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G-7's Penny-Pinching Ways Clash With Central Bank Stimulus

Ignoring low borrowing costs and other incentives, countries' spending is drying up

One big reason the global economy is spinning its wheels: some of the world's richest governments are being tightwads.

Group of Seven governments have been cutting their investment spending since a brief surge as the global financial crisis took hold. As a share of the group's gross domestic product, those expenditures were 3.3 percent in the first quarter, matching the lowest since 2000 and down from 4 percent at the start of 2009, according to numbers crunched by Oxford Economics.

The reluctance to spend on longer-term infrastructure is striking at a time when policy makers and economists are debating ideas from "helicopter money" to higher inflation targets to counteract the risk of long-term stagnation. Central banks in Europe and Japan are still buying up bonds to battle deflation risks, hoping that private companies will use lower long-term interest rates to borrow for their own investment and hiring projects.

"There is a strong case to be made that the G-7 economies should engage in `precautionary' fiscal stimulus centered on investment spending," Oren Klachkin, senior economist at Oxford Economics in New York, said by e-mail. "It could potentially boost downbeat productivity growth, an issue plaguing many advanced economies.'"

Boosting government investment by 1 percent of gross domestic product over two years could raise output in a G-7 economy by between 0.6 percent and 1.4 percent by 2017, according to Oxford Economics calculations. The power of a coordinated move would be even stronger and could mostly pay for itself as output and tax receipts rise.

That kind of a step could take pressure off central banks, and may even convince global CEOs that it's a good time to open their wallets as well.

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