But the growth fillip from public sector infrastructure spending can only be modest. Increasing infrastructure spending by a quarter, which would represent a huge administrative effort, would lift GDP growth by just 0.4 percentage points.

Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers. If America s bubble economy is now tapped out, global growth will slow sharply.

China s rapid economic growth coupled with its large population base have meant that spending by Chinese tourists in Europe is an attractive figure,

Trends in the US budget reflect an inconvenient truth If the growth of spending on health care programs cannot be slowed, stabilizing the federal debt at a sustainable level will require deep cuts in spending on other priorities and increases in taxes on the middle class. The recent slowdown in the growth of health care spending is a promising sign that America s budgetary tradeoffs may turn out to be less difficult than expected.

Second, the financial system both banks and non bank institutions is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

Even economic growth will not prevent a tradeoff between defense and welfare spending for Europeans. Fifty years of defense dependence on the US has created a powerful peace industry in Europe whose primary business is to fight defense spending tooth and nail.

Deficits resulting from capital spending, by contrast, are or can be good. If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt more importantly, it raises productivity, and thus improves a country s long run growth potential.

After five years of decline in living standards, voters oppose more austerity and further retrenchment without growth. Restoring a sound euro requires policies that revive growth, rein in government spending, and reform heavily regulated labor and product markets.

But these demand reducing measures also reduce economic growth, causing deficit reduction targets to be missed. Getting fiscal consolidation back on track then requires more spending cuts, which depress growth still further, causing budget performance to worsen even more.

The French government expects budget revenues to match all spending except debt service by 2014. But that forecast assumes continued growth, whereas France is slipping into recession.

The growth of health care spending declined or remained unchanged in real (inflation adjusted) terms each year between 2002 and 2011, falling to 3 3.1 in 2009 2011, the lowest rates on record since reporting began in 1960. Recent data indicate that after a slight acceleration in 2012, the growth of real health care spending in 2013 has fallen back to its 2009 2011 average.

The explanation is not capital spending, which is normally linked to productivity growth. There have been no major differences between the US and the large euro zone economies here.

Attention is therefore shifting to the second narrative, which suggests that the advanced economies fundamental capacity to grow by making useful things has been declining for decades, a trend that was masked by debt fueled spending. More such spending will not return these countries to a sustainable growth path.

A higher level of consumer spending would raise the average Chinese family s standard of living, a primary component of what China s leaders now call the Chinese Dream. Faster growth in consumer spending would also reverse the recent slowdown in GDP growth, providing the extra demand needed to create employment for the millions of Chinese who are leaving agriculture and the millions more who are graduating from the country s universities.

Oil exporters must increase fiscal spending further Japan and the Euro area must trigger higher growth through structural reforms and the US must implement concrete measures to sustain higher savings.

The productivity record has generally been weak over the last few years, and this suggests that growth in the years ahead could be slower than previously expected. Revenue growth thus looks insufficient to match the surge in age related public spending on health and pensions.

Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.

Within the first quarter, the monthly increase in real consumer spending accelerated from just 0.1 in January to 0.4 in February and 0.7 in March. That was faster than the 0.3 monthly growth in real personal disposable income during this period, highlighting the importance of wealth as a driver of spending.

Another factor holding back recovery has been weak growth in spending on goods and services by both state and local governments, and more recently by the federal government. Indeed, since the recession s onset, state and local governments have cut nearly 600,000 jobs and reduced spending for infrastructure projects by 20 .

The problem is that more than half of such spending is on education, science and technology, and infrastructure the areas that Obama had just argued should be strengthened. After telling Americans how important government investment is for modern growth, he promised to freeze that spending for the next five years!

Spending rate

As these families have tightened their belts, the pace of consumption spending and economic growth has become more dependent on earners at the top of the income distribution. Since the recession ended in 2009, real consumption spending by the top 5 has increased by 17 , compared to just 1 for the bottom 95 .

As the economist Alberto Alesina has found from studies of fiscal stabilization in OECD countries, eliminating fiscal deficits through spending cuts tends to be much better for the economy than eliminating them through tax increases. A natural interpretation is that spending adjustments work better because they promise smaller government, thereby favoring economic growth.

In the long run, if primary surpluses are achieved by controlling spending, the increase in national saving will promote investment and growth, whereas higher tax rates would work in the opposite direction. Successful post World War II fiscal consolidation in OECD countries averaged 5 6 in spending cuts per 1 of tax hikes.

In 2013, as transfer payments are phased out, however gradually, and as some tax cuts are allowed to expire, disposable income growth and consumption growth will slow. The US will then face not only the direct effects of a fiscal drag, but also its indirect effect on private spending.

But growth prospects could be undermined by another bruising political battle over the federal budget, resulting in deep spending cuts. The current Republican rhetoric in the House of Representatives portends additional fiscal austerity.

So India s medium term growth potential lies well below that of China in recent decades. A significant boost in infrastructure spending and policy reforms can make a difference, but it cannot close the gap.

In order to address global poverty effectively, world leaders must pursue poverty reduction policies that support inclusive, sustainable economic growth and development in turn increasing the fiscal resources that are available for social spending.

BERKELEY Over the last five years, the growth of health care spending in the United States has slowed dramatically to the lowest rate in the past 50 years. The slowdown is not a surprise.

Many analysts had expected emerging markets to generate exponential growth over the next decade. But now there is talk of how the global crisis is slowing down these economies and killing off discretionary spending.

Given the strong likelihood that consumers will remain weak for years to come, America s growth agenda needs to focus on getting more out of the other 30 . Of the four growth components that fall into this category, two have the greatest potential to make a difference capital spending and exports.

Even a small reduction in the growth of these programs would save billions of dollars. Based on the unexpected slowdown in spending growth during the last few years, the Congressional Budget Office recently cut its ten year projections for these programs by 3.5 , reducing the ten year deficit by 382 billion.

It perpetuates deficit spending.

To avoid this outcome, Germany needs to adopt policies fiscal stimulus, higher spending on infrastructure and public investment, and more rapid wage growth that would boost domestic spending and reduce the country s external surplus. Unless, and until, Germany moves in this direction, no one should bet the farm on a more robust and sustained eurozone recovery.

Using it for investment would enhance long term growth, with positive spillovers to the rest of Europe. A long recognized principle is that balanced expansion of taxes and spending stimulates the economy if the program is well designed (taxes at the top, combined with spending on education), the increase in GDP and employment can be significant.

Policymakers should pair fiscal measures to ameliorate the jobs and investment deficits now with a multi year plan to reduce the long run fiscal deficit gradually. This long run plan should increase spending on education, infrastructure, and research, while curbing future growth in health care spending through the cost containment mechanisms contained in Obama s health reform legislation.

How quickly fiscal retrenchment should be launched and the right balance between higher taxes and lower spending will vary by country, reflecting factors like the strength of the economic recovery, the market s appetite for debt, and initial spending and revenue ratios. But the common objective for fiscal policy must be to support durable medium term growth and job creation.

The EU s role in fostering productivity gains, economic growth, and employment should increase, with as much as a quarter of spending from the EU budget devoted to human capital and research. Research spending should be made more effective by scrapping bureaucratic management by the Commission and Council and opening all national research funds to EU wide competition.

Because the increase in US spending on Chinese exports will be gradual, it also is appropriate for the adjustment in the renminbi dollar exchange rate to be gradual. If China recklessly revalued its exchange rate by 20 , as certain foreigners recommend, the result could be a sharp fall in spending on its goods, which would undermine growth.

For example, the secular stagnation theory claims that low interest rates tell the true story. The global economy is suffering from a chronic demand shortfall, which can be remedied through sustained growth in government spending.

Stability of social spending is crucial, inasmuch as instability and fluctuations reduce the efficiency of social spending.

Of course, there is two way feedback between debt and growth, but normal recessions last only a year and cannot explain a two decade period of malaise. The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending.

This is possible, however, only if the key growth inputs remain in ample supply, and if human made climate change is counteracted. If the supply of vital inputs is constrained or the climate destabilized, prices will rise sharply, industrial production and consumer spending will fall, and world economic growth will slow, perhaps sharply.

But we're spending 36 percent.

Just look at this spending.