'Not a good sign': Australia's R&D investment slips against developed peers

Budget cuts risk driving Australian government investment in productivity-boosting research to among the lowest levels in the developed world, global figures show, amid calls from Treasurer Josh Frydenberg's for business to invest in innovation to help grow the economy.

The Coalition has slashed $4 billion from research and development (R&D) tax incentives in the past two federal budgets, while clawing back millions of dollars in previously approved claims.

Treasurer Josh Frydenberg: "This is not about providing tax breaks for companies to do what they will be doing anyway, but rather putting the right settings in place to enable them to go a step further and back themselves to grow." Credit: Alex Ellinghausen

Mr Frydenberg on Monday angered business leaders when he challenged them to rethink spending on special dividends and share buybacks and instead back themselves and invest in R&D for the good of the economy.

An analysis of Organisation for Economic Co-operation and Development (OECD) figures shows sharply falling government incentives are already well below those of Slovenia and Greece.

Australia fell from 114 to 107 in 2017-18, according to an OECD index of R&D investment by government. The index, measured through purchasing power parity, is expected to drop again once a 2019 budget cut of $1.3 billion comes into effect, taking Australia further below Mexico and the Netherlands, which scored 134 and 114 respectively.

The cuts have helped drive Australia's overall R&D investment below that of Europe, China, the United States, South Korea and Japan and stifled risk-taking and investment in technology, according to business and economists.

Treasury research shows the lack of innovation has left scores of unproductive "laggard firms" mopping up workers, hurting productivity and overall wage growth, which has struggled to get above historic lows across the economy.

KPMG's chief economist, Brendan Rynne, found real spending on R&D declined a further 0.7 per cent over the past year.

"As a driver of innovation, the reduction in R&D investment is not a good sign for an economy already struggling for productivity growth," he said.

The Productivity Commission in June identified R&D as one of the key reasons for Australia's "mediocre" productivity levels, which have dropped from 2.2 per cent average annual growth between 1974 and 2017 to 0.4 per cent in 2017-18.

The figure, which measures output per hour worked, has been driven by a lack of investment in new technology, while ongoing uncertainty over government investment has undermined business confidence, according to businesses such as AirTasker.

Private companies use the tax incentive to minimise their exposure if their innovations fail. The government instituted a $4 million-a-year cap on refunds for companies with turnover of less than $20 million last year, cutting $2.9 billion from the budget, before cutting by another $1.3 billion in 2019.

Mr Frydenberg made no apologies for the government's R&D changes on Monday.

His predecessor as treasurer, Scott Morrison, signalled a tougher line on companies claiming credits when they had not produced significant innovation last year, as the government prepared to move away from former prime minister Malcolm Turnbull's $1.1 billion flagship "innovation agenda".

"This is not about providing tax breaks for companies to do what they will be doing anyway, but rather putting the right settings in place to enable them to go a step further and back themselves to grow," Mr Frydenberg said.

He said the government would continue to support R&D outside the tax system and noted it had committed $2.4 billion to grow Australia's research, science and technology capabilities and invested $5 billion in the Medical Research Future Fund.

Monash University economist Jakob Madsen said R&D was a critical part of moving the economy away from the mining sector, which has led productivity gains and dominated exports, while leaving Australia with few globally competitive technology firms such as a Google or Apple.

"The Australian economy is far too undiversified; deriving a large part of its foreign income from a few minerals and agricultural products," he said.