Support for Business R&D in Budget 2012: Two Steps Forward and One Back

Abstract

The federal budget contains some sensible changes to the SR&ED investment tax credit, but the decision to reduce support for large firms to provide additional support for small firms is a step in the wrong direction. The Jenkins Panel expressed concern about excessive subsidization of small and medium-sized firms and recommended cutting back on the enhanced SR&ED credit in order to finance more targeted support for these firms. Following that advice would have improved the social return on support for R&D; in contrast, the budget measures marginally reduce the benefits to society from subsidizing R&D. The budget also announced $400 million in additional funding for risk capital. Returns in the venture capital industry are very low and the additional funding is unlikely to be successfully deployed until returns improve. There is abundant evidence that the tax credit for investment in Labour-Sponsored Venture Capital Corporations is crowding out private investment and contributing to low rates of return; eliminating the credit is therefore an essential first step in restoring the financial health of the venture capital industry.

Keywords: research, development, tax, subsidy, assistance, support, business, venture, capital, Jenkins, firm, federal, budget, innovation, investment

JEL Classification: H2, H25, O31, O32, O38