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Industry R&D Investment Expectations Fall to Decade Low, Stability of R&D Tax Incentives Crucial

In late January, InnovationAus ran a story providing commentary on a survey conducted by Australian Industry Group (Ai Group), showing only 19 percent of firms intend to raise their level of R&D investment, with 69 per cent expected to maintain spending at 2023 levels.

While firms report a positive investment outlook, including for R&D, the net balance score for the indicator has fallen from +26 to +6 — the lowest investment expectation since 2013. This is broadly in line with CAPEX expectations, which fell from +31 to +5.

InnovationAus’ story notes:

• Only 24 per cent of respondents listed R&D investment as their first or second priority, behind business process improvement, staff training and development, and business development;
• Ai Group said this is likely a response to perceptions that the economy will slow in 2024, with 40 per cent of respondents expecting overall business conditions to deteriorate. Less than 30 per cent expect an improvement;
• Despite the increase in nominal support for businesses through the RDTI last year, the government’s spend on R&D initiatives as a proportion of GDP fell to 0.49 per cent, the lowest in 30 years;

Swanson Reed notes the following in respect of this:

• There has been alot of press lately about the reported increasing cost of R&D Tax Incentives. Swanson Reed notes this increase may be an aberration that may moderate next year due to a number of factors including:
  • Claims for depreciation on R&D Assets under the temporary full expensing measures, which have expired and are no longer available after FY23;
  • Reductions in funding for startups due to raising interest rates and constrained capital markets;
  • Increasing R&D Tax compliance by regulators, which we recognise as an important function of programme integrity;
• A recent BCA survey, following the BCA published report titled “Seizing the Moment”, highlighted that if Australia wants sustained wages growth and to maintain full employment we need a reinvigorated economic growth agenda driven by large-scale investment, higher productivity, and greater innovation;
• It is widely accepted that inflation and productivity is one of the largest problems currently facing our economy. Innovation and R&D Activity (including development of more efficient processes to produce goods), is recognised as being key to increasing productivity in the economy. Productivity has been shown to be positively correlated with innovation performance across multiple documented academic studies;
• Companies who are associated with innovation and R&D Activity may be more productive and capable of producing goods more efficiently or at lower cost. This then presents them with the option to:

• • Offer products at the same cost as their peers, but with increased profit margins; or
  • Offer products at lower cost to their peers, to increase their market share.

•  Therefore, business investment in R&D should be a key focus of our leaders in helping Australia through the current economic challenges confronting us. Policy makers should ensure that suitable settings are in place (including business access to resources and the maintenance of a stable, generous R&D Tax Incentive) to assist business in playing their role in increasing Australia’s productivity and reducing inflation.

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