Abstract

We used traditional as well as time series econometrics techniques to reinvestigate the application of the Wagner’s hypothesis to Pakistan (1960 -2007). Fiscal deficit and population growth were added to the functional form of the law.Wagner’s hypothesis does not hold for aggregate public spending and income for three periods (1961 - 2007, 1973 - 1990, 1991 - 2007). WL holds for the period 1981 - 1991 when fiscal deficit is included that supports the Keynesian views about public spending. No long-run relationship exists between aggregate expenditure and income as well as between disaggregated expenditures and income. There is no-causality between income and public spending. Income Granger causes defence spending and interest payments. There is unidirectional causality between fiscal deficit and public spending as well as between income and fiscal deficit.Elasticity estimates and Granger causality results are in disagreement

Key words: Wagner’s law, elasticity, co-integration, causality.

JEL Classifications: E6; H5