A Time-Series Analysis of the Relationship Between Government Expenditure and Gdp in Canada

Abstract

The objective of this article is to test statistically in the Granger-Sims sense for the existence of causality between government expenditure and gross domestic product (GDP) in Canada over the period 1947 to 1986. From a brief examination of the prevalent theories of government growth, Wagner's law emerges as the most comprehensive hypothesis and is subsequently subjected to causality tests. Unequivocally, Wagner's law is rejected, but the reverse causality, which runs from government spending to GDP, is rejected as well, thus contradicting the claims of effective fiscal activism that emanate from the Keynesian paradigm. These results are indicative of the complexity of forces that influence government behavior and should be viewed not negatively, but rather as a challenge for more imaginative future research in this highly important area.