Budget changes to R&D assistance are a wash

CALGARY, Aug. 7, 2012 /CNW/ - In a report published today by The School of Public Policy, author John Lester analyzes the changes to Canada's innovation policies announced in Budget 2012.

Budget 2012 saw the reduction of the Scientific Research and Experimental Development tax incentive (SR&ED) awarded to larger firms from 20 percent to 15 percent. The rate allotted to small- to medium-sized private firms (SMEs) was unchanged at 35 percent. The budget also doubled the funding for the Industrial Research Assistance Program (IRAP) and announced $400 million in additional funding for risk capital.

While the budget contains many sensible changes to the SR&ED program, Lester argues that reducing the incentive for larger firms was a policy misstep. Furthermore, the budget slightly increases support for innovative SMEs from levels that are so high that there is considerable risk that the taxpayers footing the bill are no longer getting value for their money. A more prudent strategy would have been to scale back the enhanced credit for SMEs to 20% and use some of the savings to finance additional direct (non-tax) support for SMEs.

Based on the author's analysis, Budget 2012 caused the economic gains generated by the SR&ED program to edge down. In contrast, had the federal government initiated a flat 20 percent tax incentive for the R&D activities of firms of all sizes, there would have been a sizable increase in the net economic benefit from the SR&ED tax incentive.

Lester's analysis indicates that high delivery costs are preventing IRAP from generating a net economic benefit. Further, unless the IRAP model of providing firms with a substantial amount of one-on-one advice and imposing relatively burdensome reporting requirements is revisited with an eye to reducing costs, the additional funding announced in Budget 2012 will substantially increase the net loss from the program.

The federal government is now assessing how the $400 million in additional funding for risk capital should be delivered. The report makes the point that returns in the venture capital industry are very low and that the additional funding is unlikely to be successfully deployed until returns improve. There is abundant evidence that the tax credit for investment in Labour Sponsored Venture Capital Corporations is crowding out private investment and contributing to low rates of return; eliminating the credit is therefore an essential first step in restoring the financial health of the venture capital industry.

The report can be found at www.policyschool.ucalgary.ca/publications

SOURCE: The School of Public Policy - University of Calgary

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