Testing Wagner versus Keynesian Hypothesis for Pakistan: The Role of Aggregate and Disaggregate Expenditure

The objective of this study is to examine the relationship between government expenditure (at aggregate as well as disaggregate level) and economic growth for Pakistan. The study further aims to find causal relationship for existence of applicability of Wagner’s or Keynesian hypothesis. Engle and Granger (1987) two step procedure and Granger causality test (1969) are employed for time series data for the period 1976 to 2015. Results suggest that only expenditure on social, economic and education services have proposed long-run association with economic growth in five of basic versions of Wagner’s law for Pakistan. The causality tests are showing mix results regarding existence of applicability of Wagner’s or Keynesian hypothesis. Expenditure on current subsidies, expenditure on defence, current expenditure and developmental expenditure are in favor of Wagner’s law in most of the cases, where causality runs from economic growth to government expenditure. Results of expenditure on social, economic and education services are in line with existence of Keynesian hypothesis, where causality flows from government expenditure to economic growth. On the basis of results, one may conclude that government should invest for expenditure on social, economic and education services to achieve sustainable economic growth by spending more on human resource development.