The law of increasing state activities states that with economic growth and development a nation will experience an increase in the activities of public sector. The ratio of increase would raise the output per capita i.e. ratio of public consumption expenditure to Gross Nation Product will rise and hence GNP rises.
Adolph Wagner a German economist propounded the Law of increasing State activities. He gave a relationship between level of development and public expenditure.
According to Wagner as an economy develops overtime, the activities and functions of the state (government) increase. He said this based on a comprehensive comparisons of different countries. The study showed that in progressive societies –
- The Central and Local Government activities keep on increasing regularly.
- They perform both the old and new functions more efficiently & completely.
- The Increase in government activities are both extensive and intensive.
- Government take up new functions in the public interest and to meet economic needs.
- The expansion & intensification of Government function increases public expenditure.
To justify the law of increasing state activities he divided Public Expenditure into two parts; External Expenditure and Internal Expenditure and stated why each will increase with development of an economy.
External Expenditure increases as the strategic approach of a government changes from simple aggression to prevention of attack. It also increases due to the increase in demand for goods and services of the public sector.
Internal expenditure increases due to greater friction between economic units and people, high standard of living of people, easier access to capital, maintenance of large administrative units etc. as a result of economic development.
Adolph Wagner also argued that the income elasticity for government services is greater than unity i.e. Public expenditure will increase more rapidly than increase in income of the public. To substantiate this he gave variables that effect the Demand and Supply of Public Expenditure.
Variables that effect both Demand and Supply of Public Expenditure
- Per capital income
- Density and rate of population growth
Variables that effect demand
- Urbanization & Industrialization
- Distribution of Income
- Literacy level of people
- Age composition
- Alternative put services
Variables that effect supply
- Scale of production of Government
- Quality of production
- Inter government grants and independence of units for funds
According to Law of increasing state activities as per capita income and output increases in industrial nations, the public sector grows as a proportion of total economic activity.