The massive hit to forward estimates, created by a gross over-estimation of budget costs associated with the R&D tax incentive programme, could have easily been avoided had a more appropriate costings method been applied. This technical oversight is in addition to the cost over-statement previously identified by a number of accounting firms.
In hindsight, the onus is now on Government, Treasury and the ATO to explain why overly aggressive assumptions are being used that inflate the programme cost and why the ‘revenue forgone' methodology was favoured over a ‘revenue gain’ analysis - as was recommended by the recent Parliament Inquiry into the Tax Expenditures Statement (TES), and prior Australian National Audit Office (ANAO) and the Joint Committee of Public Accounts and Audit (JCPAA) reports. Over-estimated budget figures produce by the revenue forgone method are being used to help support planned programme cut backs.
Similarly, if dismissing the ‘revenue gain’ method really had less to do with political motivation and more to do with simply being relegated to the ‘too hard’ basket, the powers that be should come out and say so.
While the JCPAA recommended Treasury calculate the twenty largest tax expenditures in the TES using both the ‘revenue foregone’ and ‘revenue gain’ methods to allow comparison with the Budget Papers, Treasury only bothered to do this for 10 of the largest tax expenditures, which conveniently excluded R&D tax. A finding of the JCPAA report was that the Budget Papers are prepared with the revenue gain method. On this basis the R&D tax programme should be modelled in the budget using revenue gain.
We’re now calling on Government, Treasury and the ATO to take the JCPAA’s advice and A) expand the number of revenue gain estimates it calculates for the TES, B) prepare the budget figures using revenue gain, and C) if it wants to continue to use the revenue foregone method, be fully transparent on the assumptions it will be based on.
Had Treasury applied the more comprehensive ‘revenue gain’ method, which takes the tax revenue impacts behavioural responses - of ‘additionality’ and ‘spillovers’ - into account in the budget modelling, the cost of Government’s flagship R&D tax incentive programme would not have been over-stated. The tax revenue impact of R&D activity moving overseas would also be modelled using the revenue gain method.
In fact, a report produced by the Industry Commission in 1995 found that after ten years, the effect of removing R&D tax assistance would reduce the nation’s output (GDP) by $360 million annually. This was more than the (then) fiscal cost of the R&D tax concession. Modelling in this report also showed that there was no change in Government spending from removing the R&D tax concession. Therefore, why would the Government reduce R&D support through the tax system, if there is no financial gain?
If R&D tax incentives truly are a net benefit item for Government, then ‘fashioning numbers’ to help build the case for change and support cut backs is being ‘pennywise and pound foolish’ in the extreme - everyone loses.
Wholesale cuts to the R&D tax programme are not only unwarranted, they pose significant economic risks in a dynamic economy facing strong international competition.
With revenue gain modelling in place, Australia will for the first time, see what the benefits are from supporting innovation in business.
The next step would be to foster commercial outcomes from public R&D, which would be at no extra cost as the gains will outweigh the costs. Greater collaboration between private enterprise and the sciences would be beneficial to Australia. In other words, why not incentivise companies with the know-how to commercialise R&D applications, rather than solely rely on universities and public research to do both the research and the commercialisation?
Innovation in Australia, as well as globally, is critical for economic growth which is why we need more of it, not less.