Wagner’s Law and Developmental Public Finances

In the context of long-term fiscal sustainability challenges and a persistently uncertain geopolitical environment, the developmental role of public finances is gaining increasing prominence. A reallocation in the structure of government spending constitutes a key instrument for strengthening the developmental role of public finances and advancing the sustainable development goals. This study introduces a measurable indicator of the developmental role of public finances and examines the validity of Wagner’s law. Based on a sample of euro area countries, Granger causality panel vector error correction model estimates indicate there is a bidirectional causal relationship between general government expenditure and GDP per capita in the short-run, while the validity of Wagner’s law cannot be confirmed in the long-run. Productive government expenditure results suggest a weak indication of causality from productive government expenditure to GDP per capita. Effective fiscal policy should consider stabilisation needs, structural dynamics, and an appropriate institutional framework, while carefully managing the composition and sustainability of public spending and addressing developmental roles.