The Budget: science reaction

University of Otago Professor of Science Lyall Hanton. Photo: Supplied
University of Otago Professor of Science Lyall Hanton. Photo: Supplied
Research and development funding was almost an aside in Budget 2018, although its importance to the future economic growth of New Zealand is undeniable. Business editor Dene Mackenzie reports on the reaction to the changes.

More than $1 billion of research and development funding was included in Budget 2018, receiving mainly plaudits from those involved in the R&D sector.

Research, Science and Innovation Minister Megan Woods hoped the new system would spur on private sector R&D.

The pre-announced tax credit allows businesses to claim 12.5c in the $1 back for every $1 they spend on R&D, providing the bill is more than $100,000 a year.

The Labour-led Government prefers the tax credit over the Callaghan Innovation grant scheme of picking winners. Callaghan’s scheme will be phased down as the tax credit comes in from next April.The Budget gave the expected scope of the R&D credit. The Crown will put aside $1 billion over the four-year forecast period. About $71 million was earmarked for the current year, rising to $350 million by 2022. The figure would also cover the cost of implementing the scheme.

University of Otago professor of chemistry Lyall Hanton said although Finance Minister Grant Robertson never mentioned the word science in his Budget speech, many of the Government’s aspirations would require science to achieve them.

A good start had already been made with the investment into R&D, including a tax incentive scheme, cyber protection and the topping up of various government-based research funds.

Those research and development initiatives should encourage investment by business in much needed New Zealand-based innovation, he said.

"Here, as in so many areas such as health, New Zealand is playing catch-up with the rest of the world. If we wish to have a transformative economy providing productivity, prosperity and sustainability, we must add value to and augment our primary produce."

That could be achieved with small footprint, low environmental impact, high-tech industries, Prof Hanton said.

Science had a key role. The desire to achieve a low carbon economy, coupled with formation of an independent climate committee and the green investment fund, would require significant involvement and advice from science.Although not singled out explicitly in the Budget, some of the funding must find its way to science if the transformation of the economy was to be successful, he said.

Deloitte Dunedin tax partner Phil Stevenson said yesterday the bones of the proposed regime were similar to what was in place under the previous Labour government.

The last scheme was replaced with the Growth Grant scheme administered by Callaghan Innovation.

Whether the proposed regime would be viewed positively depended on who you were, he said.

"The Callaghan Growth Grants have been very well received and have been highly valued by those who have received them.

"The benefits of the grants is they are known upfront and can be counted on as a regular cash injection to help incentivise R&D and reduce the financial risk of innovation."

The grants were internationally competitive and they recognised the spill-over benefits to New Zealand of having smart people doing smart stuff inside the country, Mr Stevenson said.

In comparison, R&D tax credits would be available to any business undertaking the requisite type of activity, without needing to jump through all the hoops to get a grant. The average business would appreciate getting a tax "reward" for good behaviour.

However, the tax credit regime being proposed was restricted in what could qualify, and it was highly likely many of the current grant recipients would be ineligible to receive anywhere near the level of the benefits they now received, he said.

The problem with the proposed regime was an inherent disconnect between the objective of increasing R&D and attracting large R&D firms to New Zealand and the requirement the firm claiming the credit must effectively own the results of the research.

It was that requirement that would not incentivise global businesses to use New Zealand as an R&D base.

While a global business might be happy to base its research in New Zealand, it would want the ownership of the intellectual property closer to the markets where the IP would be exploited and the sales of the resulting product would be made, Mr Stevenson said.

The proposals were also unclear as to how the rules would apply to software.

Under the previous regime, there was a cap on the level of tax credit available for expenditure on software.

"Officials have kicked this for touch and are still working on these proposals.

"In this day and age, much R&D will have some type of software components and therefore the rules need to embrace and encourage software R&D," he said.

Te Punaha Matatini director Professor Shaun Hendy said the Budget contained few surprises for science and innovation.

Labour campaigned on the re-introduction of tax credits and the Labour-led Government made it clear months ago it would be a Budget priority.

There had been considerable doubt about whether the previous government’s direct grants to business administered by Callaghan Innovation were working and a change was probably needed, he said.

"But I don’t think the R&D tax credit alone will be enough to lift our woeful business R&D investment."

A potential disadvantage of the tax credit to the Government was the better it worked, the more it would cost them. It could mean a future of a"fairly conservative" series of science and innovation budgets unless the effects of the tax credit on the Government’s coffers were better understood.

The Government would need to keep thinking creatively about its science and innovation policies if it was to meet its goal of lifting R&D investment to 2% of GDP, Prof Hendy said.

One issue desperately needing further attention was post-doctoral fellowships.

The Government now subsidised PhD students but not post-doctoral fellows, creating an imbalance in the research workforce.

After receiving incorrect advice from officials, the previous government axed a scheme supporting about 90 fellowships across the country, he said.

"It then refused to engage further on the issue. The world ‘post-doctoral’ completely disappeared from the final version of the National Statement of Science Investment."

Labour campaigned on reintroducing the scheme and it was disappointing to not see it addressed in the Government’s first Budget.

Prof Hendy hoped to see progress made in the area as soon as possible.

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