A test of the Wagner's hypothesis for the Fiji islands

Abstract

In this article we examine Wagner's law for Fiji for the period 1970 to 2002. Using the Johansen (1988) test for cointegration, we find one cointegration relationship between national output and government expenditure. Using five different long run estimators, we find robust results on the impact of national income on government expenditure. The elasticity ranges from 1.36 to 1.44, implying that a 1% increase in income leads to a 1.36–1.44% increase in government expenditure. Moreover, we find that in the long run national income Granger causes government expenditure. While these results are consistent with Wagner's law, we warn policy makers that because Fiji's total debt stands at around 69% of GDP, in future the bulk of expenditure will go towards debt financing at the expense of productive sectors.