The Budget’s R&D spend looks less than futuristic, says Grant Thornton’s Greg Thompson.
While a chunk of this year’s expenditure naturally focuses on the perennial portfolios of health, education, justice and housing, this Budget aims to adjust the direction of our economy to deliver not just now but in years to come. This has been done through a mixture of ‘investing’ in people and organisations, ostensibly to remedy underfunding by the previous government in a wide range of areas. Embedded within that rhetoric is the need for our economy to be ready for the future. That’s why this year’s Budget theme is ‘Foundations for the Future’.
To facilitate this refocus the proposed catalyst of change is the Research and Development Tax Credit regime, which was announced earlier this year and is undergoing consultation. The desired outcome is to double the expenditure on R&D in New Zealand. However, simply providing a financial incentive for R&D doesn’t necessarily mean that current levels of innovation will increase, or that it will occur in the areas that are needed for a future-proofed economy.
The proposed R&D regime will redefine the criteria for expenditure on innovation projects; these projects would need to use scientific methods to acquire new knowledge, or create new or improved outcomes to resolve scientific or technical uncertainty. A high standard to achieve.
The key question is whether the tax regime will achieve its stated aims and move New Zealand towards a desired future state, where according to Hon Megan Woods, Minister for Research, Science and Innovation, we “need new ideas, innovation and new ways of looking at the world”. The tax credit regime is aimed at enabling businesses to innovate and deliver productivity gains. The government doesn’t seek to do this through the R&D credit scheme alone, recognising we need a sound education sector, an engaged workforce and fairness in the economy.
The credit system works on the assumption that businesses will invest as desired, have the resources to do so, and possess the technical ability to meet the requisite technical standard. Effectively, it sets a framework and seeks businesses to take up the challenge and deliver – similar principles the previous government had employed over its term in office.
It also cuts small businesses out of innovation, with a de minimis of $100,000 R&D spend before qualifying and no provision of cash back to businesses that are often in start-up phase, and it sets a high technical standard which business are not currently set up to accommodate.
So is it time for a complete rethink on priming the New Zealand economy for innovation? The Future of Work Commission has been formed to look at what is required for the future, and this is a great start. But whether that leads to innovation – or simply an understanding of the shift in employment needs and practices, technology requirements and skill changes – is yet to be seen.
Of course, innovation fundamentally requires investment. Most businesses can’t fund real innovation out of business as usual and that has been the problem; R&D in New Zealand has mainly been more about adjustments to existing products and ideas rather than groundbreaking developments. New Zealand has a limited capital market to provide the necessary funding; the R&D credit will only provide 12.5% of spend, meaning businesses need to fund the remaining 87.5%.
It’s time for a rethink of innovation and the future of the New Zealand economy, and how to create a real framework for directing resources, skills and expertise towards innovation that will move New Zealand into the future. Providing broad incentives and creating core framework enhancements doesn’t create the focus and speed of change which is required.
For further enquiries, please contact:
Partner and National Director, Tax
Grant Thornton New Zealand
T +64 4 495 3775