Austrian Government Expenditures: Wagners Law Or Baumols Disease?

Abstract

Government expenditures have grown in Austria during most of the 20th century. In this paper, we present empirical evidence for this growth process and analyze some of its possible reasons. In particular, two prominent theoretical explanations for public sector growth are tested for Austria: first, Wagners Law hypothesizing a positive income elasticity of demand for public goods, and second, Baumols Cost Disease, relating public sector growth to above-average cost increases in the public sector as compared to the private sector. The empirical evidence confirms the importance of the Cost Disease for Austria but cannot confirm the validity of Wagners Law. Business cycles influence government expenditures in the short run, while a number of variables suggested by public choice theories except for fiscal illusion do not significantly influence the growth of the public sector in Austria.