Wagner’s Views on Public Expenditure

Wagner’s Views on Public Expenditure:

The German economist, Adolph Wagner, argued that a nation, as it experiences economic development and growth, will experience an increase in the activities of the Public Sector. The ratio of increases when converted into expenditure terms, would increase the rate of output per capita. In other words, the ratio of public consumption expenditure to GNP (or some such measure of economic activity) both totally and by functions would rise as GNP rose.

A number of early economists discussed the relationship between the level of development and public expenditure. However, Wagner was the first to buttress such a remark with an extensive theoretical foundation.

To justify his generalization that the share of public consumption expenditure would increase, Wagner divided public expenditure into two categories, expenditures for internal and external security and expenditures for “Cultural and Welfare” which should include education, health, recreation, transportation, banking, and the like. Expenditures for external security would increase in a growing economy as the nature of the use of force by the Stae changes from simple aggression to prevention of the attack and as armies use more capital equipment. For internal security, Wagner foresaw greater expenditure because of greater friction between economic units and people as urbanization progressed.

The public sector would encroach upon the private sector as the former could produce goods and services more effectively because of three reasons. The goods and services of the public sector would be of better quality; the public sector had easier access to capital and could administer large units; the market crises that could be set by private firms would be avoided.

Engles some years before Wagner enunciated this famous law that the income elasticity for food declined with a rise in incomes. Wagner went a step further and argued that income elasticity for government services is greater than unity. It means that the public expenditure will increase more rapidly than the increase in income of the people.

(1) Variables that affect the demand and supply of Public Expenditure: The following variables may simultaneously affect both the demand for and supply of Public Expenditure-

  • Per capita income and wealth which affects not only demand but reflects “taxable capacity” and the cost of government services as well.
  • The destiny and the rate of growth of the population which affects the demand for infrastructural activities, such as roads, and hospitals in addition to the cost of supplying services.

Thus, according to Wagner, with the increase in these factors, both the demand for and the supply of public expenditure will increase and vice-versa.

(2) The following variables may affect the demand side of the Public Expenditure:

  • Urbanization and industrialization.
  • Distribution of income.
  • The literacy level of the population.
  • The age composition of the population determines the demand for schools, pensions, and old-age homes.
  • Alternative private services supplied determine the demand of socialized medical and health services.

It means that, with the increase in these factors, the demand for public expenditure will increase and vice versa.

(3) The following variables may affect the supply side of the Public Expenditure:

  • The scale of production of the government services.
  • Quality of production- a higher ratio of skilled workers of value added to teachers or students signifies greater expenditure.
  • Inter-government grants and the independence of units for funds.

The above analysis points out the reasons for the growth of public expenditure.

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