Innovation needs more investment in this budget

This budget provides Peter Costello with an opportunity to make some real investments in the future, to take steps that will increase productivity and will re-institute a culture of innovation in our economy.

The past ten years have been the decade of lost opportunity when it comes to innovation, research and development.

In 1996, the Howard Government cut the tax concession for research and development from 150 per cent to 125 per cent. The effect was immediate and dramatic.

Research and development took off in this country (from a very low base) when the Hawke Government introduced the 150 per cent tax concession in 1985. Business expenditure on research and development (BERD) increased from around 0.35 per cent of GDP to around 0.9 per cent in 1996. The 1996 cut saw BERD fall to just over 0.6 per cent of GDP in 2000 and only gradually returning to 1996 levels in the past 12 months.

This is why I call the period 1996 top 2006 the decade of lost opportunity when it comes to R & D.

The Howard Government has ridden on the back of the coal miner to economic and trade success. The growth of China means that our terms of trade are the highest they have been in 50 years. But even with this manna from heaven, we still have managed to record trade deficits.

If Australia today had the terms of trade we had when Paul Keating warned of us becoming a banana republic, our current account deficit would now be 13 per cent of GDP.

Our record terms of trade cannot continue for ever. Even the slightest plateauing of the world’s demand for commodities will leave the Australian economy on the precipice. And then, we will regret the fact that the Howard Government let Australia’s innovation rates stall, that the Howard Government did nothing to encourage high tech, or even elaborately transformed manufactured exports.

Then, we will regret the fact that Australia in the last decades did not keep up with nations like Finland, Ireland and Singapore when it comes innovation.

That is why it is important that Peter Costello takes this opportunity to right this particular wrong of the 1996 budget.

The 125 per cent R &D concession is not internationally competitive. Singapore, for example, has 200 per cent concession. And the reductions in the corporate tax rate over the past 20 years mean that the concession is worth substantially less now than when it was introduced.

I am not espousing a simple return to a 150 per cent concession, or higher. The proposal by several science and technology groups for a cascading rate of tax concession is attractive. Under this scenario, the more a company spends on R & D as a percentage of their turnover, the more their tax concession would be.

So firms spending less than 2 per cent of their turnover on R &D would continue to receive a 125 per cent tax concession. Firms spending between 2 and 5 per cent on R & D would receive a 150 per cent concession. And firms spending more than 5 per cent would receive a 175 per cent concession, for example.

Australia can’t afford to let Peter Costello miss yet another opportunity to invest in our future.