The displacement effect hypothesis was propounded by Peacock and Wiseman (1961). In the literature, it has been closely linked to the Wagner’s law although there are some difference between the two. Peacock and Wiseman argue that under normal conditions of peace and economic stability, changes in public expenditure are rather limited. These changes are bounded by “tolerable” limits of taxation. However, during crises and calamities, such as wars, people do not mind higher taxes and their threshold level of taxation rises permanently. Thus, government expenditure over time appears to outline a series of plateaus separated by peaks. However, empirical studies by Borcherding (1965) and others do not find much support for the hypothesis. Peacock and Wiseman also have a formulation for the Wagner’s law which we test.