The International Monetary Fund (IMF) has an enticing suggestion for Australia. If it wants a solid way to make an 80-fold return on its investment, it needs to invest $1 billion a year on tax breaks for corporate research and development (R&D). This suggestion was part of a study recently conducted by the IMF.
According to the IMF’s study, based largely on a general model for advanced economies, investing $1 billion a year should generate an additional $80 billion in revenue for the nation. The suggestion comes as part of a larger push by the Washington-based IMF to encourage world economies to more effectively use their resources in order to generate greater economic growth and productivity.
The IMF has been warning the nations of the world that the global economy has been "trapped in an era of mediocre growth" since about 2008 and 2009. In order to escape this era of mediocrity, the IMF argues greater innovation is needed. That, in turn, requires greater investment in research and development. Improved innovation will ultimately drive economic growth, stimulate the world economy, and improve overall living standards.
The IMF’s research suggests that governments should accept the sacrifice of short-term deficits in exchange for long-term growth and stability driven by innovation. In fact, based on its analysis, paying for or providing concessions in support of research and development generate an average return rate of about 20%. This is particularly true during times of economic slowdown when credit and investment capital can dry up, impairing private companies’ ability to invest in innovation.
"Given the potentially large growth dividend from expanded R&D, the case for supportive fiscal policy is strong," the IMF’s report says.
The IMF estimates that boosting research and development by 40% could increase global gross domestic product (GDP) figures by as much as 5% over the long term. This would likely require a “fiscal cost” of about 0.4% of GDP on average.
In the case of Australia, incentives were a mere 0.15% of GDP ($2.4 billion) in 2013. Increasing Australia's incentive programs by 40%, (about an extra $1 billion) could generate an 80-fold return of about $80 billion. The IMF suggests that the best way to ensure this return is to use tax breaks rather than direct investments, and that they are better directed at new companies rather than small, established enterprises.