An investigation of the public deficits and government spending relationship: Evidence for Greece

This paper tests the validity of the Buchanan-Wagner hypothesis for Greece, that increases in public spending are the result of the tolerance of large deficits over the period 1961-1994. To test this hypothesis, three unit-ro ot pretests, the Dickey-Fuller, Phillips-Perron and Kwiatkowski et al. and maximum likelihood estimation techniques of cointegrating vectors and a vec tor error-correction model are employed. A long-run relationship is found t o exist among government spending, deficit, income, wages and adult populat ion and the importance of short-run deviations are presented. The empirical evidence suggests that Buchanan and Wagner hypothesis, seems to find suppo rt for Greece in the long-run and the short-run. Further, productivity in t he public sector is lower than in the private sector and the growth of inco me is not an important determinant of the increase in the relative size of public spending.