New Zealand abolished its research and development tax incentive scheme shortly after the election of the new National government in 2008.

Internationally the trend is for an increase in R&D tax incentives, and for good reason. As expected, there is a positive correlation between R&D incentives and productivity growth.

According to the OECD, R&D incentives improve economic performance, create job growth (especially in fields like science and engineering), increase social well being, and attract foreign investment. Everyone benefits. Some countries even expanded their schemes to use as a tool to soften the effect on the economic crisis on business.

In contrast, New Zealand’s comparatively unusual decision to abolish the scheme reduced the country’s comparative attractiveness for inbound foreign investment, reduced the country’s attractiveness for highly qualified engineers and scientists, and made it comparatively more difficult for New Zealand businesses to compete against businesses from countries with tax incentives.

Not only should New Zealand institute a well targeted, well designed, R&D tax incentive scheme, the government should signal that the scheme is a long term one that will not be placed at risk by changing political and economic circumstances. The perception of long term stability is a factor that increases the positive impact of R&D tax incentive policies.

Given the concern about New Zealand’s economy, we believe that proper and aggressive investment by the government in R&D tax incentives is an essential and urgent step.

A new report, Economic Policy Reforms 2013, from the OECD highlights the low funding of business research and development in New Zealand. The report calls for the government to reinstate R&D tax credits. These tax credits were abolished by the National government because it was thought that there was scope for the misuse of the tax credits, and also because the government needed the funds from the tax credits to pay for income tax reductions and because of lower than expected Treasury forecasts.

Abolishing tax credits that incentivise desirable economic activity is like firing your sales people who earn the highest commission income (yes we have seen this done). Such actions reduce future income and send the wrong signals.

Issues around the misuse of R&D tax credits could be dealt with by tighter rules around the recharacterisation of expenses and by limiting the tax credits to new R&D spending. We believe the government should reinstate the credits without delay.