Research & Development

by David Richardson

One of the major U-turns of the 2020 Budget was the decision to scrap the savings the Government earlier sought to make by reducing the tax concessions going to companies for their spending on research and development (R&D).

Empirical research finds that increasing R&D by 1 per cent of GDP increases economic growth by 0.32 per cent to 1.18 per cent in a number of selected OECD countries. R&D creates ‘positive externalities’, which refer to benefits to other participants in the economy well beyond the actual investors in R&D. If Australia’s experience reflects that of some other countries a one per cent of GDP increase in R&D would increase growth by somewhere between 0.32 and 1.18 per cent. That implies that in 10 years GDP itself would be higher by $65 to $249 billion per annum based on present GDP figures.

The Explanatory Memorandum gives the actual savings figures which sum to $1.765 billion over the forward estimates (2019-20 to 2022-23). The present initiative is to reverse those cuts. The cost of that is exactly $2 billion. The increase appears to be the cost of dropping the 2019-20 estimate and adding in the 2023-24 estimate.

A lot of this is beside the point. Changes that affect company profits are nullified in practice by the change in franking credits in the opposite direction. That means a lot of the incentive from the tax deduction was taken back through the dividend imputation system. If a company pays less tax as a result of the R&D tax incentive, then there are fewer franking credits that can be distributed to shareholders. In an earlier submission to the Senate Economics Committee, The Australia Institute argued that dividend imputation means that traditional assistance measures should be re-examined.

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