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Grant Robertson has faced consistent calls to open the purse strings and spend. Photo by Hagen Hopkins/Getty Images
Grant Robertson has faced consistent calls to open the purse strings and spend. Photo by Hagen Hopkins/Getty Images

PartnersMay 17, 2018

Budget 18 is stuck in the present. We need investment in innovation for the future

Grant Robertson has faced consistent calls to open the purse strings and spend. Photo by Hagen Hopkins/Getty Images
Grant Robertson has faced consistent calls to open the purse strings and spend. Photo by Hagen Hopkins/Getty Images

The Budget’s R&D spend looks less than futuristic, says Grant Thornton’s Greg Thompson.

While a chunk of this year’s expenditure naturally focuses on the perennial portfolios of health, education, justice and housing, this Budget aims to adjust the direction of our economy to deliver not just now but in years to come. This has been done through a mixture of ‘investing’ in people and organisations, ostensibly to remedy underfunding by the previous government in a wide range of areas. Embedded within that rhetoric is the need for our economy to be ready for the future. That’s why this year’s Budget theme is ‘Foundations for the Future’.  

To facilitate this refocus the proposed catalyst of change is the Research and Development Tax Credit regime, which was announced earlier this year and is undergoing consultation. The desired outcome is to double the expenditure on R&D in New Zealand. However, simply providing a financial incentive for R&D doesn’t necessarily mean that current levels of innovation will increase, or that it will occur in the areas that are needed for a future-proofed economy.  

The proposed R&D regime will redefine the criteria for expenditure on innovation projects; these projects would need to use scientific methods to acquire new knowledge, or create new or improved outcomes to resolve scientific or technical uncertainty. A high standard to achieve.

The key question is whether the tax regime will achieve its stated aims and move New Zealand towards a desired future state, where according to Hon Megan Woods, Minister for Research, Science and Innovation, we “need new ideas, innovation and new ways of looking at the world”. The tax credit regime is aimed at enabling businesses to innovate and deliver productivity gains. The government doesn’t seek to do this through the R&D credit scheme alone, recognising we need a sound education sector, an engaged workforce and fairness in the economy.

The credit system works on the assumption that businesses will invest as desired, have the resources to do so, and possess the technical ability to meet the requisite technical standard. Effectively, it sets a framework and seeks businesses to take up the challenge and deliver – similar principles the previous government had employed over its term in office.

It also cuts small businesses out of innovation, with a de minimis of $100,000 R&D spend before qualifying and no provision of cash back to businesses that are often in start-up phase, and it sets a high technical standard which business are not currently set up to accommodate.

So is it time for a complete rethink on priming the New Zealand economy for innovation? The Future of Work Commission has been formed to look at what is required for the future, and this is a great start. But whether that leads to innovation – or simply an understanding of the shift in employment needs and practices, technology requirements and skill changes – is yet to be seen.

Of course, innovation fundamentally requires investment. Most businesses can’t fund real innovation out of business as usual and that has been the problem; R&D in New Zealand has mainly been more about adjustments to existing products and ideas rather than groundbreaking developments. New Zealand has a limited capital market to provide the necessary funding; the R&D credit will only provide 12.5% of spend, meaning businesses need to fund the remaining 87.5%.

It’s time for a rethink of innovation and the future of the New Zealand economy, and how to create a real framework for directing resources, skills and expertise towards innovation that will move New Zealand into the future.  Providing broad incentives and creating core framework enhancements doesn’t create the focus and speed of change which is required.


This content is brought to you by Grant Thornton New Zealand – a national team of business advisors who are committed to unlocking the potential for growth in their people, clients and communities.

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PartnersMay 17, 2018

Grant Robertson and the blame-it-on-the-last-bunch budget

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They’ve left wiggle room for some rainy day expenses, but the Labour-led government more than anything has sought to sell today’s funding announcements as an exercise in cleaning up National’s mess. Rebecca Stevenson reports from Wellington

Grant Robertson hammered a few key messages in his budget address today: this is a budget that will lay the “foundation for the future” by rebalancing government spending towards children and families, but it is also very much a “stuff you, National, we have to fix busted up public services” budget.

Overall the government is forecasting a surplus (that’s money in the bank rather money we will be in debt) of $3.7 billion in the 2018/19 financial year. Economic growth should average about 3% a year over the next five years and unemployment is expected to stay low (maybe even hitting a ten-year-low) at about 4.1%.

The finance minister said he’s left “wiggle room” in this budget to cover unexpected costs like containing the M. Bovis disease afflicting dairy farms, and potential wage rises for public servants.

So what does this budget have for us, Joe/Joeli/Janelle Blogs? Robertson says he’s spent a bit more than he wanted to, in this, his first of three planned budgets. New operational expenditure (money to run stuff, like hospitals and benefits and the like) totals $3.2bn – but it’s also saving bits and pieces where it can, which is estimated add up to about $430m. New capital expenditure (for infrastructure) is estimated at $3.8bn. 

Health: The big bopper

Robertson didn’t literally say “stuff you National”, but he may as well have. “Our public services have been underfunded for too long and there has been a failure to appropriately plan for the future,” said the finance minister. “That changes today.”

Health got a serious chunk of change, with operating funding (that’s money to run stuff) of $3.2bn and $850m capital funding (for infrastructure like leaky hospital buildings) with $750m of that capital expenditure going towards, yes, hospital building issues.

DHBs snagged more money. With $549m allocated in new funding this year and $2.2b over the next four years, and a wedge of money is going towards a national bowel screening programme ($67m over four years) there’s increased money for maternity services ($112m over four years) AND air ambulance services got a lift in funding of $82m over the next four years.

For the young ‘uns school-based health services (nurses in decile 1-3 schools) will be extended to decile 4 schools, and is expected to cost about $4.2m across next four years. Free doctor visits are to be extended to under 14 year olds (about 56,000 teens are expected to benefit).

Low GP fees (up to $30 off GP visits for people with a Community Services Card) will also be extended to more than 540,000 Kiwis at a cost of about $365m over four years. Minister of Health David Clark: “Last year more than half a million New Zealanders didn’t go to their GP because of the cost. In a country like ours, that’s a disgrace.”

Housing: The elephant in the economy

KiwiBuild is old news now, but the government has pledged to boost public housing stock (state houses) by an estimated 6,400 homes over the next four years. It has allocated more than $634m for operating funds for housing, with new spending including $7m for “frontline housing resources” this year, with $30m allocated towards this over four years.

Funding for state housing (existing and additional supply) is expected to total about $234m over four years. Transitional housing gets a significant boost; $101m over four years.

The Housing First programme (targeting the long-term homeless) will expand into new communities, with planned spending of $4m rising to $18m by the fourth year, for a total spend of $43m over four years. The programme itself is expected to cost $20m over four years to run.

There is an extra $15m increased funding for the Māori Housing Network, Papakāinga housing for Māori and there is $142m over four years for the Healthy Homes insulation and heating programme for eligible owner/occupiers.

Education: money, money, money

We’ve all seen and heard our schools are under pressure. Will this budget help? There’s a school growth package of $395m over four years to build new schools and classrooms and a further $63m operating spending.

Overall education spending sits at $1.6bn for operational spend and $334m for capital expenditure, with money for 1500 new school teachers and a serious boost to early childhood education, $590m over four years.

There’s an impressive lift in funding for learning support; $284m over four years and Robertson was rightfully trumpeting this spending. This spending, Robertson expects, should take pressure off school budgets overall. Teacher aides feature in the budget; with cash for raising rates starting at $5.7m in the first year and rising to $23m by year four.

Wages

Not much to cheer about in the projections here. It’s expected that wages will stay pretty flat with a 3% growth estimated over the next three years and more than 200,000 new jobs created.

It’s often suspected that low-wage working immigrant workers are dragging down wages, and there’s additional funding in the budget for more labour inspectors, $8.8m over four years. We also have to take into account the already announced rise in the minimum wage and increased paid parental leave.

Other stuff

They put it like this: “Increasing our Aid to Tackle the Biggest Global And Regional Challenges of our Time” – that’s our offshore aid, is set to increase $122m then rise up to about $230m a year spend by 2021.

There was new some money for biosecurity; $2.3m a year, $3.7m for a sustainable farming fund and a biodiversity fund rising to $31m by the fourth year of the budget.

A clothing allowance (currently only kids in care) will be extended to kids out of care, costing $23m a year rising to almost $30m per year, or $105m over four years.

Weird stuff

Sometimes when things are slashed you wonder how they got funding in the first place. But it does seem a bummer that there’s no more money in the kitty for the National Aeronautics and Space administration teacher ambassador programme – $300,000.

The government is stopping our contribution to the Kea network – $175,000.

KidsCan and KickStart charities will get no more money after this year.

There’s a little money for musicians to tour overseas: $650,000.

And we also have to pay for the Canterbury earthquake mess; Canterbury Earthquakes Insurance Tribunal $6.5m, and an inquiry into EQC $2.4m.

Not everyone will thrill at the $100m for sailing and the America’s Cup, while the Commerce Commission gets a little lift in funding of $1m. They do have plenty on their plate.

What did Winnie’s crew get?

There was something for the Supergoldies, $1m to develop a free annual health check and it wouldn’t be a Peters budget without a dollop for racing; the industry is allowed to claim tax deductions for the cost of livestock acquired to breed (estimated cost $150k 2019/20 or $4.8m over four years).


This content is brought to you by Grant Thornton New Zealand – a national team of business advisors who are committed to unlocking the potential for growth in their people, clients and communities.