Wagner’s Law, Government Size and Economic Growth: An Empirical Test and Theoretical Explanations for Italy 1861–2008

By the BARS algorithm, we econometrically assess, for Italy, for the 1861–2008 years (divided in the two monarchic and republican periods and in seven subperiods)- the Wagner empirical law of growth of public expenditure G and the Wagner optimal public expenditure growth G*, defined as GDP maximisation. Our results show the presence of a non-linear relationship between G and G* with an inverted “U-shape” curve. In the monarchic period until 1914 G G*. In the centre and centre left sub-period of the Republican epoch from 1946 to 1972 again G > G*. In the subsequent unstable period 1973–1992 and in the euro subperiod too G > G*, in spite of the fiscal compact. The two Wagner laws, as emerging in the Italian case, may be interpreted by Montemartini’ paradigm of the government as a political enterprise, which employs its coercive power to distribute the cost of the collective goods approved by its majority (but not necessarily fitting their true preferences) on the entire community. Another explanation may lie in Wagner principle about the natural tendency of public bureaucracy to expansion. The European rules as well as the Italian policies, in the application of the fiscal compact, should more clearly and firmly distinguish the reductions of public spending and the increases of taxes as instruments of reduction of public deficits and debts.