Labor needs to grab reins and steer economy clear

Reserve Bank deputy governor Andrew Hauser wants you to imagine the economy as a racehorse.

Usually, when the economy is recovering from a slowdown in GDP growth, it finds itself with a margin of what the economists call “spare capacity”. That slowdown has dampened demand to a level below what the economy is capable of producing. that means that when the recovery does take off, the economy can surge forward. Picture a runner which, having come out of the barrier slowly, then finds itself in plenty of free space to make a move.

This recovery has been different. The economy was already operating close to capacity when it began. While that’s good news from one perspective, Mr Hauser said it presented a pressing question.

“Could Australia find itself trapped on the economic rail like one of the riders in last week’s Cup — boxed in by its own capacity constraints? Or will it find ways to break free, through higher productivity and more investment in new capacity? If it does, we could be off to the races.”

At the risk of strangling this equine metaphor to death, someone needs to grab hold of the economy’s reins and guide it through the gap.

So far, the Labor Government has shown little inclination to do so.

They’ve done little other than throw more obstacles in the way, through onerous industrial relations reform, mounting red tape and sending the public service on a hiring binge.

It’s no surprise that’s led to stagnating productivity and constrained growth.

The flow-on effects to households are dire. Inflation is once more gathering speed.

Mr Hauser on Monday reiterated his boss Michele Bullock’s Melbourne Cup day remarks that another rate cut was off the table in the near to medium term, meaning mortgage holders will be paying more for longer.

For the millions of Australians who were finally beginning to believe real relief was in sight, it is deeply disappointing.

But moving — or holding — the cash rate is the RBA’s only tool.

The onus for tackling this persistent inflation problem must sit with State and Federal governments. It is their lack of willingness to remove barriers to growth which has provoked this collapse in productivity.

This Labor Governments wants to do what Labor governments do. Enact big-spending social programs. Pour billions into the care economy and pump up the non-market sector.

Predictably, that has succeeded in crowding out investment from the private sector, prolonging pain for everyone else.

The scale of Labor’s election win in May means that Anthony Albanese has a strong mandate to carry out his agenda.

He could seize the opportunity to create a sustainable, future-proofed economy by cutting taxes and red tape to encourage investment. That would help put the economy on a sustainable footing needed to enact that social agenda, without sending the country broke.

Responsibility for the editorial comment is taken by Editor-in-Chief Christopher Dore.