The validity of Wagner’s Law in the 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. The data covers a period in which U.K. economy faced increased economic growth, government spending and met most of the assumption of Wagner’s Law (industrialisation, urbanisation, increased population). Furthermore, the long data set ensures the reliability of our results in terms of statistical and economic conclusions. 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.