Does Wagner's Law Ruin the Sustainability of German Public Finances?

The literature on long-term relationships in public finance is dominated by two approaches: fiscal sustainability and Wagner's law. In this paper, we argue that they should be analyzed simultaneously, using vector error-correction models for public expenditures, revenues, and GDP. For Germany, we show that since 1973 the sustainability of public finances has been ruined by the interaction of Wagner's law with permanent expenditure increases and revenue reductions resulting from fiscal policy reactions to the oil crisis. Our findings underline the importance of the German debt brake for reestablishing sustainable public finances.