Clare O’Neill on R&D tax incentive

James Riley
Editorial Director

Industry policy is at its lowest ebb in years and federal Labor is urging government to re-examine the Turnbull-era Innovation and Science Australia 2030 report for its recommendations on re-setting the nation’s R&D spending.

Opposition innovation spokesperson Clare O’Neil says the canary in the coal mine are the shocking shortfalls in projected numbers of STEM graduates from local universities, where we need 121,000 in the next six years but will produce only 38,000 graduates.

But this not the only – or even the most important – structural problem standing in the way of securing access to a pipeline of high-skilled, high wage jobs in the increasingly tech-driven economy.

The R&D funding model is not producing the returns to the economy as those of international rivals.

Ms O’Neil has urged a more pro-active intervention of government to drive national strategic R&D priorities, increasing national spending on R&D, and overhauling the R&D Tax Incentive. Governments should not shy away from placing bigger strategic bets, moving away from the indirect support via the tax system and toward a greater role for direct grants.

And very specifically, Ms O’Neil said the federal government must use its own spending as an instrument of industrial policy – just like our competitors.

“Government spending in Australia is 36 per cent of our GDP. Of course, it shapes our economy, indeed, it cannot avoid doing so,” Ms O’Neil said.

“Government decides whether we fund students to do biomedical science or business; architecture or aged care. Government determines whether we fund an inland rail route or an international space program; whether we push for a better trade deal for live cattle or lithium.

“All these decisions build the platform on which Australians innovate, invent, start businesses, export, grow, employ, and train up others.

“If we don’t acknowledge this and seek to take advantage of it, we miss the chance to be thoughtful about how all the choices we make are connected.”

Ms O’Neil has urged government to revisit the recommendations of the Australia 2030: Prosperity through Innovation report published in late 2017. The report came out of Malcolm Turnbull’s National innovation and Science Agenda (NISA), prepared by Innovation and Science Australia.

At the time, the ISA was led by venture capital legend Bill Ferris, and the report became known as the Ferris review. The report took two years to prepare, highlighted specific inefficiencies in Australia’s innovation ecosystems, and sank without a trace once government has provided an only lukewarm response to its recommendations.

Among other things, this Ferris review highlighted Australia’s relatively low R&D spend compared with other comparable economies, and in particular the low level of Business Expenditure on R&D. Mr Ferris recommended that the R&DTI be reset, and that government increase the level of direct investment in R&D, while reducing the indirect support via the tax incentive.

It is fair to says that the ISA board was then shocked when the government tweaked the RDT!, but trousered the savings (back into general revenues) rather than boosting direct investment though grants as the 2030 report recommended.

The problem with a low and declining R&D spend is a problem of deep national concern, Ms O’Neil said. Not only does it come during a historic decline in productivity growth, but also coincides with a period of spectacular global industrial, technological and economic change.

R&D is the pipeline for economic growth and a high standard of living for Australia’s future, and yet Universities Australia has reported that in 2019 government spending on R&D was at its lowest in 40 years, she said.

“The amount of spending is an issue, but what government funds is another critical question. If government’s role is to create something bigger than the sum of the parts, spending ought to be strategic,” Ms O’Neil said.

“The RDTI is the centrepiece of our R&D policy. And it’s an indirect tax incentive. As long as a company’s project qualifies, they get government support, no matter the subject of the research.”

“The Ferris Review made a pretty simple point: best practice countries are doing much more direct spending on R&D, for example, through grants programs, than we are. That allows those governments to be much more strategic about what they do and don’t fund. Indeed, in Germany and Israel, the entire R&D program is directly funded,” she said.

“I’m not advocating a full direct-investment approach, but rather noting that the RDTI is just one of an incredibly diffuse range of investments being made by the government, which spread scarce innovation dollars across a dazzling array of activities.”

Instead of letting a thousand (or many thousand) flowers bloom, best practice countries are driving innovation the opposite way – by focusing policy and spending on a handful of national research and innovation priorities in areas of comparative advantage.

There is a far bigger role for government in rebooting the innovation system, and in driving industry policy that takes advantage of the economy-wide technological disruption that are presenting opportunities to build new industries.

But Ms O’Neil says the Coalition dropped any public pursuit of these opportunities after the electoral scare at the 2016 election that nearly unseated Malcolm Turnbull.

“Like house mice, the Liberals briefly appeared in the innovation policy kitchen. But after the scare of the 2016 election, they have not returned,” Ms O’Neil said.

“We will not get the jobs of the future that Australians deserve without policy change on innovation. And I fear we will not get policy change under this government,” she said.

Do you know more? Contact James Riley via Email.

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