The Mid-Year Economic and Fiscal Outlook (MYEFO) released by the federal Treasury on November 2 is upbeat. Revising the May budget's projections for the Australian economy, it predicted unemployment will peak lower, growth will be higher and inflation will be under control.
"The Australian economy has performed better than expected since [the] Budget and the economic outlook has improved. These good outcomes — supported by the fiscal stimulus and low interest rates — have bolstered confidence by more than expected and set a solid platform for recovery", the MYEFO said.
On the basis of these "better than expected" projections, and a sharp inflation rise for the September quarter, the Reserve Bank of Australia (RBA) raised official interest rates by 0.25% to 3.5% on November 3.
The headline figures released in the MYEFO appear impressive at first glance. The spin from Treasury was meant to allay any fears. But the recovery is simply not certain. And even the Treasury admitted any "recovery" would have to be paid for by the falling living standards of working people.
The Treasury said the Australian economy is the "strongest growing economy in the developed world". It predicted nominal Gross Domestic Product growth of 1.25% in 2009/10 (nominal GDP figures are not adjusted for inflation). However, it admits this growth would still be "the lowest annual rate of growth since 1961/62".
It said, "expected growth in 2009/10 is due to the direct consequences of the fiscal stimulus", not the underlying health of the economy. It projected the stimulus spending would add 1.5% to GDP growth.
The outlook for the broader economy is flat. "With credit conditions still difficult for many businesses and profits weak, business investment is expected to fall ... Public infrastructure spending will be critical to supporting activity while private investment is weak and to maintaining investment that boosts the economy's capacity."
The Treasury expects inflation to stabilise, as the economy grows slowly. A key factor in their expectation is "wages growth [which is] expected to be moderate". In other words — workers wages are not expected to make up for inflation rises. Real wages are set to fall.
At the same time, the Treasury signalled it would maintain the Rudd government's neoliberal "fiscally conservative" policy. It promised, "higher tax receipts will be allowed to flow directly to the budget bottom line to deliver lower deficits and debt". Therefore, any increased government income will not go to increase spending. Instead, it will be used to bring the deficit down.
New spending will have to be met by cuts elsewhere, the MYEFO said. And even if the economy grows faster than expected, government spending growth will be limited to less than 2% a year.
Say goodbye to any significant boost in funding to health, education or public transport.
And at the same time, all government departments will be forced to make big spending cuts.
"Every department and every agency suddenly has a line in its budget called 'whole-of-government departmental efficiencies'", said Alan Kohler in the November 3 Business Spectator. "For 2009/10 they total $63.6 million and for 2010/11, $118.8 million."
There is no information on how many job losses will result from these "efficiencies".
The Treasury and the RBA pin hopes of a sustained Australian recovery on continued growth in China.
"A recovery is underway in Australia's Asian trading partners", the MYEFO said. "China, in particular, has continued to perform better than expected, with domestic demand supported by aggressive monetary and fiscal policy stimulus."
RBA governor Glenn Stevens justified his decision to lift interest rates on the same basis. "Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets", he said on November 3.
However, expectations for sustained growth in the Chinese economy may be too optimistic.
China's National Bureau of Statistics announced on October 22 that, compared to the previous year, China's economy grew by 7.7% in the first three quarters of 2009/10.
China's economic growth has increased demand for Australian commodity exports, which has helped shelter the Australian economy from the ravages of the global financial meltdown. But how sustainable is this growth, and is it likely to continue?
In its Regional Economic Outlook for the Asia and Pacific Region, released on October 29, the International Monetary Fund (IMF) said: "For Asia to retain its strong growth momentum, it needs to shift the drivers of recovery from an export engine, much more into domestic demand."
But this is not what is happening in China.
China's growth is being sustained almost solely by government stimulus spending — largely for capital investments to boost China's export capacity.
In the October 23 Business Spectator Kohler said: "Over the first nine months of 2009, China's infrastructure investment grew by 53%. Of the three-quarter GDP growth of 7.7%, 7.3% was accounted for by investment (consumption was 4% and falling net exports subtracted 3.6%)."
He said: "As a result there is now tremendous over-capacity being created in China. When the government stops spending so much on infrastructure, the slack is unlikely to be taken up by domestic consumption or exports."
Kohler said some economists worry that "China is a trembling economic bubble waiting to collapse".
The Chinese economy is structured around exports. The IMF and others have urged the Chinese government to boost domestic consumption (which would require raising the real incomes of Chinese workers and peasants). But the capitalist Chinese government has done little to improve the living conditions for most of its citizens.
And while China's main export markets (the US and Europe) remain in the doldrums, the threat of a collapse of the Chinese economy, with the resulting flow-on to Australia, remains very real.
There is no guarantee that the worst of the crisis is behind the Australian economy. And regardless, working people will continue to pay for the "recovery" for years to come.