Wagner Law of Increasing State Activity - Public Expenditure

Introduction - Public Expenditure is Increasing ↓

Adam Smith wrote in the 'Wealth of Nations' that the government should restrict their activities to;

1. Defence against foreign aggression.
2. Maintenance of internal peace and order.
3. Public development work.

All other functions besides these were considered beyond the scope of the state & expenditure on them was treated as unjust & wasteful.

But there had been a spectacular expansion in the functions of state & this resulted in phenomenal increase in public expenditure for this we shall take a look at contribution by Adolph Wagner & Peacock-Wiseman hypothesis.

Adolph Wagner's Law of Increasing State Activity ↓

Adolph Wagner, the German economist made an in depth study relating to rise in government expenditure in the late 19^thcentury. Based on his study, he propounded a law called "The Law of Increasing State Activity".
Wagnar's law states that "as the economy develops over time, the activities and functions of the government increase".
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."

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 increase in government activities is both extensive and intensive.
3. The governments undertake new functions in the interest of the society.
4. The old and the new functions are performed more efficiently and completely than before.
5. The purpose of the government activities is to meet the economic needs of the people.
6. The expansion & intensification of government function & activities lead to increase in public expenditure.
7. Though Wagner studied the economic growth of Germany, it applies to other countries too both developed and developing.

The Peacock-Wiseman Hypothesis ↓

Peacock and Wiseman conducted a new study based on Wagner's Law. They studied the public expenditure from 1891 to 1955 in U.K. They found out that Wagner's Law is still valid.
Peacock and Wiseman further stated that :-

1. "The rise in public expenditure greatly depends on revenue collection. Over the years, economic development results in substantial revenue to the governments, this enabled to increase public expenditure".
2. There exists a big gap between the expectations of the people about public expenditure and the tolerance level of taxation. Therefore, governments cannot ignore the demands made by people regarding various services, especially, when the revenue collection is increasing at constant rate of taxation.
3. They further stated that during the 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.