17th May, 2018

NZ Budget 2018: Whoopie! More R&D!

The big winners from the Labour-led coalition Government’s first budget are innovative businesses, with $1 billion more being made available for incentivising R&D.

This is big news, given how important it is for New Zealand’s economy to move up the value chain.

We want to see more businesses involved in R&D because it delivers higher value jobs, more productivity and more innovation.

The government has committed to lifting national R&D spending to 2 percent of GDP, up from 1.3 percent now. That’s important because New Zealand cannot afford to fall further behind, given the OECD average is 2.4 percent.

The proposed tax incentive allows businesses to claim 12.5 cents back for every dollar they spend on R&D. The incentive will be available for all businesses spending more than $100,000 on R&D.

All businesses involved in R&D should take time to engage with the government’s consultation document currently out for feedback on how the tax incentive scheme should be designed.

We think further consideration needs to be given to how to support startup and high-growth companies. These businesses might currently be making a loss and therefore not paying tax, but should be incentivised to invest more in R&D.

MYOB’s Business Monitor Survey of more than 1,000 local small to medium businesses found 36 percent do not budget for R&D, while 29 percent spent less than 1 percent of their revenue on product or service innovation (see table).

What percentage of revenue (or sales) does your business spend on research and development?

The budget comes as small business owners take a wait-and-see approach to the performance of the new government.

According to the Business Monitor, 42 percent of business owners are neither satisfied nor dissatisfied with its performance, 26 percent are satisfied, while 30 percent are dissatisfied.

We also know business confidence has taken a hit recently. Our Business Monitor also showed that expectations for the economy fell from an overall net positive 21 percent just over 12 months ago, to a net negative 14 percent in the latest survey, although owners rated their own firm’s prospects more positively.

With this backdrop, and considering increasing costs for small businesses in the forms of increasing wage pressures, it would have been good to see movement on issues like tax rates for business.

We face the real prospect of a gap opening in tax competitiveness with Australia with its government looking to reduce business tax rates further.

In Australia the corporate tax rate for businesses earning up to $10 million in revenue sits at 27.5 percent, with those above paying 30 percent.

The goal is to reduce company tax rates down to 25 percent for all businesses by 2026-27. New Zealand business all currently pay 28 percent.
Other important initiatives of Budget 2018 to business include:

  • A substantial investment in regional development with $1 billion allocated to the Provincial Growth Fund to support local economic development projects
  • $7.1 million over 5 years to implement e-invoicing, helping to streamline New Zealand’s business environment and speed up cashflow
  • Funding for the Government’s transport strategy, the Auckland Transport Alignment Project and the Canterbury Acceleration Fund
  • $100 million of new funding for a new Green Investment Fund to encourage investment in low-carbon industries
  • Support for the Ministry of Foreign Affairs and Trade to help businesses involved in export
  • Funding for the Future of Work Tripartite Forum

In terms of the hard numbers, according to the Treasury forecasts presented in Budget 2018:

  • Economic growth is expected to average about 3 per cent per year over the next five years.
  • The unemployment rate is expected to drop to 4.1 per cent, which would be the lowest rate in 10 years.
  • Real wages are expected to grow each year, with average annual earnings rising to $71,000 by June 2022.
  • Inflation is expected to remain steady and stable at around 2 per cent.

Click here for more information on Budget 2018.