Testing Wagner's Law at Different Stages of Economic Development - A Historical Analysis of Five Western European Countries

Using historical data, we test the validity of Wagner's law of increasing state activity at different stages of economic development for five industrialized European countries: the United Kingdom, Denmark, Sweden, Finland and Italy. In order to investigate the coherence between Wagner's law and development stage, we classify every country into three individual stages of income development and apply advanced cointegration and vector error correction analyses. In line with Wagner's hypothesis, our findings show that the relationship between public spending and economic growth has weakened with an advanced stage of development. All countries support the notion that Wagner's law in its pure form may have reached its limit in recent decades.