Peacock and Jack Wiseman advanced the study of growth of public expenditure through Peacock Wiseman Hypothesis by their study of public expenditure at Great Britain during the period 1890 to 1955.
Peacock Wiseman Hypothesis focused on the pattern of public expenditure and stated that public expenditure does not follow a smooth or continuous trend but the increase in public expenditure takes place in jerks or steps. They gave three separate concepts to justify the hypothesis, they are:
- Displacement Effect
- Inspection Effect
- Concentration effect
According to Peacock Wiseman Hypothesis, due to some social or other disturbance in an economy there is a need for increased expenditure as the existing public revenue cannot solve the disturbance.
The fiscal activities of the government rise step by step to successive new higher level during the span of decades to meet successive social disturbances.
When a social disturbance occurs the government raises taxes to increase revenue and increases public expenditure to meet the social disturbance. This creates a displacement effect by which low taxes and expenditures are replaced by higher tax and expenditure levels. However, after the disturbance ends, the newly emerged level of tax tolerance makes the people willing to support higher level of public expenditure since it is capable of bearing heavier tax burden than before. As a result, the new level of public expenditure and public revenue stabilize but are soon destabilized by another new disturbance which causes another displacement effect.
Even if there is no new disturbance there is no strong motivation to return to lower level of taxation as the increased revenue can be used to support a higher level of public expenditure. Therefore government expands its fiscal operations partly due to disturbance and partly to expand economic activity and take up new functions that were earlier neglected. This is known as Inspection effect.
When an economy is experiencing economic growth there is a tendency of central government`s economic activities to grow at a faster rate than that of state and local government`s activities. This is known as concentration effect. It is related to the political set up of the country.
The Peacock Wiseman hypothesis of government spending trend is more convincing than in Wagner`s hypothesis. The natural course of advancement and structural changes in an economy leads to constant and systematic expansion of public expenditure. An increase in public expenditure can also be accredited to urbanization, population growth, awareness of civil rights, awareness of duties by the State government etc.