Government measures during the economic policy implementation should be based on the impact on economic growth and economic development. Moreover, as it is inevitable to have government expenditures, it is crucial to analyze what kind of relationship exists between economic growth and government expenditure. The answer comes from either Keynes or Wagner theories. This report explores such relationship for Georgia during 1995-2022 and finds the optimal point, when there is a maximum national income, according to Armey-Rahn curve.
According to Keynes, government expenditure is the measure of the fiscal policy, through which it is possible to increase revenues (Demez 2021, 201). On the other hand, according to Wagner, economic growth is accompanied by the faster growth in government expenditure (Балацкий 2010, 80) and therefore, public spending is endogenous factor of economic development. Wagner theory shows that as revenue is increasing, it is more necessary to regulate externalities and demand of public goods is also increasing which causes public spending to growth (Sideris 2007, 5). In this case, public spending is behavioral variable as private consumption is (Singh & Sahni 1984, 630).
There is no common attitude towards Wagner theory. As there are different authors who are developing researches for different countries, according to some authors, Keynes theory has been proved, while for others – Wagner theory. Furthermore, it is also possible both theories to be in place and bilateral relationship between government expenditure and economic growth to be proved (Abbasov and Aliyev 2018, 1233; Loizides and Vamvoukas 2005, 125). Moreover, Wagner theory is considered to be valid for the long run period and results could be more valid in terms of economic as well as statistical interpretation, when longer time-series is taken. (Sideris 2007, 7). According to Балацкий(2010), Wagner law is more empirical and not economical which shows that only the fact that Wagner theory is on place does not mean that there is economic development.
Ram (1986) thinks that when government expenditure is high (government size), it might damage effectiveness and economic growth because it might be additional cost for the economy. Author highlights that government effectiveness is important during the economic development through productive investment, which explains impact of the government on economic development. However, government size should not me neither so low nor such high so that it will create an obstacle for effectiveness. This idea is represented by the Armey-Rahn cure and explains that up to some point, when government spending is increasing; economic activity is increasing as well, but then is starts to decline partly due to the crowding-out of private sector investments.
It should be noted that Wagner theory considers the relationship between government expenditure and economic growth for the countries under the industrialization process. During that time, using government spending as policy instrument might not be quite effective and monetary policy instruments might even have more important role (Demez 2021, 207).The relationship between Wagner law, at one point, and increasing up to some point and then decreasing Armey-Rahn cure, on the other hand, might be justified by the fact that Wagner is usually proved in developing time and when the country is more developed, there is more negative impact from government expenditure to the economic growth (declining part of the Armey-Rahn curve). We can say that high level of government expenditure might damage effectiveness and economic growth. However, Балацкий (2011)notes that Wagner law is not valid in the countries with “classic” capitalism like US or UK, neither in countries with social model like Sweden nor in countries with transit economies like Russia.
As mentioned, the relationship between government expenditure and economic growth depends on the developing step the country is. For example, Wagner theory usually exists in developing country with industrialized time. Results differ according to the estimation of short and long time, and methodology and estimation time is important for the results.
The paper examined Wagner law for Georgia, using all the available data (1995-2022). After that, Armey-Rahn curve is constructed as the relationship between government spending and revenue, which shows the optimum level of government when revenues achieve at the maximum point.
Analyzing Georgian available data, the result shows that Wagner law is valid and Government expenditure is dependent variable, while real GDP is its explanatory. However, as after some time, in the wake of development government revenues cause economic activity as well, we could construct Armey-Rahn curve for Georgia, where Scull point or optimum level of government expenditure, which maximizes GDP per capita, is at 24.9 percent.
Keywords: Armey-Rahn curve, economic growth, Wagner law, government expenditure, fiscal policy.
JEL Codes: E62, E63, F43, O23, O40

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