Allan T. Peacock and Jack Wiseman originally derived this hypothesis from an evaluation of UK public expenditure data.

Peacock and Wiseman conducted a new study based on Wagner's Law. They studied the public expenditure from 1891 to 1955 in the United Kingdom. Their thesis dealing with the growth of public expenditure was put forth by Jack Wiseman and Allan T. Peacock, in the book The Growth of Public Expenditure in the United Kingdom, 1890-1955 The main thesis is that public expenditure does not increase in a smooth and continuous manner, but in jerks or step like fashion. At times, some social or other disturbance takes place, creating a need for increased public expenditure which the existing public revenue cannot meet. They argue that shocks cause sudden increases in the size of governments, which never falls back to the previous level. People will accept, in a period of crisis, tax levels and methods of raising revenue that in quieter times they would have thought intolerable, and this acceptance remains when the disturbance itself has disappeared. Citizens resistance to high tax burdens was also mentioned in Wagner's work. However, Peacock and Wiseman introduced the important notion of 'suppliers' into the public expenditure determination process. They derived the key concept of a 'tolerable tax burden' relying on the political propositions that governments desire to spend more (for political profit; i.e. votes), while citizens do not like to pay more taxes. In 'normal' times, the existence of a customary notion of 'tolerable burden' is likely to constrain the rate of implementation of government expenditure plans. But this constraint will be weakened or destroyed during periods of social upheaval, when such notions of taxation are more easily broken down, and the gap between a 'desirable' growth of public expenditures and a 'tolerable' tax burden may be narrowed. Peacock and Wiseman thus stated that:1. "The rise in public expenditure greatly depends on revenue collection. Over the years, economic development results in substantial revenue to the governments, this enabled to increase public expenditure". 2. There exists a big gap between the expectations of the people about public expenditure and the tolerance level of taxation. Therefore, governments cannot ignore the demands made by people regarding various services, especially, when the revenue collection is increasing at constant rate of taxation. 3. They further stated that during the times of war, the government further increases the tax rates, and enlarges the tax structure to generate more funds to meet the increase in defence expenditure. After the war, the new tax rates and tax structures may remain the same, as people get used to them. Therefore, the increase in revenue results in rise in government expenditure. Three notions have been derived from the analysis of Peacock and Wiseman: DISPLACEMENT EFFECT: War and depression create a displacement effect by which previous (lower) tax and expenditure levels are replaced by new higher budgetary levels. New levels of tax tolerance (deficit tolerance) support a new fiscal plateau where tax burdens are higher. On the new plateau some old expenditure by government are eliminated and new ones are substituted for them. Some of the substitutes may have been produced by the private sector in the past. For example, conducting Research & Development or providing retirement benefits. It argues that in periods of social upheaval, such as wars, some on-going government spending (related to normal times) are displaced upwards by war-related spending. Government expenditure does not fall to its original level, following the crisis period, because a war, for instance, is not fully financed by taxation due to limited taxable capacity. Therefore, nations have to repay debts and related charges after the event. INSPECTION EFFECT: War and other social disturbance force people and their government to seek solution to important problems which previously had been neglected or perhaps unnoticed, for

example, the need for an interstate highway system or re-engineering of the hospital system. The 'inspection effect' points to the previously unidentified government spending brought into focus by crisis. This arises from 'citizens' keener awareness of social problems' during the period of crisis, which allows governments to expand their scope of services to improve those social conditions. The inadequacy of the revenue as compared with the required public expenditure creates an inspection effect. They need to review the revenue position and the need to find a solution of the important problems that have come up and agree to the required adjustment to finance the expenditure. They attain a new level of tax tolerance. They are now ready to tolerate a greater burden of taxation and as a result the general level of expenditure and revenue goes up. CONCENTRATION EFFECT: This effect notes the tendency for central government economic activity to become an increasing proportion of total public sector economic activity when a society is experiencing economic growth. As the crisis also leads to an increase in the concentration of power in the hands of central government and this is also not reversed after the crisis. Y PE PUBLIC EXPENDITURE b2 a3 DIAGRAMMATIC REPRESENTATION On the y-axis the increase in public expenditure (as percentage of Gross National Product GNP) and on the x-axis the time period is shown. PE is the public expenditure increase path, a is the first social expenditure that causes disturbance which causes an enormous increase in public expenditure, afterwards when the economy is about to settle the government reviews the situation and b1 is the inspection effect. Once the new fiscal plateau is reached the concentration effect takes place. CRITICSMS What are these social crises'? Wars and major depressions obviously qualify and Peacock and Wiseman used these to explain the increase in public expenditure in the UK in the 1930s and after World War II but how bad does a depression need to be before it qualifies as a `social crisis'. The theory does not provide any answer.A certain amount of empirical evidence was produced to support the displacement effect hypothesis in a number of countries, but problems remain. In many western industrialised countries, public sector expenditure surged from the mid-1960s to the mid1970s. What social crises caused this as it was a relatively peaceful time? BIBLIOGRAPHY i. ii. iii. iv. v. vi. Bhatia,H.L. (1993). Public Finance. New Delhi: Vikas Publications. Dewitt, K.K. (1966). Modern Economic Theory. New Delhi: S. Chand & Co. Lekhi, R.K. (2008). Public Finance. New Delhi: Kalyani Publishers. Peacock A and J Wiseman. (January 1979). Approaches to the Analysis of Government Expenditure Growth. Public Finance Review. Vol. 7. No. 1. 3-23 Peacock, A. T., & Wiseman, J. (1961). The Growth of Public Expenditure in the United States. London: Oxford University Press. Singh, S.K (2008). Public Finance in Theory and Practice. New Delhi. S. Chand & Co.

b1 a1 O

a2

New fiscal plateau

Social disturbance X TIME PERIOD

Further it stated that during the times of war the tax rates are increased by the government to generate more funds to meet the increase in defense expenditure. This is known as displacement effect.[4] Such 'displacement effect' is created when the earlier lower tax and expenditure levels are displaced by new and higher budgetary levels. But it remains the same even after the war as people become habituated to it. Such an increase in revenue therefore gives rise to government expenditure.[5]

2.1.3 The displacement effect

Therefore, Peacock and Wiseman invented the displacement effect. This involves a number of separate ideas:(a) societies not subject to unusual pressures have fairly stable ideas about the tax burden which they regard as tolerable. These ideas dominate those of desirable government expenditure and hence limit the extent to which government expenditure can grow. (b) however, large scale social disturbances weaken these ideas of tolerable tax burdens. Emergency government expenditure is accepted and so too are the higher rates of taxes needed to pay for it. People become used to the higher tax rates and their notions of the tolerable tax burden are displaced upwards. After the disturbance, there is thus increased scope for government expenditure and this does not fall back to its old level. (c) as well as the taxation constraint being eased by the social crisis, there is also an `inspection effect' of the crisis - people observe social needs during the crisis and accept that there is a case for greater social spending. (d) finally, the crisis also leads to an increase in the concentration of power in the hands of central government and this is also not reversed after the crisis. Thus each major disturbance leads to the government assuming a larger proportion of the total national economic activity. Both of them are emphasizing the recurrence of abnormal situations which cause sizeable jumps in public expenditure and revenue.

Permanent influences
Several of the ideas above and some others were grouped by Peacock and Wiseman under the heading of permanent influences on government expenditure from the changing nature of society. We can list these as: (a) The level of development (b) Population size and the age composition of the population - population growth leads to overcrowding and congestion, increased interdependence and external effects of private consumption and production decisions; changing age composition of populations may lead to increases in the proportion of the old or very young in the population, both of which groups may require greater state support (health expenditure, old people's homes, education, expenditure on housing). (c) Increased output per capita and increasing population lead to growth of conurbations and urbanisation is associated with increasing interdependence and externalities. (d) Social insurance: Urbanisation and affluence lead to the breakdown of the extended family, requiring increases in public expenditure, especially on health care. (e) Increased mobility of society can be seen as part of the same process. (f) All of these factors and others may mean that the income elasticity of demand for public sector services is higher than that for private sector services, although this begs the question of why public sectors provide the services which they do provide; (g) Effects of war, war-related and defence expenditure. It has been argued that the single best explanation of the huge growth of the public sector which took place in the USA was the dominant influence of direct and indirect expenditures on wars and threats of war. This may have been true up until the 1960s and again during the Reagan administrations, but between 1965 and 1975, US federal civilian expenditure increased twice as fast as defence spending. According to Peacock and Wiseman, the problem lies in the permanent nature of all of these influences. They argued public expenditure growth had not been steady but had involved spurts of growth followed by long static periods.