Economic Output and Government Expenditures: Applicability of Wagner’s Law in Jordan

Abstract

We examine the applicability of Wagner's Law in Jordan by testing the relationship between economic growth and governmental expenditures, then measuring the effectiveness of the output growth in reducing the governmental budget deficit, and followed by exploring the dependence of governmental expenditure on the governmental domestic revenues and foreign grants over the period 1980-2013. Following Peacock and Wiseman (1979 modeling to test for Wagner's Law, It was found that the elasticity of the real expenditures with respect to the real GDP is positive and greater than 1, which conforms and validates Wagner's Law in the case of the real governmental expenditures and its components. Furthermore, the real current expenditures had the highest elasticity, indicating that their responsiveness to the real GDP is greater than that of the real capital expenditures. We also found that the elasticity of the real total governmental revenues and grants is positive and greater than 1, but less than the elasticity of governmental revenues. However, the elasticity of the real local revenues, the real income tax revenues, and the real taxes on domestic transactions are all positive and greater than 1. Interestingly, we found that the elasticity of the real foreign trade revenues is, while positive, too low and less than 1. This fact explains the relative low value of the elasticity of the real total governmental revenues with respect to the real GDP since the real foreign trade taxes represent the major part of the local revenues.

The validity of Wagner’s law in Egypt from 1960–2018

“…While this paper produces mixed results, the results are more inclined in favor of accepting Wagner's law. Likewise, the studies of Ghali (1997), Salih (2012), Al-Ghalbi (2012, Magableh et al (2014) and Abu-Eideh (2015) did find support for Wagner's law in the context of Saudi Arabia, Sudan, Iraq, Jordan and Palestine, respectively. This goes in line with what was propounded by Lamartina and Zghini (2010) regarding the idea that more support to Wagner's law is provided by countries with lower income per capita, as development government expenditures increase in an attempt to catch up with the more developed countries.…”

“…Moreover, using the error correction model, he found that the relationship between the variables in most of the law's variants was bi-directional, supporting both Wagner and the Keynesian hypothesis similarly. Magableh et al (2014) also used disaggregated data to test the validity of Wagner's law and found support for Wagner's law depicted in Peacock and Wiseman variant, for the Jordanian data in the period 1980-2013. They classified the government expenditure into real capital expenditure and real current expenditure and found that the real current expenditure exhibited greater responsiveness to changes in economic growth.…”