Thursday, 6 February 2020
Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019; Second Reading
I rise to speak to the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, but before I do that I move as a second reading amendment:
That all words after "That" be omitted with a view to substituting the following words:
"whilst not declining to give the bill a second reading, the House:
(1) notes that:
(a) research and development continues to fall in Australia and sits at 1.79 per cent of GDP;
(b) private research and development is only 0.9 per cent of GDP; and
(c) Australia is close to the bottom of the OECD ratings for collaboration between industry and researchers; and
(2) criticises the Government for its staffing cap at the CSIRO and its continued attempts to politicise science and research and development in Australia".
As we debate the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, first and foremost we need to understand the floundering economic environment we find ourselves in under the Morrison government. Undoubtedly, the devastating bushfires and the coronavirus are having a dampening effect on the Australian economy, but the Prime Minister and the Treasurer should not be using the fires and that virus as excuses for their longstanding failures on the economy.
The most recent labour force figures released by the Australian Bureau of Statistics are a reminder of the deep structural issues in the labour market and in our economy. There are, for example, almost two million Australians looking for work or for more work because of the economy, which is floundering on the Liberals' watch. Labor has been highlighting the issue of underemployment and calling on the government to take action for more than five years. The underemployment rate at 8.3 per cent and the underutilisation rate of 13.4 per cent for the month of December are far too high. Under the Morrison Liberal government serious structural issues in the labour market continue to generate insecure work and historically low wages growth.
Labor, and particularly my colleagues the Labor leader and shadow Treasurer, have consistently been calling on the government to heed the warnings of the Reserve Bank and the warnings of business and economists about the floundering economy, an economy that was struggling before the bushfires fully hit and the coronavirus became a health emergency. As they've noted, the most recent growth figures were quite lacklustre. Annual growth was well below trend in the budget forecasts. The midyear budget update said unemployment would rise and downgraded growth and wages. It said consumption was at its slowest pace since the global financial crisis and the private domestic economy had already gone backwards for two quarters.
Wages are growing at a fraction of company profits: just one-fifth of the pace of profits. This is a result of the marketing based approach of the Prime Minister, whose strategy is to buy an election but who has no plans for economic growth except slogans. The lack of an economic plan certainly extends to the issues before us in this bill. This is a government with no plan for science, no plan for research and development and no plans for innovation.
Research and development are fundamental components for growth, particularly in Australia's developed, knowledge-based and high-skills economy. The jobs of the present and the jobs of the future depend on both public and private research and development. Research and development is particularly important for the capital formation and capital deepening of companies operating in the country. In general terms, this means businesses are investing in their physical and intellectual property, creating jobs in the process. In the Productivity Commission's annual Productivity Bulletin published in May 2019 they note that although capital growth hovered around 1.9 per cent for the last few years, this was well below the historical average of four per cent from 1974-75 to 2017-18. In its words:
This is troubling because investment typically embodies new technologies, which complement people’s skill development and innovation. This is especially so for investment in research and development, where capital stocks are now falling.
And even more so new investment. Growth in R&D capital formation is even more subdued than capital formation generally, so that R&D investment share of total investment has also fallen. What confidence can Australian researchers—our best and brightest—have as R&D continues to be smashed under this government's watch?
The latest gross expenditure in research and development as a proportion of GDP decreased from 1.88 per cent to 1.79 per cent according to the latest data from the ABS. The total human resources devoted to business R&D are still well below what was devoted when the government took office. In 2013-14 the total person years of effort had fallen almost five per cent. Business R&D spend has hit 0.9 per cent of GDP, falling below one per cent of GDP in the previous data. This is a continuation of an overall downward trend in research and development under this government's watch, and one that stakeholders suspect could be exacerbated by this bill. I will return to this point later as I outline why this bill requires further scrutiny.
As a recent Australian Institute of Company Directors report detailed, Australia's total gross domestic spending on research and development is currently ranked 21st within the OECD, and, while the global trend is for national business expenditure on R&D to grow, Australia's has fallen. As such, investment levels are below countries such as South Korea, Israel, Sweden, Denmark, Finland, Iceland, Norway and Singapore, and many, many more. Australia is close to the bottom of the OECD ratings for collaboration between industry and researchers. According to the OECD index of research and development investment by government, Australia is falling. This is a trend that must be reversed if we want to support jobs, support economic growth and remain globally competitive.
By investing in R&D, governments provide the resources for universities and research institutions to produce results that inspire innovation, private investment and further research and development. Strong investment in R&D allows all Australians to share in the benefits of new industries, new products, good jobs and a higher standard of living. In this context, it is concerning that the current government has reintroduced this controversial bill amending the research and development tax incentive. In the last parliament, when the government first sought to cut around $2 billion from R&D, it slipped the measure into a bill entitled 'Making Sure Multinationals Pay Their Fair Share of Tax in Australia'—a misnomer if there ever was one, given that a large number of firms affected are Australian start-ups and small and medium enterprises.
Labor supports the intent of measures to maintain public confidence in the integrity and financial sustainability of the research and development tax incentive as per the Senate economics committee's report. The government, however, is yet to properly explain how the minor tweaks to the bill before parliament have heeded the concerns—and I make the point: the bipartisan concerns—of the Senate committee. That Senate committee unequivocally stated that the research and development measure 'should be re-examined in order that Australian businesses are not fully disadvantaged.'
Labor is proud of creating the R&D tax incentive, the single largest investment the Commonwealth makes in supporting science, the research industry and innovation in our economy. I contend that only Labor has sought to address the decline in R&D spending in Australia. Labor continues to consult widely on the impact of the R&D tax incentive measure and fight for researchers against the government's anti-science agenda. But I would say again: it is clear the government's lack of an economic agenda, coupled with the anti-science backbench, poses a serious threat to our economy, our industries and present and future workforces. Just take, for example, the recent call for an oversight of research in this country. Indeed, the government's arbitrary staffing cap has seen jobs cut at the CSIRO while others are placed on insecure contracts and conditions. We never hear a peep from this government about supporting those scientists. We have a situation where one of our most remarkable and iconic institutions is being undermined by the insecure work and the lack of security for those researchers. The government is doing that wilfully—not by neglect—by making sure that there is no secure employment for many researchers, and that is of course leading to major problems of morale and proper research. It has consequential effects upon the research and the work undertaken by that remarkable institute.
The anti-science mob in the Queensland LNP also passed a motion at the Nationals' Federal Council, calling for a national science watchdog to oversee scientific papers. Now, that is a blatant attempt by members of the government to undermine the integrity of peer review with political intervention. Can you imagine the member for Dawson oversighting the work of scientists to see whether they're getting it right? Can you imagine those members who are involved in supporting that motion of the Nationals' Federal Council interfering with the work of scientists? But that's the sort of rubbish we're hearing from government members and their intent to subvert proper research and interfere with the work of eminent scientists and researchers.
After months without meeting scientists after the election, the minister met with Australian scientists, including the CSIRO and the Bushfire Cooperative Research Centre in response to the bushfire crisis. The question remains: what real action will result from that meeting? Minister Andrews, who's at the table now, comments that debating the existence of climate change is a waste of time. Indeed, she says it is a concern. For that reason, Labor urges the minister to defend Australian scientists who have consistently warned of the effects of climate change on natural disasters. We've just been privy to firefighters coming out and talking about the change in the nature of fighting fires. They've been telling us what has happened. We've had that. But of course, in 2008 we had the Garnaut report and review that already made that clear—and scientists told us what would happen. We need to encourage scientists to speak openly, without fear or favour, on the facts. And we need a minister and a government to support that good work. We would argue that is not happening and, in fact, that they're being dissuaded from speaking out on such important matters.
The government should take the opportunity to, firstly, provide funding certainty to the bushfire cooperative research centre; funding is set to expire at the end of June 2021. The centre is building disaster resilient communities across the country by bringing together all of Australia and New Zealand's fire and emergency service authorities with leading experts across the range of scientific fields; hence the warning of CSIRO scientists on climate change. As The Australian reported earlier this month, at a meeting of the Australian Disaster and Climate Change Resilience Reference Group in late 2018, CSIRO senior climate scientist Dr Pep Canadell warned senior mandarins from two dozen government departments and agencies that a warming planet will trigger a rising likelihood of angry summer events associated with severe heatwaves, power blackouts and fierce bushfires. Indeed, we would also ask the government to take an opportunity, and indeed the minister, to confirm that they have listened to the CSIRO scientists. We need to make sure that that has occurred and that there's no further obfuscation about these issues.
We believe that it's critical for government to do those things and send the right message to scientists and others that they're on their side. We need to make sure that the government's listening while also making a determination on the impact of climate change and developing a plan to deal with the ramifications. We would also need the government to clarify that it agrees with CSIRO scientists who state unequivocally that 'recent warming can only be explained by human influence'. Before anyone opposite argues this is a segue, the minister for science herself noted after meeting these scientists that the government bushfire response would focus on the factors contributing to the extent and severity of the fires as well as new technology and citizen science to aid 'medium and longer term solutions'.
Labor is concerned, and I mentioned this earlier, that the Morrison government's cap on public sector staffing numbers is hurting the CSIRO and undermining its role in advancing science and innovation. The CSIRO staff association recently made a submission to the Senate Standing Committees on Legal and Constitutional Affairs inquiry outlining the impact of a 5,193 person cap on permanent staff on Australia's scientific capability. The submission highlights reports of increased use of external contractors, which is putting a number of major projects at risk and is sidestepping secure local jobs. Reports have revealed that staff recruitment has been placed on hold and outsourcing has increased to avoid the cap. This is the institution that invented Wi-Fi, plastic bank notes, Aerogard—just to name a few. Research and innovation like this are under threat, we would contend, by the government's approach and the way it treats this body. We would say that the government has no regard or little regard for scientists, and this staffing cap is another example of simply a continuation of its war on science.
In the big scheme of things, the government appears to be if not at war then ambivalent about Australia's modern and innovative manufacturers. Stakeholders have indicated the significant reductions in research and development. Support that's outlined in this bill dwarfs the Morrison government's announcement of funding to support local Australian manufacturers. Fifty million dollars is an insult to the industry while it is slashing $2 billion in research and development tax incentives. The government's recent announcement of $160 million of a Manufacturing Modernisation Fund only contains $50 million of government funding, with the majority investment onus put back onto industry. Research and development is key to the future of Australian industry, particularly the future of manufacturing in Australia. The advanced manufacturing research centre competitiveness plan calls on the government to improve government support for business-led R&D and encourage industry research and collaboration.
We would argue that if the government were serious about helping manufacturers to grow, to become more competitive globally and to develop technologies, they would be investing in research and development either directly or indirectly. So let's look at the research and development tax incentive in more detail. R&D incentives have been a feature of the tax system since the 1980s, but the current research and development tax incentive was introduced in 2011 by the previous Labor government. The incentive is the principal mechanism used by the Australian government to stimulate industry investment in research and development by providing a tax offset for eligible R&D activities and is considered to encourage such activities that might not otherwise be conducted and recognises that the new knowledge gained is likely to have a wider Australian economic benefit. The two core components of the incentive are a refundable tax offset at the rate of 43.5 per cent for certain eligible entities whose aggregate turnover is less than $20 million a year and a non-refundable tax offset of 38.5 per cent for all those other eligible entities that may be used to reduce an entity's income tax liability for an income year with excess carried forward to be applied in future income years. The incentive is currently subject to a $100 expenditure threshold. This and some associated provisions are currently legislated to sunset on 1 July 2024.
According to Treasury, approximately 13,000 companies are registered in the R&D tax incentive scheme, which is jointly administered by the Australian Tax Office and the Board of Innovation and Science. Of these, approximately 10,000 companies claim the refundable tax offset and the remaining 3,000 companies claim the non-refundable tax offset. In late 2015—just to give some context to this bill—the then Prime Minister Malcolm Turnbull commissioned a review of the incentive. The review panel was chaired by the then chair of the Board of Innovation and Science, Mr Bill Ferris AC. Along with him, there was Australia's Chief Scientist, Dr Alan Finkel, and the then Treasury Secretary, Mr John Fraser. It is now known colloquially as 'the three Fs review'. The review panel found that the program fell short of meeting its stated objectives of additionality and spill overs, and made six recommendations to be considered as a package of measures to improve the overall effectiveness and integrity of the program while encouraging additional research and development.
This bill is a partial implementation of some of those recommendations. Following an announcement in the 2018-19 budget, Treasury conducted a consultation process on proposed changes to the incentive—from 29 June to 26 July 2018. In a telling sign of the government's aversion to scrutiny and transparency, submissions to the consultation were only made public, and publicly available, in late January 2020 after a freedom of information request from my office. I won't go into those submissions at length; no doubt, there are other occasions on which we will speak to those, and I can assure this place that I will be engaging with the authors of those submissions. But those submissions raised a number of concerns about the proposed changes to the incentive scheme. Labor will consult closely with those stakeholders and scrutinise their concerns through the Senate committee process, which will have a bearing on the outcome of this bill.
The bill has the following proposed reforms. Schedule 1 to the bill claims to improve the targeting of the incentive through the following changes: increasing the R&D expenditure threshold from $100 million to $150 million and making the threshold a permanent feature of the law—I note that 'the three Fs review' recommended a $200 million threshold and made no recommendation about a sunset clause; linking the R&D tax offset for refundable R&D tax offset claimants to claimants' corporate tax rates; and a 13.5 per cent premium, which ensures an alignment of changes to the corporate tax rates with lower tax rates for businesses with a turnover of less than $50 million.
Another component of the bill is capping the refundability of the R&D tax offset at $4 million per annum. However, offset amounts that relate to expenditure on clinical trials do not count towards that cap. Further, the bill increases the targeting of the incentive to larger R&D entities with high levels of R&D intensity, reducing the benefits provided to certain entities undertaking R&D activities and increasing the benefits to others. Large R&D entities with aggregated turnover of $20 million or more for an income year are entitled to an R&D tax offset equal to their corporate tax rate plus one or more marginal intensity premiums—that is, rather than a flat 8.5 percentage point premium. This is based on R&D expenditure expressed as a proportion of the entity's total expenses. The intensity premiums differ from those of the three Fs review but are slightly more generous than those proposed in the previous term. So, as I say, there's a small change to the bill that was proposed in the previous term.
Schedules 2 and 3 to the bill make a number of amendments to improve the integrity, administration and transparency of the incentive. These are non-controversial.
Many stakeholders have reached out to Labor and reiterated their concerns about the intensity thresholds. Stakeholders have argued that the bill may impact upon existing business decisions and is of concern to many firms of all sizes and across many industries, including manufacturing, mining, renewable energy, pharmaceuticals, biotech and others. Of course, it's also worrying small businesses and start-ups. As the tiered intensity premium rewards those who dedicate a higher proportion of their expenditure to R&D, manufacturers are concerned that this may punish firms that manufacture domestically and thus have high non-research-and-development expenditures domestically. For example, the base premium would be 4.5 per cent compared to 8.5 per cent under the current arrangements; however, there is a higher premium, of 12.5 per cent, for those who dedicate a significant proportion of their spending to research and development. Australian manufacturers, who spend proportionately more on their domestic operations, including on workers and ongoing capital expenditure, note that it would be very difficult for them to reach the higher premium unless they were to offshore their manufacturing.
Industry is also very concerned that the government is not implementing the three Fs' second recommendation of 'a collaboration premium of up to 20 per cent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly funded research organisations'.
Labor, we would contend, is the party of research and development. We invented this scheme; we put it together. We knew that there had to be something in place that encouraged public and private investment in research. And, of course, we have long held aspirations of increasing R&D as a percentage of GDP. Labor has publicly supported the intent of measures to maintain public confidence in the integrity and financial sustainability of the tax incentive scheme, as per the Senate Economics Legislation Committee's report.
So let's be very clear: our position at the moment is that we've got some major concerns about the way in which the government deals with these issues, including the way in which it approaches science and relying on our scientists for good public policy. We are not saying that there are not considerable issues that might beset this scheme. That's why we have an open mind on some of the issues that have been raised either by the government or by stakeholders. We're not saying the scheme is by any means perfect; you can always look to improve upon a scheme. We don't want to see taxpayers' money wasted in a deadweight loss situation where companies are accessing taxpayers' money but not providing benefit to the taxpayer or acting in the national interest. These things have to be considered, which is why we will be referring the bill to a comprehensive Senate inquiry. We want to have a very good look at this bill. We want to have real and genuine engagement with the stakeholders who are going to be impacted, adversely or otherwise, by the proposed bill if it is not defeated or amended. These are important things that need to be done. The opposition will hold the government to account. If this bill is to pass, Labor will seek to improve the bill if we get an opportunity. But, before we formalise our final position on this matter, we do need a comprehensive examination of the effects of this proposition upon companies across all sectors of our economy.
The bill, of course, is being debated at a time when public and private research and development continue to slide as a percentage of GDP. The government is yet to properly explain how measures or their minor tweaks from the last iteration of the bill before parliament have heeded the bipartisan concerns of the Senate committee that the research and development measure 'should be re-examined in order to ensure that Australian businesses are not unfairly disadvantaged'. As such, Labor believes it is imperative that we refer the bill to the Senate Economics Legislation Committee and interrogate the potential impacts of the bill, including its timing and the economic impacts of these reforms.
Deputy Speaker, thank you so much for the opportunity to contribute to what is a critically important debate about a crucial piece of legislation. A lot of what we talk about in this chamber must feel a little bit esoteric, but we're actually addressing here one of the most pivotal questions that we face as a parliament: how are we going to use the powers and the laws that we have to create a high-wage and high-skill economy for today's Australians and for their children and grandchildren?
Arguably, the single most important lever that we have to influence how innovative we are as an Australian nation is the program that we're talking about today, and that is the R&D tax incentive. It's a huge program. It's important. It's very expensive—we're spending $2 billion a year on this program. And if it's well designed it is an incredibly powerful driver of productivity.
I really want to echo a lot of the comments that were made by the shadow minister who spoke before me. What is most notable about this bill, from my point of view, is not some of the detail that has been included in the bill but it's actually what's not here. What I see when I look at this piece legislation is a gut-wrenching lack of ambition about how much this parliament could be doing to fix the very significant problems that our innovation system faces as country. With so many of the big structural problems that we should spend our time in this parliament dealing with the government comes in and it goes to the margins. It picks off the detail of, 'Should we do this per cent or that per cent or should it be this amount or that amount,' when really there are some fundamental things wrong with the system that we could be here debating today and we're not doing it. I see that as a tragic missed opportunity. I wonder sometimes why people fight so hard to be here in this chamber if all they do with the opportunity of government is just tinker at the margins. There are much bigger problems and much bigger issues and, unfortunately, the bill before us—as it has its good points and bad points—is not going to go the fundamental issue of how we are getting the incredibly creative and clever people of our country innovating and creating new things that are going to drive the jobs of the future?
I note that the bill seeks to implement some of the recommendations of the R&D tax incentive review, which will, I'm sure, in some ways improve the integrity and effectiveness of this scheme, but it doesn't structurally or systemically fix our deficient innovation system. Most importantly, it does not invest any more government capital in direct or indirect R&D support, and I will come to this very significant problem in a few minutes. It also doesn't really contemplate any type of substantial public policy reform to create a high-skill, high-wage economy. And that's the bottom line for us as a parliament. We don't need any more speeches from the RBA governor, or renowned economists around Australia and around the world, to know that we need to start thinking about some new ideas in this country, in this parliament, and the bill before us is not going to help us do that.
That R&DTI, as this program is known, is something that's been under debate in the chamber here for a long time. In fact, it was 35 years ago that the Hawke government first introduced a kind of broad based tax incentive to try to encourage Australian companies to innovate. It was intended that that concession be temporary, but I think the government saw that this was actually driving big productivity benefits in the economy and so the Keating government later decided to make this a permanent feature of our tax system. Since that time we have gone through four big reforms. Some of those were done by the Howard government and some by the Rudd and Gillard governments. In its current incarnation, in 2011 the previous Labor government made some very substantial changes to the scheme. I'm very proud of what that Labor government did to the scheme. It made very significant improvements to the way that the R&DTI operated.
But we are in a new age now. Believe it or not 2011 was nine years ago. Since that time we have seen countries around the world streak past us when we look at measures of how we compare on various innovation statistics. It's pretty clear that we need to think about some new ideas, some fresh thinking on this subject, and again, unfortunately, the bill today doesn't help us do that.
As we continue the debate in the parliament about what is the most effective way for us to support innovation, one of the things I'd like to be a part of the discussion is an issue about whether we provide direct support for innovation or indirect support for innovation. It might sound banal and techie but it's actually a very important decision for us to make. When we look at best practice countries around the world what we see is that they are very reliant on direct forms of support for innovation. So what we see is that they create grants programs where they thoughtfully assess project by project what it is that companies would like to do in the way of innovation.
The measure that's before us today is something called an indirect measure. Basically that tells us it's agnostic to what type of project you're doing. It doesn't matter whether you're innovating in renewable energy, or in the start-up sector, or some other area of the economy. And it doesn't ask anything really in terms of performance outcomes. Often makers of public policy start to hear alarm bells ringing when we're funding inputs but not asking much in the way of outputs to see how hard our money is working for us.
One of the things that's really interesting in the way our program for innovation has evolved as a country is how we've leaned more and more on direct rather than indirect measures, and that, during that time, the best practice countries in the world have gone in exactly the other direction. In fact, there are very highly innovative countries around the world today where 100 per cent of their innovation programs are funded directly; so with the RDTI, this very important, powerful measure we're talking about today as a way to drive innovation, all of the $2 billion per year is indirect spending.
One of the interesting things about that is how different an approach it is to that taken by previous coalition governments. It was Howard and Costello who really pushed for direct measures. They also pushed for an increase in R&D spending. I'm perplexed and fascinated by the different approach that we see from this current incarnation of the coalition government. These days, under the Liberals, the R&D tax incentive measures have been a much bigger part of the program overall for how we fund R&D in Australia. What I don't hear is a clear explanation of why that is. That worries me. We need to be super strategic about this. We're a small country. We're competing in a world of almost seven billion people. We need to be really strategic about every dollar we spend on this. What I see when I look opposite is a little bit of a blindness. This program is growing and growing, and it's a bit unwieldy, but we're not making a big, strategic choice about how we redesign the program; we're just tinkering at the margins and trying to make performance improvements here and there.
One of the other things notable about the way this government is approaching R&D compared to previous incarnations of coalition governments is the lack of government as an actor in this system. For example, our universities are being defunded and run down. In previous incarnations of Liberal governments, there's been a real acknowledgement that some of the smartest people in the country are in these universities and that they want to be engaged in developing research that's used to grow our economy and create jobs. But we're really missing that opportunity when we create programs like this, which don't ask for any collaboration between the different sectors of our economy.
I have a suspicion that some of the reason why we're seeing some of these issues occur is more continental drift than strategic thinking. It shouldn't surprise us that we see that in the area of innovation. All Australians have watched how this debate has unfolded during the last seven years. When the previous member for Warringah, Tony Abbott, became Prime Minister his only objective seemed to be cutting things in the budget, and that's exactly what he did; he took big amounts of money out of pieces of our innovation system. We had one of the previous members for Wentworth, Malcolm Turnbull, come in as Prime Minister for round 2, and the ideas boom was suddenly a thing. That lasted for about five minutes. Since Malcolm Turnbull left the prime ministership, it's really felt like Scott Morrison is just terrified of the word 'innovation'. We did a count in the last election campaign, the lengthy election campaign, in May last year. The Prime Minister uttered the word 'innovation' four times—come on! It's like he's banished innovation into the Albanian forest with Voldemort; it's the word whose name cannot be spoken.
I'm going to get to the education sector. The minister's agitating me here. Don't worry, Minister Tehan, I'm about to come to your portfolio.
One of the things that is frustrating about all of this is that it's so obviously an area where we can be doing better. Instead what we see is a Prime Minister who can't even mention the word 'innovation', and that leads to policy timidity across this whole, expansive sector. I find that incredibly disappointing.
I want to mention three other big directions that I think the parliament needs to look at as it reviews and discusses this important bill over the coming months. One of the issues that cannot be papered over is the simple fact that we are not spending enough on research and development as a country. Our R&D spending has dropped to less than 1.8 per cent of our GDP, whereas best practice countries around the world are spending more than four per cent. This is an enormous problem for our country to consider. We're ranked ninth out of 11 comparable countries on R&D spending. In fact, the biggest lagging area when we break R&D spending into the different sectors of the economy where that spending is being conducted is private sector innovation spending, and the biggest thing this chamber does to promote private sector innovation spending is the R&D tax incentive, so that should tell us right off the bat that there's a pretty significant problem not just with the edges of this policy but with the driving force of it.
What I really want to be clear about—and those on the other side of the chamber need to understand this too—is that the bill that's before us, as proposed by the government, will see R&D spending in Australia decline further. This is not about increasing funding. We know we're not spending enough, and the bill is going to see this go backwards for us as a country.
We see the same in the university sector. The problem there is so profound. Of 34 advanced nations, Australia ranks 30th for government spending on universities. The government introduced cuts of $2.2 billion from universities over the coming years via the funding freeze for degree courses. A further $3.7 billion was removed from the sector with the closure of the Education Investment Fund. Government spending on tertiary education in Australia is 0.7 per cent of GDP. The OECD average is 1.1 per cent. Serious! What kind of government, going into the economy that we know we need to embrace, is cutting spending on our skills sector when we know the best thing a person can do for themselves in this new economy is to get as skilled and educated as they can? It makes absolutely no sense.
I also want to mention the problem of something called additionality, which is like the Holy Grail in this policy area. Basically, success for a program like this one is when the program incentivises companies looking around the world to see where they may do research and development to do it in Australia. That way we get the knowledge, the skills and the jobs that come with those initiatives. Failure for a program like this is when a company is going to do R&D in Australia anyway and we give them government funding to do something they would already have done. That seems simple in principle, but creating public policy to determine which project is which is much more difficult. Something the shadow minister talked about is that we're conducting a Senate inquiry into this bill. Something that Labor will be looking at very closely is what evidence there is that this program is going to create more additionality so we're wasting less money paying companies, often very large companies, for doing things they would have done in Australia anyway.
I also want to mention a perennial and growing problem for us in our R&D program and that is the lack of strategy in how we're spending our R&D dollars. Australia's spending on R&D is about two per cent of global spending. We can't be the best at everything. In fact, in most other areas of policy and economy, we don't try. We do the smart thing that one does when you have limited resources in a globally-competitive world: you think about where you've got a special advantage that might make you particularly good at something and you try and invest and grow that. Renewable energy, for example, the absolutely biggest no-brainer, is right there in front of us. Because our R&D program is indirect, it's letting a thousand flowers bloom—in fact, many thousands of flowers bloom. We're not taking the opportunity to ensure that every dollar is working as hard as possible for us, because it's basically scatter gunned right around the economy. And that's something, again, that doesn't meet best practice when we look around the world and isn't fixed in any way in the reforms that are before the parliament right now.
Again I want to reiterate some of the shadow minister's comments about Labor's history in this area. We're really proud of the importance that we place on things like the R&D program. We're very proud of the support that we've long given to universities in this country. We know there are certain undeniable facts about the future world that we're going into—we've got these brilliant pockets of creativity and innovation in our economy. Government needs to bring these things together. We're not seeing big ideas on that side of the chamber, but we'll engage with this bill in good faith to make sure we get the best out of it we can.
R&D is an essential part of ensuring that Australian business and our economy as a whole survive and thrive in the modern 21st century globalised economy, yet Australia is ranked as low as 21st in the OECD for R&D investment. As such, it's important that we support research and development across the board. It's the only way that we will continue to be world leaders, in particular across the resources sector, and, similarly, it's the only way that we'll be able to make a significant positive impact on developing further initiatives in Australia's defence industry, as well as across many, many other areas.
The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 is being debated at a time when public and private research and development funding continues to slide as a percentage of GDP. However, this legislation before us is somewhat concerning. It will essentially suck nearly $2 billion out of R&D investment in Australia. However, its objective of ensuring that the government's R&D incentives spend is efficient and effective is also very important. It is essential, though, to ensure that these changes do not produce any unintended consequences, because entirely legitimate projects may well be adversely affected. For example, Northern Minerals, a company focused on the development of heavy rare-earth projects, say that the $4 million cap on research and development rebates will have a negative impact on groundbreaking, critical mineral resources projects like theirs. They say the cap will force innovative projects, such as their Browns Range project, to develop much more slowly and will result in missed opportunities for Australia in this new and growing sector. This unique project is expected to provide a critical commodity vital to current technological developments, as well as jobs in one of the most remote parts of Australia, by producing a mixed rare-earth carbonate, which includes a high grade of dysprosium and terbium, and will see WA become the first heavy rare-earth producer outside China. This is a fantastic opportunity for Australian trade as we continue to see increasing demand for the critical minerals used in technologies that save energy and produce low-cost or renewable energy, including dysprosium and terbium. Indeed, the critical rare-earth sector is something that we on the Labor side are championing and want to see grow more.
Northern Minerals' Browns Range project is a beneficiary of the current Commonwealth government's research and development tax incentive scheme arrangements. To put it simply, the pilot project is unlikely to have ever gotten off the ground without such a scheme. Northern Minerals freely admit the current R&D scheme added to the company's confidence in undertaking the detailed studies into hard rock heavy rare-earth mining and processing, resulting in several innovative enhancement initiatives as the project has evolved. Their business case is built up around the R&D incentive, as currently configured, as is the case for many R&D intensive businesses across the country. Analysis by Deloitte Access Economics indicated that the full-scale stage of the project will boost the gross regional product of the Kimberley region by some $393 million by 2030, as well as providing hundreds of jobs during the build and operation—an overall package of over $773 million.
So we must ensure that there are no unintended consequences in throttling R&D investment and growth in this nation from this legislative change. Late last year, the member for Brand and I had to opportunity to visit Fastbrick Robotics, a robotic bricklaying company in High Wycombe, east of Perth. Fastbrick Robotics is yet another success story built on the foundation of the government's encouragement of Australian research and development through this tax scheme. They are currently in the pre-revenue research and development cashflow-negative stage, and expect that it will be about three years before they are able to begin to commercialise and export their promising automated technology, which will significantly speed up and lower the cost of housing in Australia and around the world.
Research and development continues to fall in this country, when it needs to do the opposite. We have some amazing minds and opportunities to develop amazing technologies for our diverse industries, including the resources sector, defence industries and manufacturing as a whole. However, under this government the lack of investment in research and science and in the CSIRO is seeing opportunities dwindle. As a recent Australian Institute of Company Directors report said, while the global trend is for national business expenditure on research and development to grow, in Australia it has fallen. Australia is close to the bottom of the OECD ratings for collaboration between industry and researchers. According to the OECD index of research and development investment by government, Australia is falling. This is a trend that must be reversed if we want to support jobs and economic growth and remain globally competitive in resources, defence industry, science, medicine—the list goes on and on. Strong investment in research and development allows all Australians to share in the benefits of new industries, new products, good jobs and a higher standard of living.
Labor supports the intent of measures to maintain public confidence in the integrity and financial sustainability of the research and development tax incentive, as per the Senate economics committee report when it last looked at this legislation. However, the government is yet to properly explain how the minor tweaks to the bill that is now before parliament have heeded the bipartisan concerns that were raised by the Senate committee. That Senate committee unequivocally stated that the research and development measure should be re-examined in order to ensure that Australian businesses are not unfairly disadvantaged.
Labor is proud of creating the research and development tax incentive, the single largest investment the Commonwealth makes in supporting science, research, industry and innovation in the Australian economy. Only Labor has sought to address the decline in research and development spending in Australia. Research and development is key to the future of Australian industry, particularly the future of manufacturing in Australia. The advanced manufacturing research centre competitiveness plan calls on the government to improve government support for business led research and development and encourage industry research collaboration.
If the Morrison government were serious about helping manufacturers to grow, become competitive globally and develop new technologies, they would be investing more in research and development either directly or indirectly. Labor has publicly supported the intent of measures to maintain public confidence in the integrity and financial sustainability of R&D tax incentives, however we are debating this bill at a time when public and private R&D continues to slide as a percentage of our GDP. The government is yet to properly explain how these measures or the tweaks that they've made since they last had this legislation before us have heeded the bipartisan concern of the Senate committee that the research and development measures should be re-examined. As such, Labor believe that it is imperative we refer this bill to a Senate committee and interrogate the potential unintended impacts of this bill, including its timing and the economic and sectorial impacts of these reforms, because frankly we can't afford not to.
I'm pleased to speak today on the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019. This bill seeks to implement some R&D tax incentive review recommendations from the 2015 review called by then Prime Minister Turnbull, sometimes known as the three Fs review, which was done in order to improve the effectiveness and integrity of the R&D incentive program while at the same time encouraging additional research and development from participants in the scheme. There is, as other speakers have noted, significant concern among industry participants that this bill will affect existing business decisions across a number of sectors, particularly surrounding the intensity thresholds and the lack of a collaboration premium, which is a premium designed to encourage private enterprise collaborating with public universities in their research and development efforts.
I think it's worth reflecting briefly on some key points regarding the scheme in the last decade, which will of course inform future decisions around the bill and the broader incentive scheme itself. The original R&D tax incentive was introduced in 2011 by the Gillard Labor government after extensive consultation with academics in industry and universities, and is the primary incentive mechanism used by the federal government to stimulate industry investment in research and development, by providing a tax offset for eligible projects. The objective was that industry would participate in research and develop activities that they otherwise might not have without the scheme, which then has a significant flow-on effect for the Australian economy and the broadening of Australia's knowledge pool and scientific research capability.
When Prime Minister Turnbull commissioned this review in 2015 the chairs were Bill Ferris, Alan Finkel and John Fraser. It was handed down in 2016 as part of Prime Minister Turnbull's innovation agenda, with slogans like 'Innovation Nation' and 'Ideas Boom' which were thrown around the parliament and the media in place of any actual policy to do with research, development or science. We all know where that went; the innovation agenda went down the drain eventually and we've yet to see anything take its place from this government.
Any remaining interest that the coalition government had in science went out the window with Prime Minister Turnbull, as well as some of the more reasonable coalition MPs that followed Turnbull out the door recently, last year. And what do we have left? Any action on the Three Fs report has been delayed for three years, leaving industry in the dark about its future while those opposite choose to squabble over energy policy, the realities of climate change and the science associated with climate change, as well as having them review a conga line of leadership aspirants whose commitment to the university sector continues the tradition of former Prime Minister Abbott's notion of continual cuts to that sector.
Industries have been strongly voicing concerns about these changes for a long time. I've been pleased to meet with many industries which are affected by this change to the R&D tax incentive. They've been waiting a very long time for certainty—for nearly five years now—to know what their tax position will be with regard to their research and development spend. They are concerned about the impact this will have on their forward plans, including made-and-paid business decisions.
Manufacturers are also particularly concerned, as well as those in mining and mining exploration, renewable energy, pharmaceuticals and biotechnology, and a number of small businesses and start-ups around the country. Industries are concerned that the government is not implementing the recommendations of the report commissioned by Prime Minister Turnbull in full. They are not initiating the collaboration premium of up to 20 per cent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditure undertaken with publicly funded research organisations, which we know are the universities and the CSIRO.
Labor is supportive of a collaborative premium commitment and an R&D spend of three per cent of GDP by 2030 target. That went to the last election and is the commitment which no doubt will be considered as part of our post-election policy review process. A very important commitment it was too and, of course, it was utterly ignored by those on the other side. Our proposals went with wide support from a range of sectors, particularly the all-important university sector. Indeed, Universities Australia CEO, Catriona Jackson, said late last year:
Since 2015, Universities Australia has advocated for a premium tax concession for businesses collaborating with our nation’s universities on research and development.
A premium tax concession would boost the number of businesses that tap into the wealth of expertise inside universities and enhance innovation in Australia.
… … …
Australia’s expenditure on R&D (1.88 per cent of GDP) now lags most of the OECD, as well as the OECD average of 2.38 per cent.
This statement followed a statement from the Group of Eight CEO, Vicki Thomson, who expressed disappointment at the ongoing drop in R&D investment by the government last year. She said:
A nation walks away from investing in research at its peril. Research creates jobs, stimulates the economy, saves and changes lives and contributes significantly to the economic, social and environmental well-being of the Australian community.
I couldn't agree with her more.
The cuts to research that have been seen in this country under the leadership of the Liberal and National parties in government have been extraordinary. In 2017, the MYEFO attacked research by ripping $328.5 million from universities. So while other OECD nations are increasing their research funding, or at least maintaining their support for research and science, this Liberal government has slashed research and consequently has slashed the potential of this nation. It's also capped undergraduate places of course, leaving regional and outer suburban communities much worse off.
This government has slashed $2.2 billion from universities, denying 200,000 students a place to study. What I've never understood when it comes to research, development, science and the funding of universities is why the National Party and National Party members in this place don't stand up to their coalition partners in the Liberals when they attack research funding and universities. The remarkable agricultural faculties around this country have formed the basis of the success of the agricultural industry in this country.
If I could, I'd just point to a few examples of scientific research that I know have underpinned the development of Western Australia. In the 1930s, Professor Eric Underwood, at the Institute of Agriculture at UWA, led a team that looked into the deficiencies of the soil in the south-west of Western Australia. At the time there was an extraordinary wasting disease that was causing sheep and cattle to no longer be able to process the nutrients that would keep them alive and make them productive beasts for our agricultural industry. He and his team, and also a team in South Australia, discovered, after a number of years, that the missing essential ingredient from the soil was in fact cobalt, and that if we were able to put more cobalt into the soil of south-west Western Australia then the sheep would live and the cattle would be good livestock capable of supporting an industry. This research, and how they went about implementing changing the soil content of Western Australia and South Australia, saved that industry—and that was back in the thirties. Professor Eric Underwood is rightly recognised in street names and the names of halls right around Western Australia for his magnificent contribution to agriculture.
In the 1940s in Western Australia the ewes in our flocks had an extraordinary infertility problem—it was on a massive scale—that was identified as oestrogen deficiency. You can't inject every sheep with oestrogen; it's an inefficient way to try to help them and help the farmers who are trying to maintain their flocks. But what you can do is apply your mind to the problem with science and research and development. What they ended up doing was create a subterranean clover strain that contained that essential hormone. They went about planting it and they saved those flocks. Of course, now the sheep and beef industries in the South West in Western Australia are very important parts of our agricultural industry.
If I could, I'll now turn to wheat, which is one of the biggest exports out of Western Australia; it's very important in my electorate as we host the Co-operative Bulk Handling company. Wheat was also a marginal practice in the thirties and forties, but thanks to the science and research and development that we entered into—cooperatively, I might add, with farmers assisting scientists—Western Australia farmers, along with scientists, developed dry farming techniques. The addition of superphosphate to their soils, the improved varieties of wheat: these were all down to the application of science and research and development and the collaboration of primary producers and farmers with universities and public-funded institutions like the once great WA Department of Agriculture.
So why don't the Nationals stand up to the Liberals when they cut science funding and introduce bills, like this one, which have floundered for five years and have failed to take on the recommendations of leading scientists in our community to have a collaboration premium? Well, I don't know. The Nationals deny a lot of other science, we know that. They deny the science of climate change; they like to pass judgements about what science is wrong and what science is right in their humble opinion. I even believe a Queensland LNP motion was moved at the national federal council or some such organisation to have some kind of oversight body for science run by parliamentarians, which seems to go against the notion of the peer review of scientists judging scientists. They are trained to be objective; this is what science is. The Nationals, in ignoring their past and the heritage of farmers having contributed greatly to the research and development efforts of our nation, are denying the great efforts farmers have put into developing cooperative science in this nation.
In the 1950s the Farmers Union of Western Australia was the first group to introduce a voluntary levy of one farthing per bushel on all wheat. That one farthing per bushel went into a pool and was used to fund science and research and development that would the increase the fertility of soil that's more suited to an hourglass, perhaps, than producing wheat in the Western Australian Wheatbelt. This was farmers, off their own bat, understanding the importance of research and development and science.
In 1954, the WA parliament passed the Soil Fertility Research Act, which was the first such cooperative based research program that would take voluntary levies from farmers to produce research and development. Now, of course, we have widely respected research and development corporations that have all sprung from that move of the Farmers Union of Western Australia: Meat and Livestock Australia, Grains Research and Development Corporation, Fisheries Research and Development Cooperation, the former Grape and Wine RDC, among many others.
We should be very proud of our approach to cooperative science and where it has got us and our agricultural industries in this country. Again, I do not understand why the Nationals in this place, and for that matter outside this place—anyone involved in the National Party—don't take it up to their coalition partners and ask them: 'What on earth are you doing by making it harder for people and private enterprise to collaborate with publicly-funded research organisations to undertake research and development across all sectors—not just farming and agriculture, but all sectors? This should be your legacy as a National Party. Your people—the farmers that you claim can only be represented by you, the Nationals—are betrayed by you at this point, when you fail to support science and research and when you fail to support the funding of science and research; when you let the Liberal treasurers, in the plural, take out money from the proper funding of the science and research capabilities of our great publicly funded universities in this country. You are denying the heritage of farmers in this country—their cooperation with science and scientists and their legacy.'
We know farmers in this country depend on science and research and development, whether it be satellite technology, wi-fi technology, new strains of grain, or wheat or whatever crop they have. Instead you, through you, Madam Deputy Speaker Claydon, flounder in the denying climate science space. It's like you're choosing what science you want to back—as if you can choose your facts. That's a very sad state of affairs for your supporters, or so-called supporters. I hope this will go to a Senate committee and we hear about the timing of the implementation of a program that will cause less money to be spent on research and development—which will be very tough at a time when higher education cross subsidies that require international students to support research in universities is under threat from a disease that is beyond our control. But when you don't plan for the future and you deny proper funding to science and universities, that is the result you will get: an overdependence on other forms of income that are susceptible to global shocks. Good luck to you!
Of course Labor will support the passage of the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 through the House, but we will refer it to a Senate committee because there are further issues that need to be dealt with by looking at the details. Yesterday, we heard the Reserve Bank Governor give an insightful speech into his view of the outlook for the Australian economy, particularly over the year ahead. Something that stuck with me in terms of the RBA Governor's speech yesterday was his view that government and business investment needs to grow in Australia if we're going to tackle the problem of the productivity malaise that's developed in our economy. In his words, 'Business investment has been weak for a long period of time.' That's the view of the Reserve Bank Governor of business investment under a Liberal government that claims to be all about representing the business community and boosting investment in Australia. It also proves that the government's claim that reducing company taxes would spur a business investment boom simply hasn't occurred, and that the notion of trickle-down economics is complete rubbish.
Reflecting this is the fact that business expenditure on research and development has fallen by about 30 per cent under this Liberal government. We see that in the national accounts, where expenditure on government tax concessions associated with research and development in Australia is also falling under this government. Australia now has a woeful record when it comes to supporting private sector research and development. Business R&D expenditure in Australia is now at a level below one per cent of GDP, sitting at 0.9 per cent—a level it hasn't been at for many, many decades. We are ranked 21st in the OECD when it comes to investment in research and development by private corporations. The global trend in research and development throughout the world is to increase investment in important innovation and research and development. In Australia, the opposite is occurring under this government: investment in research and development by corporations is falling. In the coming years Australia's wealth will increasingly be tied to our ability to innovate, to develop and create new industries in what is becoming an increasingly competitive global economy. Australian businesses that invest in research and development need to be the engine of growth, innovation and productivity in Australia in years to come. If they are not making the investments now, we will suffer the consequences in the future.
Leveraging the talents of our educated workforce, Australia has the ability to build on some of the wonderful innovations that have been developed in this country—like wi-fi or the bionic ear. These, along with other innovations in new and established industries, create the jobs of the future in Australia and ensure our nation's future economic prosperity. But innovation and research and development as a focus, as an agenda, from this government has been sadly lacking. In 2011, when Labor Party in government, we implemented the current framework for research and development tax concessions to spur on and boost private research and development in this country and drive innovation and investment—because we know R&D is integral to a modern information driven and innovative economy.
The incentive is currently one of our principal mechanisms to stimulate investment in research and development and to encourage R&D activities that might not otherwise be invested in and taken up by the business community. Currently, around 13,000 companies take advantage of the two levels of the scheme—the refundable tax credit and the non-refundable tax credit. The vast majority of those companies are in the lower turnover bracket. Labor took a pro-industry and pro-innovation policy to last year's election, including the collaboration premium that industry and research bodies have been crying out for. Labor committed to establishing an electric vehicle manufacturing and innovation strategy to support the Australian Centre for Innovative Manufacturing and to invest in the expansion of the Mackay Renewable Biocommodities Pilot Plant. We had a plan to establish a hydrogen industry in Queensland. Unfortunately, Labor was not elected at the last election. These commitments were put in place with the stated aim of boosting research and development and getting to a target of three per cent of GDP by 2030. Labor was the only party in the election that had that stated aim, that looked at boosting R&D expenditure to three per cent of GDP by 2030 and bringing it back on track with what is going on in other nations. That is a stark contrast to what the Liberals have been doing, with R&D investment falling.
This bill proposes some new recommendations. It comes on the back of the 2015 review conducted by Bill Ferris, Alan Finkel and John Fraser, which has become known as 'the three Fs review', and the Treasury consultation that went with that. The government's bill claims to improve the operation of the incentive through increasing the incentive's expenditure threshold, capping the refundability of the tax offset and increasing the specificity with which the tax incentive levels are applied as a reward to organisations that have a higher proportion of research and development investment.
This bill will implement a $150 million expenditure cap, allowing an increase in the cap from $100 million but well below the $200 million that was recommended by the review. In that vein, it may not provide the business confidence required to bring R&D expenditure to those GDP target levels. This aspect of the bill, we believe, should be examined by the Senate committee if the Senate Economics Legislation Committee gets the opportunity to look at the details of this bill.
The government intends to cap the value of the refunded tax offset credits at $4 million per annum. This aims to contain the costs of the incentive whilst continuing to provide financial support for companies engaging in R&D expenditure. The bill seeks to increase the specificity of the application of the tax incentive levels through the use of an intensity premium, a mechanism to ensure the proportional R&D investment of an organisation. Through these reforms, companies that spend proportionally more on R&D compared to their overall turnover will receive an increased tax offset. This mechanism rewards companies that spend more of their overall turnover on R? however, it does also complicate the policy. The aim of the policy is to benefit smaller organisations than the Liberal government has in the past, but it may in some respects be a disservice to those smaller organisations because you're actually increasing the complexity of the system with those three different levels of specificity when it comes to that offset.
We're saying that that is, again, another issue that should be dealt with by the Senate economics committee. It should look at whether or not that's simply complicating the system too much to encourage people to actually invest and take up those opportunities for the R&D tax offset. If a private corporation has made a decision to invest money into research and development then they should be rewarded and supported for that endeavour and given incentives by the government.
But it's important that the government is also serious about considering the non-legislative recommendations put forward by the FFF review. They include plain-language guidance for businesses and a simplified application and administration process to assist smaller business in accessing the incentives. The government must also consider the introduction of a collaboration premium in order to stimulate cooperation between different organisations in pursuit of bold new research.
So this is a bill that has potential to provide an encouragement to R&D in Australia and to boost the uptake of the R&D tax offset in Australia, but we are sceptical about that given that they haven't taken up the recommendation for the $200 million. There's now a cap on the level of R&D research expenditure that can be tax offset, and you've got those specificity levels in terms of intensity which are very, very complicated. There's nothing that's been said by the government to make the system easier to understand or to provide plain-language guidance for businesses so that, hopefully, more of them take this up.
We can't afford to get this wrong. We need to make sure, given the flailing levels of investment in research and development by private industry in Australia, that we don't get this wrong. That's why Labor's suggesting that this bill be referred to a Senate inquiry so that the Senate economics committee can look into these issues and can recommend to the parliament whether or not this particular bill meets the stated aims of boosting research and development in Australia. We all know that Australia is falling globally and we're falling domestically in terms of the amount of money that's being devoted to research and development. That will only mean that in the future our economy will be less competitive and less efficient. We'll have difficulties boosting productivity, and overall Australian living standards will fall if we don't get this incentive right.
I rise to speak on the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019. If you take a long-term view of the way economies are evolving and our role as people within economies, we have rapidly moved away from the muscle towards the mind. We are relying less on human labour in physical effort and replacing that, in times past, with machinery. Now robotics, you would anticipate, will take up more and more of the load. Some of the difficult and dangerous, and dull and repetitive, tasks that people carry out will be done by machine. Where the difference will be is where people can bring imagination, creativity and problem-solving to make a difference in workplaces. This is where things have headed.
Big movements happened through the fifties and sixties. If you look at agriculture and manufacturing—obviously, everyone goes back to the start of the industrial revolution—we've had truly big shifts occur from the way in which we employed people in earlier generations, and we can see it continuing now. A lot of people think that there are a lot of jobs that will always be done by people. Some will, yes, but a lot won't, no. As we advance through the application of artificial intelligence and robotics, we are potentially going to see some changes that people thought wouldn't happen in our lifetime happen quicker than we imagined in our lifetime.
The pressure is on countries to invest in human capital and to think about how they can evolve their communities and their economies. The belief seems to prevail that we can just play catch-up. This will increasingly become more difficult as those who invest in R&D, those who do longer-term planning around what their economies will look like, steal a march on us. It will be increasingly difficult for us to play catch-up, to bring ourselves on par with where they are.
This whole notion of first-mover advantage becomes clearer and clearer. If you look at what China, in particular, are doing in our region, they're putting a serious, committed investment in artificial intelligence. They see a $150 trillion industry potentially emerging out of their investments in AI. It's not just an economic investment for their nation; it's a strategic investment as well. We see other countries devoting significant amounts of money to the development of artificial intelligence and a national game plan. This is serious stuff, and we as a country cannot afford to see where AI will—some of the biggest companies on the face of the planet, like Amazon, Google, Facebook, Tencent, Alibaba and Baidu, that are using AI in this way will just propel themselves further. With the mountains of data they're collecting they will become even more efficient and advanced, and they will leave us even further behind.
As parliamentarians, particularly in this country, we have to take this more seriously. While we will have our debates in this place, I actually believe that most parliamentarians get that Australians are incredibly smart and innovative people. Given our continent and our isolation here, we have had to in times past have very bright people. We know that. This is not just simple rhetorical flourish by me; we can look at it. Most other places pinch our people—our best and brightest get taken overseas—because they know of the talent that exists here. I hear stories, as many people in this place do, of people who have dedicated themselves to the area of scientific endeavour and then left it. The brother of a colleague of mine had worked in the area of scientific endeavour, but he now works for a major financial institution. He is not doing what he wanted to do; he is now working for a financial institution. He said of science, 'There was no opportunity for me there.' This is the type of story that should make our collective blood boil, because we are wasting talent. We are not applying skill or know-how in a way that will make an enduring impact on our nation. As a country, we should be ensuring that every element of government investment twinned with business focus, that effort, puts Australia in a position where we are doing smarter and better than we've previously done. If we don't, we will be left behind. We will be absolutely left behind. People will reflect on the impact of traditional industries, like mining and agriculture, on our economic fortune and think that that's going to basically deliver us income and wealth for years to come.
I note that in the Financial Review last year someone had pointed out that researchers from Harvard had examined the concentration of effort that was dedicated purely in resources and agriculture in this country and then contrasted the complexity of other economies. The Financial Review of all places said, 'If we are doing so badly why are we so rich?' Yes, we are rich. The question is: how long for? Some of the most advanced thinking and automation has occurred in our mining sector, because if you look at the number of people employed in the sector versus what the belief is it's completely different. There is the challenge for us to think ahead and to invest and to back it up.
When you look at research and development, and all the things that we would use to measure how smart we are as a nation and what that will do longer term for us, all the major metrics are going the wrong way and this should be ringing alarm bells in this place. For example, gross expenditure in R&D as a proportion of GDP has dropped from 1.88 per cent to 1.79 per cent, according to the ABS. If you look at business research and development it's hit 0.9 per cent of GDP, falling below one per cent of GDP in the previous data from 2015 to 2016. The total human resources devoted to business R&D is still below what was devoted when the government took office. In 2013-14, total, as it's known, person years of effort was 78,839, but the most recent data shows up as 74,991, so a contraction of five per cent.
The recent Australian Institute of Company Directors report has let us know that for Australia's total gross domestic spending on R&D we are currently ranked 21st within the OECD. And that while the rest of the planet is getting the whole notion that we've got to increase national business expenditure Australia has fallen. All the metrics are going to wrong way for us as a country, and we need to do better on this because there is a long-term imperative to do so to ensure that we've got the type of economic prosperity and opportunity, and employment growth that people will expect longer term.
So, if we see ourselves as a smart people, and we think this is a smart nation—when you look at some of the stats, you look at the international rankings on the inputs, human capital, we do quite well but the outputs are nothing to be proud about. I said earlier that we should be making sure that we twin everything that is happening in government with everything that's happening in business to ensure that R&D in this country. The thinking about where we want to be as a country advances. This is the problem with this bill: people have been concerned that what this bill is largely about is a budgetary saving but not an investment in the productive capacity of the economy longer term.
We have had one Senate review of those proposed changes come out and say that the government should not go ahead with what it was thinking in this regard. We've got now, as we've rightly moved as an opposition, a focus on doing another review on these laws to ensure that the economy is not short-changed longer term.
The other thing that has happened as well, not just in terms of this structural reform, that a lot of people are concerned about—and they are concerned for instance about what this will do on smaller firms. I do note, for instance, that some people—for example, the R&D tax incentive specialist Daniel Ronai believes that these reforms will have a disproportionate impact on smaller businesses. He says that:
Around 1,030 (almost two thirds) of the non-refundable companies claiming the R&D tax offset have intensities of 4 per cent or lower.
And he believes:
This would result in their benefit dropping from the current 8.5 per cent to 4.5 per cent – in real terms a drop of almost 50 per cent.
An applicant in the four per cent or lower R&D intensity would have been spending $1 million previously and received $85,000. But now, that same applicant, with the same expenses, would receive $45,000. So there are people saying that the change to the type of thinking that's being applied by the government will shortchange small and medium enterprises, the same ones which were championed a few moments ago in another bill, where we want to set up the Business Growth Fund to help businesses expand. We're putting money in there, but in this bill we'll take money away from small and medium enterprises that are doing the thinking around research and development.
Other firms—tech start-ups—have been caught up by the change of treatment of the research and development tax incentive as it applies to software development. Start-ups have been screaming that the types of assumptions they had made on what would be acceptable in terms of receipt back as part of that incentive are then having to second-guess what the tax department and AusIndustry would do in deeming invalid the applications that had been made for the use of the RDTI. And that had been dragging on for ages. It was attempted once in the 2013-16 term of government, it was supposed to be fixed up and then it reared its head again in the 2016-19 term. Huge amounts of effort were expended to try to get the ATO to reconsider what it was doing to a number of Australian start-ups that would be impacted by this. Investors were particularly concerned that assumptions were being made about how the R&D tax incentive could be drawn upon. Those investors were concerned that those assumptions may be founded on very shaky ground and would inhibit their ability to make a return in the longer term. And so there was a concern about the chilling effect on investment as well.
I totally get, and a number of speakers from the opposition also totally get—and I've said on the public record a number of times—that if people are abusing the R&D tax incentive then we should all, collectively, with one voice, be going after those people: absolutely. Any reforms to improve that operation, for sure! And we should absolutely crack down on bigger businesses that are using the incentive and masking business-as-usual activity behind the incentive, because that's not advancing the national interest. But can we do it in a way that ensures the nation progresses because we have smart people thinking about problems confronting the nation, coming up with new opportunities to grow as firms and then advancing economic prosperity because of the application of those smarts. That's absolutely what we should be encouraging.
My most heartfelt wish is that we, as parliamentarians, start to say: 'Do you know what? We do the reform element and we make the changes to stop the shonks from taking advantage of these types of incentives. But we actually don't just look at this is an opportunity for a budgetary saving; we look at it as an investment in the productive capacity of the economy.' We want Australia to grow; we don't want us to become, effectively, a vassal state dependent on trade with other countries where the inputs are at a lower quality level and we shortchange ourselves economically because we didn't do the longer term thinking of investing in this activity: government and business working together to ensure that the nation does well in the longer term.
We should be having an argument in this place, outbidding each other on what we'll do on R&D. There should be an active competition between both sides of politics that will put more money into R&D, that will put more money into science and that will invest more in human capital, all with a longer term vision which says that as the economy evolves we will, with other nations, be at the front. Dare I say it—if I can make this final point—that we aim to be the best and not be embarrassed about pushing for that. Other nations do it, why can't we?
I just want to first of all commend the member for Chifley for so eloquently outlining some of the issues we have with this Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 and also for his passionate commitment to research, development and innovation. I'm a very proud Australian and very proud to be part of a nation where we have such a wealth of talent in the research and development space. In my own electorate of Cowan I have met with so many people who have wonderful ideas and who really just need the investment into their ideas. We can, I believe, be a great nation, be a world-leader in research and development but we have to get the policy settings right. We are lagging behind so many other nations and it's not because we have a lack of talent.
An opposition member: It's a national embarrassment.
It is a national embarrassment. It is not because we have a lack of talent. It is not because we have a lack of resources. Australians are some of the world's smartest people in areas of innovation. Within my own electorate of Cowan I have people working on renewable energy innovation and medical imaging. I have a start-up that is looking at a world-first way of using thermogenics—the temperature in the space between your eyes—as a very accurate lie detecting test. But they need the backup, they need the money and they need the support to be able to carry out the research that will take their innovation that step further.
We have the capacity to be a world leader in so many fields if we invest. The key word that the member for Chifley used here was 'investment'. We have to view this as an investment into our research and development capabilities. Sadly, though, I don't think that is happening. I don't think we see that as investment. I think this government sees that as a spend not as an investment. Other countries, countries that we lag behind in the OECD, see this as investment and see the value of investing in their in research and development and, as a consequence, Australia is being left behind. Our young talent is being left behind. There is a bleed of talent moving out of Australia and into those other countries where research and development is encouraged, where young people in particular but people of all ages with great ideas, with innovative ideas, can go and actually bring their ideas to fruition.
This Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 seeks to put in some reviews into an existing bill. Just by way of background, the research and development tax incentive was introduced in 2011 by the previous Labor government, which, I believe, shows our history of commitment to research and development, and to innovation. And the principal mechanism used by the Australian government to stimulate industry investment in R&D is by providing these tax offsets for eligible R&D activities. As we heard from the member for Chifley, because some big companies are abusing that in various ways, there is absolutely no reason why we need to take our eye off the ball and introduce measures that are also going to prove a disincentive for those smaller companies and those smaller organisations, those start-ups, those Australians with those brilliant ideas, from pursuing research and development because of the policy settings.
The original bill that Labor introduced was intended to encourage R&D activities that might not otherwise be conducted, and that is an important aspect of the original purpose of this bill—to support R&D that might not otherwise be conducted and to recognise that the new knowledge gained is likely to have a wider Australian economic benefit. That is the crux of investment. That is the crux of what it means to invest in research and development.
This bill was previously introduced, there were some issues raised with it and there was a review of the bill. This new bill still falls short and there are still some issues with this new bill. Many of the industry stakeholders in this bill are concerned about the intensity thresholds and the lack of a collaboration premium. We recognise that the bill may impact existing business decisions. It's of concern to many firms of all sizes including manufacturers and firms across many industries—mining and renewable energy, pharmaceuticals and biotech—and particularly among small businesses and start-ups.
The reforms will reduce concessions to businesses and deliver significant savings. I think that's an important consideration here. This should not be about delivering savings to the government. It should be, as the member for Chifley rightly pointed out, about investing in Australia's future and, indeed, Australia's present.
As the tiered intensity premium rewards those who devote a higher proportion of their expenditure to R&D, manufacturers are concerned that this may punish firms that manufacture domestically and thus have non-R&D expenditure domestically. We want to encourage domestic manufacturing. We want to diversify our economy. Australia's economic diversification has fallen. We now lag behind many countries in the world. The way forward for Australia, the way to sustain the Australian economy, is to diversify our economy.
Industry is also concerned that the government is not implementing the second recommendation of the three Fs review: 'a collaboration premium of up to 20 per cent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly funded research organisations'. I note that Labor took to the 2019 election a commitment to a collaboration premium and an R&D target of three per cent of GDP by 2030. These things are now being considered as part of our post-election policy review process.
Labor's position is that we've publicly supported the intent of measures to maintain public confidence in the integrity and financial sustainability of the R&D tax incentive, as per the Senate Economics Legislation Committee's report. However, this bill is being debated at a time when research and development, public and private, continues to slide as a percentage of GDP. It's now at just 1.79 per cent of GDP in total, with business research and development at just 0.9 per cent of GDP. I think that's abysmal in a country like Australia. As I mentioned earlier, I see so many talented people with so many fabulous ideas and so much potential, and they are just so frustrated because they cannot take advantage of R&D opportunities. This is a country where those opportunities should be encouraged. We should be encouraging people with great ideas for innovation. We should be taking advantage of the level of talent in this country. We should not be introducing policy settings that are going to quash that talent and frustrate those people even further.
I don't want to take up too much time on this bill except to reiterate Labor's position and ask the government to properly explain how their minor tweaks from the last iteration of the bill have heeded the bipartisan concerns of the Senate committee that the R&D measure 'should be re-examined in order to ensure that Australian businesses are not unfairly disadvantaged'. Those opposite can't stand here in this place and talk about their support for Australian business and then introduce a measure that's going to unfairly disadvantage Australian business. They cannot talk about growing the economy, having a strong Australian economy, and then introduce measures that are going to weaken it by weakening research and development, taking opportunities for research and development away from small and medium-sized enterprises and start-ups.
In conclusion, I urge the government to heed industry concerns, to look at the reviews that have already been done, to take a look at the impacts the measures in this bill will have on Australian industry and, through this bill, to stay true to their spoken commitment to Australian business, which they often talk about.
One of the consequences of the weak economy under this government's management is that consumption is low, household expenditure is low and confidence throughout the economy is low. That has only been added to. It was a problem before we came into the summer of fires. It was a problem before we were hit by the uncertainty arising out of the coronavirus. The consequence of all of this is that you've got weak business investment. Capital accumulation is very low. We're deeply concerned about this on this side of the House because it means we are kicking the productivity problem down the road. We know that if we're going to get a boost in productivity which is going to underpin growth in wages we need to get new business investment and, particularly, research and development moving again. That's not happening. The tragic thing about this is that the government hasn't got a plan to turn it around. My great concern is that the bill before the House, the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, is not going to fix this.
We on this side of the House agree that the research and development tax incentives need reform. There's no doubt about the fact that there are some distortions in the system. There's no doubt about the fact that there are some claimants in the system that shouldn't be there. If you've got a system which enables people to claim tax offsets and tax incentives for business-as-usual arrangements, then that's not incentivising new investment and new research and development; it's just rewarding people for things that they should be doing anyway. When Labor set the system up that's not what we intended to occur.
There has been a review. The review put forward a range of recommendations, some of which are reflected in this bill and some which aren't. We think we need a thorough inquiry into the consequences of this. In my own electorate, for example, the steel industry is one of the nation's biggest investors in research and development, but they also have a very high level of ongoing operating costs because of their input costs. The intensity formula within the proposal will have an impact on those sorts of businesses. We want the Senate inquiry to have the opportunity to have a look into this, give stakeholders the opportunity to have their say and hopefully improve the legislation on its way through the other place. With those very brief comments, we commend the bill to the House and consideration in the other place.
Firstly, I'd like to thank those members who have contributed to this debate. The government is committed to supporting research and development in Australia and the economic opportunities and jobs it creates. These reforms are a response to the 2016 review into the incentive, chaired by former Treasury Secretary John Fraser; the then Chair of Innovation Australia Bill Ferris; and Australia's Chief Scientist, Alan Finkel. The changes proposed in the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 will improve the tax incentive's effectiveness as well as the sustainability, integrity and administration of the program. Importantly, the reforms will ensure that the incentive is true to its name, providing an incentive to undertake additional R&D rather than subsidising activity that would have been undertaken anyway. Undertaking these reforms to the incentive will ensure it remains an important part of the government's overall support for R&D in Australia. I commend this bill to the House.
The original question was that this bill be now read a second time. To this the honourable member for Gorton has moved as an amendment that all words after 'that' be omitted with a view to substituting other words. The immediate question before the House is that the amendment moved by the member for Gorton be agreed to.
The House divided. [13:28]
The division was unavailable at the time of publishing.
The debate is interrupted in accordance with standing order 43. The debate may be resumed at a later hour.