The Budget !

 The thinking behind the Federal budget is fairly simple to understand.  Borrowing money is incredibly cheap and the Feds are going on a spending spree that will will create many jobs and soak up the unemployed arising from the drastic lockdowns needed to tame COVID-19.

Government confidence is buoyed by the unexpected rapid recovery of the business sector now that vaccination is under way and there is the expectation that interest rates will remain low for sufficient time for the recovery to balance the books.

There will be the usual difference of political opinion on the spending mix that this money will finance, but generally it will receive a good reception and it will be judged by what happens to the unemployment rate.   There is the expectation that it will quickly recover to about four percent, which in modern terms is considered to be " full employment ".

A budget heavy on spending is always a gamble and this recovery depends on two factors remaining stable.  China has been flexing its muscle and trying to punish Australia for our efforts to determine how  the coronavirus originated; something China has suspiciously tried to cover up and deflect onto Europe. It is refusing Australian coal exports and slapped tariffs on a range of goods that will be detrimental to the Australian economy.

The holdout is iron ore. Increasing steel production in China has increased Australian iron ore imports and sent the world price to a record high.  This Australian product releases less carbon dioxide than iron ore from other parts of the world and it is in China's interest to reduce its air pollution promise by continuing using it.

It is our iron ore sales to China that have improved our trading performance and reduced the deficit. Our budget strategy depends on this iron ore market holding firm and in China Communist ideology takes preference over logic.

The other factor that could harm this budget strategy is the mystery that still surrounds COVID-19.  We would appears to have the answer to this virus by way of several vaccines but it is far from under control in many countries, and it is constantly changing its user pattern.

The future this coronavirus may take is still to be determined, but some scientists predict that it will be with us for a very long time and it seems likely that it may gain the ability to resist the vaccinations designed to halt its spread.  If that happens, we would be forced to implement further lockdowns and that would negate all the benefits this spending budget is designed to bring.

Basically, this budget relies on iron ore sales to China remaining steady and the containment  measures in place to stop the coronvirus working to plan.    Reaction to the budget depends on whether you are an optional - or a pessimist  !