3 Theories of Government SpendingThis section highlights same basic theories that have been used to support the effects ofpublic expenditure on economic growth. Such theories amongst others are:2.2.3.
1 Musgrave Theory of Public Expenditure GrowthThis theory was propounded by Musgrave as he found changes in the income elasticity ofdemand for public services in three ranges of per capita income. He posits that at low levelsof per capita income, demand for public services tends to be very low, this is so becauseaccording to him such income is devoted to satisfying primary needs and that when per capitaincome starts to rise above these levels of low income, the demand for services supplied bythe public sector such as health, education and transport starts to rise, thereby forcinggovernment to increase expenditure on them. He observes that at the high levels of per capitaincome, typical of developed economics, the rate of public sector growth tends to fall as themore basic wants are being satisfied.22.214.171.124 The Wagner’s Law/ Theory of Increasing State ActivitiesWagner’s law is a principle that was propounded by the German economist Adolph Wagner (1835-1917).
Wagner propounded his ‘law of rising public expenditures’ by studying trends in the growth of government spending and in the size of public sector. The law postulates that as per capita income increases, government spending also increases. The law gain opines that the development of modern industrial society would lead to an increased political pressure for social progress and a call for increased allowance for social consideration in the conduct of industry. Furthermore, the rise in government spending will exceed the increase in the national income (income elastic wants). Also as an economy grows, it becomes imperative for government to put in mechanisms to ensure law and order. The government would only achieve this by spending.2.
2.3.3 Engel’s Theory of Public ExpenditureEngel’s law which suggests that consumers change their budget for food as their income increases was propounded by Ernest Engel, a German economist. According to Engel, the proportion of income that goes to food products is less than the proportion of income that goes to other needs such as expensive luxurious goods.
He believes that in the early stages of a nation’s development, government spending may be focused on the construction of roads, provision of potable water, harbors and electricity among others. But as the nation develops, this may change. Over time, one would expect the proportion of government spending that goes into capital formation to decline.
According to Muritala et al (2011), Ernest Engel’s findings which were obtained by comparing individual expenditure patterns to that of national expenditure is referred to as the declining portion of outlays on food.126.96.36.199 Peacock and Wiseman’s Theory of ExpenditurePeacock and Wiseman (1961) proposed an alternative model of the determinants of government spending which suggests that government is likely to increase in times of crisis like wars, droughts and famine because people are willing to pay extra tax. According to Peacock and Wiseman (1961), when government spending increases temporarily during crisis, people expect expenditure to fall back to normal in the near future after the crisis is over.
Government revenue is however displaced upwards and it may become difficult for government to reduce its spending even after the crisis to the initial level. Barro (1987) in a study in the United Kingdom provided an argument in support of Peacock and Wiseman’s model. In addition, temporary increase in government military spending has an effect on macroeconomic variables like interest rate as compared to a permanent increase Barro (1987).