The Relation between Gross Domestic Product and Government Expenditure in Egypt: The Validity of Wagner’s Law or Keynes Hypothesis

Document Type : Original Article

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Department of Economics and Public Finance Faculty of Commerce Tanta University Egypt

Abstract

This research aims to study the causal relationship between both consumption and investment government expenditures in Egypt on one hand and gross domestic product on the other hand using Toda-Yamamoto causality test. Also, the research aims to examine the relationship among consumption and investment government expenditures and gross domestic product in the long-run using Johannsen cointegration test and in the short-run using Error Correction Model. The study found that there is a positive and significant relationship among gross domestic product and consumption and investment government expenditures in the short and long-run. Also, there is unidirectional causality relationship from gross domestic product to government consumption expenditure, which sustains Wagner’s law. However, there is bidirectional causality relationship between gross domestic product and government investment expenditure, which supports Wagner’s law and Keynes hypothesis in Egypt. Therefore, during the stagnation period, the Egyptian government could increase the government investment expenditure because it increases gross domestic product and boosts economics growth, which leads to an increase in the government investment expenditure again. This is because there is bidirectional causality relationship between the gross domestic product and the government investment expenditure.

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