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Wagner's law, also known as the law of increasing [a] state activity, [2] is the observation that public expenditure increases as national income rises. [3] It is named after the German economist Adolph Wagner (1835–1917), who first observed the effect in his own country and then for other countries.
Additional public borrowing and spending would tend to increase interest rates, because the monetary authority would increase interest rates in response to additional public borrowing and spending, in an effort to contain the effects on the level of public activity—to prevent overheating in the demand for resources and inflation, for example.
Other governments also increased public expenditure to create more employment. The increase was accelerated by World War II anticipation in the second part of the 30s among European countries. In 1937 the amount of average public expenditure share was between 22 and 23 percent, twice as much as before World War I.
Government expenditures refer to how money raised by the government is allocated in order to support a wide range of causes, meet the needs of its citizens and ensure economic growth through various programs. The expenditures can be divided by the Classification of Functions of Government :
Depending on the state of the economy, fiscal policy may reach for different objectives: its focus can be to restrict economic growth by mediating inflation or, in turn, increase economic growth by decreasing taxes, encouraging spending on different projects that act as stimuli to economic growth and enabling borrowing and spending. The three ...
Expansionary fiscal policy consists of increasing net public spending, which the government can effect by a) taxing less, b) spending more, or c) both. Investment and consumption by government raises demand for businesses' products and for employment, reversing the effects of the aforementioned imbalance.
The government budget balance, also referred to as the general government balance, [1] public budget balance, or public fiscal balance, is the difference between government revenues and spending. For a government that uses accrual accounting (rather than cash accounting ) the budget balance is calculated using only spending on current ...
a major war, like World War II; a public health emergency like the COVID-19 recession; or; a severe economic downturn as with the Great Recession. [11] In the absence of debt financing, when revenues decline during a downturn, a government would need to raise taxes or reduce spending, which would exacerbate the negative event.