"Wagner's Law" of Public Sector Growth: Does It Hold for Austria?

Preliminary Draft - not to be quoted

Government expenditures have grown in Austria during most of the 20^th 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, “Wagner’s Law” hypothesizing a positive income elasticity of demand for public goods, and second, “Baumol’s 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 “Wagner’s 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.