Innovation
You have outlined some research, science and technology priorities: removing Fast Forward, removing the Research and Development (R&D) tax credit, and increasing funding for Crown Research Institutes (CRIs). These should be able to be implemented fairly quickly (although it will involve legislation for the R&D tax credit and there may be some complexity with Fast Forward). We see research, science and technology as an important driver within New Zealand's broader innovation system, and our advice on this is:
- Innovation is a fundamental driver of productivity growth. New Zealand invests relatively little in producing innovation, particularly at the firm level. The challenge for New Zealand is to improve its productivity through producing more higher-value, high-skill, knowledge-intensive goods and services.
- New Zealand is already quite good at producing good science. But we also require a system that strongly supports knowledge application: firms taking up and applying knowledge from both domestic and international sources (over 99% of knowledge is produced overseas), to produce innovative new products, services, and processes.
| Key policy proposal | Treasury comment | Alternatives/implementation advice |
|---|---|---|
| Removal of the R&D tax credit | The R&D tax credit incentivises firms to invest in R&D, recognising that benefits from R&D "spill over" to others, resulting in a social return that is higher than the private return. Evidence indicates that tax credits are likely to be more effective than discretionary grants to stimulate growth-promoting R&D spillovers and build capacity of firms to absorb knowledge. They are likely to result in a significant but not spectacular increase in firms' R&D - of the order of $1 additional R&D for each $1 of tax credit over an 8-10 year horizon. Evidence also indicates that additional business R&D will have a high rate of return to the economy. Our judgement is that the overall benefit in terms of higher productivity is likely to be greater than the cost and complexity of tax credits. | We recommend retaining the R&D tax credit at least for now. Further evidence will be available over the course of the five-year evaluation programme. We can discuss with you lower-value spending areas that could be used to fund your priorities. Other alternatives would be to replicate key features in a new R&D grant scheme (eg, one that is non-discretionary and with relatively low compliance costs) or tighten eligibility for the credit to lower its fiscal cost. |
| Removal of the $700 million Fast Forward Fund company | The Fast Forward (FF) structure does appear somewhat unwieldy. However, FF has been successful at getting industry buy-in and a very significant level of pledged industry funding. There are mechanisms to try to ensure that the industry funding is "additional" but not all of it may be. By jointly deciding on and funding innovation priorities in the pastoral and food sectors, FF aims to use public- and private-sector resources more effectively. | We recommend retaining Fast Forward or, alternatively, funding it through annual appropriations. If it is dismantled, we recommend working with industry on ways to retain their commitment to pastoral and food innovation - for example, through expanding the research consortia parameters. |
| Increasing funding for CRIs | Increasing funding for CRIs would recognize that they are generally well-performing organizations that produce good science. | We think targeting funding towards gaps in the innovation system would be higher value for money - for example, focusing funding further on helping end users absorb and apply knowledge. |
Additional to this agenda you might wish to consider measures to reduce the fragmentation of New Zealand's innovation system- a multiplicity of institutions and extensive product clutter. Given this, we think there is a strong case for having a more integrated and strategic approach to the innovation system, by having a single "innovation" Minister tasked with developing and leading high-level strategy for innovation and economic performance, and making some changes to public sector governance arrangements and structures.
