Administration :The Central Governments expenditure on administration has increased due to growth in population and economic development. Government incurs on law and order, tax administration, civil administration etc. Due to inflation the government has to revise the payscale periodically. The production cost of public goods and services has also risen due to rising prices. 6) Rise In National Income :The national income of the country has increased over the years. The increase in national income resulted in more revenue to the government by way of tax revenue and other income, which in turn enabled the government to increase its expenditure. For Eg. From 1980-81 to 2007-08, the N.I. has increased at the rate of 5.7% p.a. Percapita Income has also risen. 7) Urbanisation :Urbanisation has led to increasing expenditure on civil administration. Government expenditure on courts, police, transport, railways, schools and colleges, public health measures, water and electricity supply, public parks, libraries etc. have increased due to growth of towns and cities.

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

PUBLIC EXPENDITURE AS A PROPORTION OF THE GDP IN INDUSTRIALISED WESTERN COUNTRIES SINCE 1960

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