Tax incentives have a "positive and significant" impact on research and development spending, according to an International Monetary Fund working paper published this week, but remain contentious in New Zealand with the ruling National party dubbing them an "unknown financial liability" while the opposition Labour Party is still committed to implementing them.

While R&D spending is inching higher, New Zealand still lags behind its peers with recent data showing total R&D investment as a proportion of gross domestic product increased to 1.3 per cent in 2016 from 1.2 per cent in 2014. The OECD average is 2.4 per cent. Business investment in R&D was 0.6 per cent of GDP in 2016, still well off the government's aim to lift it to 1 per cent.

The IMF paper notes many governments use tax incentives to stimulate private expenditure on research and development, including the majority of OECD countries and other large economies such as China, India, Brazil and Russia. In a recent mission to New Zealand, IMF officials recommended the government lift its support, describing those incentives as "a bit on the timid side".

Both National and Labour see innovation as critical to lifting the country's productivity levels, a challenge given its relatively small economy and distance from other markets. National, however, has argued New Zealand's research and development grant system administered through Callaghan Innovation stops companies "gaming the system" by reclassifying spending to qualify for tax credits.


"The R&D Growth Grant works like a tax incentive in that the grant approval process is non-discretionary and available to all businesses that meet pre-defined criteria. The Growth Grant system gives us a much better idea of the likely cost, rather than a tax credit system which would be an unknown financial liability," Science and Innovation Minister Paul Goldsmith told BusinessDesk.

The grants cover 20 per cent of a business's R&D costs, up to $5 million a year, and are available to businesses that invest more than 1.5 per cent of turnover in R&D. Callaghan handed out $112m in three different types of grants in the 2015/16 year, according to its annual report. The bulk of that - $86m - went to Growth Grants.

Megan Woods, Labour's spokesperson for Innovation and Science, said the idea that companies game the system is a "red herring." She noted that businesses can also rejig what they are doing under a grant system. "What you have to do is make sure you've got the right monitoring of both the grants and the tax scheme in place to make sure that's not happening," she said in a telephone interview.

Woods said Labour had a commitment to tax credits for research and development in the last election and "I think the reasons for those commitments still stand." She said the credits are more responsive to business needs and importantly "shift the conversation within a business from being about expensive research to being about the revenue stream." The fact that overall spending as a percentage of GDP remains low is a worry. "We are not making strides," she said.

"If we want to move our exports up the value chain and have them be about value add, we cannot do that without an investment in R&D," she said.

ExportNZ executive director Catherine Beard called on the government to do more: "New Zealand is missing an opportunity here in that we are an outlier with regard to what other countries are doing. We think it needs further investigation as we are still lagging R&D investment compared to other countries."

She noted that most countries have both a grants system and R&D tax credits. Many of New Zealand's larger companies are eligible for the governments' growth grant and are positive as the compliance costs are not too onerous, Beard said.

However, "the small to medium size companies are less happy with the support they get, as the definition of R&D does not always capture how manufacturers or ICT companies innovate, so many miss out on project grants," she said.


She agreed that the aim should be to boost investment and "if it is a well-designed system, audits should be able to counteract any gaming of the system."

(BusinessDesk receives funding to help cover the commercialisation of innovation from Callaghan Innovation.)