Explanation
Alan T. Peacock and Jack Wiseman conducted a study of the behaviour of government expenditure in the UK for the period 1890 to 1955. Their study was based on Wagner’s hypothesis of increasing state activity.
The study analyses the time pattern of public expenditure. It explains some important characteristics of the growth of the public sector. It is argued that growth in public expenditure involved spurts of growth followed by long static periods rather than a smooth and continuous growth pattern, i.e. in a step-like pattern coinciding with social crises and wars.
They explain the hypothesis with the help of three types of effects through which public expenditure increases: displacement, inspection and concentration effect.
The displacement effect is explained by comparing public expenditure in times of peace and times of social disturbances as they see that the expenditure cannot be the same at these two times. They were of the view that the government likes to increase its expenditure as it has to take care of society’s welfare. Besides, some disturbances at times may also lead to an increased need for government expenditure, which may not be met from existing public revenue. However, the fact that citizens do not like to pay taxes puts a constraint on government spending.
The government expenditure is constrained by what they call a ‘tolerable level of taxation’, which remains quite stable during times of peace. With the growth in national income, tax revenue would also grow at a constant ‘tolerable’ tax rate. It enables the public expenditure to grow gradually.
This gradual trend is disturbed by social crises such as wars, famines or other economic problems during which higher taxes also become acceptable to society as the government needs higher public revenue to meet unanticipated expenditures. The relative expansion in government activity at times of social disturbances displaces the previous level of government expenditure, which they termed as the displacement effect.
They also argued that this displaced public expenditure does not fall back to the original level, i.e. it remains displaced at this level even after the crisis. Peacock and Wiseman argued that an increase in public expenditure does not tend to be smooth and continuous rather it increases in a jerk or step-like fashion.
The Inspection Effect takes place when people observe and accept the greater social spending required to fulfil social needs during the crisis. It happens as society realizes that it carries a new, higher tax burden. In other words, new levels of tax tolerance emerge.
The Concentration (scale) Effect is the tendency for central government economic activity to become an increasing proportion of the total public sector economic activity during times of economic growth of a society.
Gupta (1967) subjected the displacement hypothesis to empirical testing in the case of five countries and found an upward displacement, confirming the validity of the hypothesis. Dada and Adesina (2013) attempted to examine the validity of the Peacock-Wiseman hypothesis in the case of government expenditure and revenue in Nigeria, covering the period 1961 to 2010. It was found that the hypothesis holds in the short run as well as the long run. Government spending induced the growth of public revenue during the reference period.
Graphic Presentation of Hypothesis
In the Figure, the step-like pattern of growth of public sector revenue and expenditures in Great Britain during the period 1890 to 1955. Government fiscal activities rise step by step to successive new plateaus, and this spurt of growth is followed by a long static period. The steps indicate the periods of major social disturbance. After every step, a new, higher tax and expenditure level displaces the old, lower levels.
Criticism
Peacock-Wiseman hypothesis recognized the importance of public expenditure during social crises. Still, it has failed to explain the limit after which an economic problem can be qualified as a ‘social crisis’.
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