Budget 2024: The missing innovation puzzle remains unsolved

 

From Devan Arumugam

At RM393.8 billion, the just tabled Budget 2024 is the biggest ever.

But Prime Minister Anwar Ibrahim has made it a priority to reduce the overall budget deficit.

Apart from cutting subsidies, the one-off blanket allocations to demographics of mixed-income groups have also been reduced, while taxes on certain non-essential services have been raised.

The health ministry will see the largest increase in allocation of 13.5% to RM41.2 billion, while the education ministry has been given the largest allocation of RM58.7 billion.

Overall the budget seems balanced, while serving more as a sneak preview with little in the way of the fine print.

Realpolitik may allow for this gradual reform towards a dynamic, responsible, technologically advanced and equitable future.

However, time may have a different perspective on the matter.

For us to ascend the value chain and assume a more prominent role in the global supply chain and innovation ecosystem, we must stay ahead of the curve.

We currently neither qualify as a high-income nation nor do we rank among the elite in the Global Innovation Index 2023.

Sadly, Budget 2024 fails to inspire nor creatively allocate resources for the solid foundation needed for significant innovative activities to materialise in the coming years.

These activities have the potential to narrow the gap between our nation and the highly innovative, high-income countries.

Even last-minute calls by science, technology and innovation minister Chang Lih Kang to significantly boost our research and development (R&D) allocations seem to have been disregarded.

We are in survival mode, not in a position to lead the charge toward innovation and prosperity.

In order to bolster investor interest across all levels of our innovation ecosystem and create jobs of the future, a robust R&D tax incentive should have been introduced in Budget 2024. Such a measure could have served as both long-overdue relief and a long-term stimulus for the sector.

We can gaze across our borders and admire other countries’ pragmatic approaches. Canada’s 15% tax credit for companies and employees, Australia’s 43.5% tax offset and the UK’s notable package of up to 33p for every £1 spent on R&D underline their commitment to grassroots innovation.

In Canada, these almost four-decade-long incentives facilitated the transition of the country from a resource-based economy to a knowledge-based economy within two decades of their introduction.

Taking the cake is Singapore’s mind-blowing 100% to 400% tax deduction. It is no wonder that the city state’s venture capital scene is highly active and liquid, with numerous early-stage companies ready for investments even in an unfavourable global economic climate.

Without tailored fiscal incentives, our spirited SMEs will be largely forced to play it safe, opting for familiar paths instead of venturing into new and unexplored territories.

There is mention that capital gains tax will now apply to venture capitalists (VCs), but the details are unclear. We should be actively wooing VCs directly from across the Straits of Johor to invigorate our economy and pave the way for the future.

Singapore’s success illustrates that the combination of R&D tax incentives and venture capital funding can be potent.

While tiered investment tax incentives and global hub services tax deductions continue to favour large multinational corporations, SMEs are left wanting more.

And audaciously, the R&D-innovation aspect continues to be unexploited.

The government has sidelined SMEs and has merely provided incentives to keep them afloat in the form of minimal digitalisation grants, loans and co-investment funds via equity crowdfunding platforms.

It is crucial to understand that the major players, with ample resources, benefit less significantly from R&D tax incentives than SMEs do.

For SMEs with leaner budgets, such incentives can significantly improve the bottom line and enhance their competitive market position, making them more appealing to venture capitalists.

Recently, there has been much debate on the progressive wage (PW) policy. The details of the PW policy have yet to be announced.

It is hoped that the approach will be one that provides great emphasis on innovation and jobs of tomorrow, on top of its core objectives.

It is important to note that this missed opportunity to introduce a robust R&D tax structure extends beyond fiscal policies, serving as a pivotal strategy for attracting and preserving elite talent crucial for technological and economic advancement. - FMT

Devan Arumugam is the managing director of an SME group.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.