Peacock-Wiseman hypothesis
Also called: Displacement effect · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
The Peacock-Wiseman hypothesis says public spending grows in steps, not smoothly. In wars and crises, spending jumps, and people accept higher taxes to pay for it. When the crisis ends, spending does not fall back to its old level. This is called the displacement effect: the crisis moves spending to a new, higher level.
Example
During COVID in 2020-21, India's central fiscal deficit jumped to 9.2% of GDP and subsidies rose to 3.6% of GDP. Deficits came down in later years, but new commitments stayed. One example is free foodgrains under PMGKAY, extended for five years from 1 January 2024.
Don't confuse with
- Wagner's law: public spending grows steadily faster than national income as an economy industrialises. Wagner describes a long-run upward trend. Peacock-Wiseman describes sudden jumps caused by crises.
Related concepts
- Revenue expenditure
- Capital expenditure
- Plan and non-plan expenditure
- Committed expenditure
- Interest payments
- Effective capital expenditure
- Social sector expenditure
- Welfare expenditure
- Wagner's law