Peacock and Wiseman's displacement hypothesis: some new long-run evidence for the UK

Abstract

This article presents new evidence on the ability of Peacock and Wiseman's displacement hypothesis to explain temporal increases in the ratio of government expenditure to Gross Domestic Product (GDP) in the UK. Using univariate modelling techniques that are robust to structural changes in the underlying data generating process and a data set extending back to 1836, we find four instances where the ratio of expenditure to GDP displays an evidence of a structural break. Two of these breaks coincide with major social upheavals as predicted by the displacement hypothesis.

Acknowledgements

We would like to thank Jushan Bai for making available the GAUSS code (originally prepared by Pierre Perron) for the test of multiple structural changes. Any errors are our responsibility.

Notes

¹ These data have also been used to test the tax smoothing hypothesis by Crosby and Olekalns (1999). The discussion of British fiscal policy, which follows, is based on the material in that paper.

² The British experience stands in marked contrast with the 19th century experience of France, where war deficits were financed by occasional repudiations of debt (Sargent and Velde, 1995).

³ Bai and Perron (1998) provide asymptotically valid critical values for inferring the number of structural breaks.