UNIVERSIDAD DE MANILA
Antonio Villegas St. Mehan Garden, Manila
REPORT ON THE TOPIC
EXPENDITURE THEORY, POLICY AND PERFORMANCE
In Partial fulfillment of the requirement in the subject
PA026A – PUBLIC FISCAL ADMINISTRATION
PREPARED AND SUBMITTED BY
Vincent Yuzon Rosales II
Antonio Vitan Jr.
Ma. Lourdes Cuenco
PROFESSOR CYNTHIA RAVELA CUBOS
June 28, 2011
THEORIES OF EXPENDITURE GROWTH
Three prominent theories that used the time-pattern of expenditure in the long-run to explain the expansion of the public sector are discuss in this chapter. Although this theories were formulated based on the experience of the now developed countries, the general idea of government expansion and the underlying concepts provide some explanations as to the pattern and growth of our government.
Adolph Wagner a 19th century German political economist. Who made one of the earliest attempts to explain public sector growth. Observe the tendency of the public sector in a number of industrialize countries such as Britain, USA, France, Germany, etc. to grow, both absolutely and relative to the rest of the economy. He predicted a public sector that would grow continuously, and considered society’s economic and social structure as factors that influenced this continuous growth. Wagner’s prediction was called the “law of increasing public and particularly state activities” or the “Wagner’s Law”.
The equation below shows Wagner’s presumption that the existence of a functional cause and effect relationship between growth of an economy and the relative growth of its public sector.
____________ < _____________ RCPI1 RCPI2
He postulated that as per capita income and output increase in industrializing nations, its public sector necessarily grow as a proportion to total economic activity.
Wherein RPCOPG represents the “real per capita output of public goods”, RCPI represents “real per capita income”; and where the numerical values represent an earlier and later period respectively.
Wagner believes that social progress is the basic reasons for the relative growth of government in industrialize countries. Because it implies giving importance to distribution issues, and perhaps a desire for a more equitable distribution of resources. Accordingly, an increase in cultural and social welfare services is expected.
Public sector growth comes about in a chain reaction and over a long period of time, wherein social progress leads to growth in governmental functions, which in turn leads to an absolute and relative growth of governmental economic activity. The need for public regulatory and protective activities expands as the economy undergoes a process of industrialization. This makes a case for the state to expand administration and law and order to carry out the necessary protective and regulatory duties to enable the economy to develop in a n economically and socially efficient manner.
Wagner also made an explicit case on the need for public enterprises. He pointed out that private sector exists to make profit and may not put money into large scale investment with long-gestation period for recoupment of capital, too excessive for it to finance, or with strong social objectives. While a public enterprises may operate at a commercially profitable level, and thus contribute to government coffers.
He gives recognition to the importance of revenue as a limiting factor in the expansion of government activity. However, in the end, people in their desire for development will tolerate higher tax burdens, thus enabling the government to overcome financial difficulties.
Wagner further attributed the expansion of the public sector to the expansion of the fiscal needs of both the central and local governments. He said that...