Usefulness of Computer
ECO318 Public Finance Course Notes
4. The growth of the public sector
1. Introduction
Let us begin by taking for granted a large growth in public expenditure as a proportion of output in all western industrialised economies. We shall then concentrate on attempts to explain the growth of the public sector. We need to remind ourselves, however, of the distinction between resource-using public expenditure and transfer payments since some of the theories below are concerned only with resource-using expenditure (that is, public expenditure on goods and services and on domestic fixed capital formation), arguing that the reasons for the growth of transfer payments might be quite different.
2. A classification of theories of public sector growth
Bailey (1995) (p.43) divides models of public expenditure growth into macro models and micro models. In this classification, macro models attempt to account for the long term growth of public expenditure whereas micro models attempt to explain changes in particular components of public expenditure.
2.1 Macro models of the growth of resource-using public expenditure
2.1.1 Wagner's Law
It is customary in discussions of public sector growth to start with Wagner's law. In 1883, Adolph Wagner, a German social scientist, put forward an idea which became known as Wagner's law of increased government activity. The most usual interpretation of this law is that Wagner thought that there would be an inevitable increase in the share of government expenditure in total output, although he did recognise some limits to this increase. Essentially, he was arguing that an expanding government would necessarily accompany social progress and rising incomes. Such a notion, that societies inevitably change according to particular rules, is an example of historical determinism.
In thinking about Wagner's law, one has to understand Wagner's view of the relationship between the state and its citizens - that the state can be seen
4. The growth of the public sector
1. Introduction
Let us begin by taking for granted a large growth in public expenditure as a proportion of output in all western industrialised economies. We shall then concentrate on attempts to explain the growth of the public sector. We need to remind ourselves, however, of the distinction between resource-using public expenditure and transfer payments since some of the theories below are concerned only with resource-using expenditure (that is, public expenditure on goods and services and on domestic fixed capital formation), arguing that the reasons for the growth of transfer payments might be quite different.
2. A classification of theories of public sector growth
Bailey (1995) (p.43) divides models of public expenditure growth into macro models and micro models. In this classification, macro models attempt to account for the long term growth of public expenditure whereas micro models attempt to explain changes in particular components of public expenditure.
2.1 Macro models of the growth of resource-using public expenditure
2.1.1 Wagner's Law
It is customary in discussions of public sector growth to start with Wagner's law. In 1883, Adolph Wagner, a German social scientist, put forward an idea which became known as Wagner's law of increased government activity. The most usual interpretation of this law is that Wagner thought that there would be an inevitable increase in the share of government expenditure in total output, although he did recognise some limits to this increase. Essentially, he was arguing that an expanding government would necessarily accompany social progress and rising incomes. Such a notion, that societies inevitably change according to particular rules, is an example of historical determinism.
In thinking about Wagner's law, one has to understand Wagner's view of the relationship between the state and its citizens - that the state can be seen