The validity of Wagner’s Law in United Kingdom for the period 1850-2010

The relationship between national income and government spending is one of the most debated topics between economists and policy makers during the last decades. The objective of this paper is to examine the Wagner’s law validity, and if it can be applied in the U.K. public spending expansion for the period 1850-2010. According to Wagner’s hypothesis, fundamental economic growth is a determinant to the public sector growth. The public sector is said to be able to grow at a very high rate when compared to the national income. We deploy annual time series data. We apply unit root tests, unit root tests with structural breaks, cointegration techniques and Granger causality tests.Our results indicate a presence of a long run relationship between national income and government spending, while the causality is bi-directional, thus we find support of Wagner’s and Keynesian hypotheses. The Keynesian hypothesis proves to be true in UK and means that the public sector and the government spending have positive impact on economic growth and development of a country. Thus government should shift the spending towards sector that have more efficient and effective on the economic growth of the country. Additionally, the supporting evidence of Wagner’s law will allow government authorities to reduce the budget deficits and there will be promoted the expanding role of the private sector in the economy. Finally, we have to point out that some countries such as UK should reduce the role and the size of public sector of the government in order to meet higher growth and development. Our empirical results are in accordance with previous studies examined the case of U.K. (Gyles (1991), Georgakopoulos et al. (1992), Kolluri (2002), Chow (2002), Chang (2002), Chang (2004), Loizides and Vamvoukas (2005)), or tested the validity of the law for a long period (Oxley (1994), Thornton (1999), Guerrero and Parker (2007), Sideris (2007)).