5 mins read

The missing innovation puzzle in Budget 2024

October 19, 2023
The Edge
5 mins read

Fresh out of Friday’s tabling of Budget 2024, Prime Minister Datuk Seri Anwar Ibrahim has much to prove on his second budget, as finance minister, to manage the rising political tensions and the economy through this rough economic period. The budget is the biggest ever, totalling RM393.8 billion, up from RM388.1 billion in the previous year.

Setting aside the revised budget for 2023, this is the first full-fledged budget presentation by the Madani government. True to his words, the prime minister has reduced the overall budget deficit percentage by cutting subsidies. Additionally, one-off blanket allocations to demographics of mixed-income groups have been reduced, and taxes on certain non-essential services have been increased.

The Health Ministry received the largest rise, a 13.5% increase to RM41.2 billion, in allocation while the Education Ministry received the largest absolute 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. In order 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.

Friday's Budget 2024 failed to inspire and creatively allocate resources for the solid foundation of significant innovative activities that could have materialised in the coming years. These activities could have potentially narrowed the gap between our nation and those 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 towards 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 33 pence (RM1.91) for every £1 spent on R&D underline their commitment to grassroots innovation. In Canada, these almost four-decades-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%-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 despite the global climate.

Closer to home, without tailored fiscal incentives, our spirited small and medium enterprises (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. VCs should be actively directed 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 coinvestment funds via equity crowdfunding platforms.

It is crucial to understand that the major players, with ample resources, benefit from R&D tax incentives much less significantly than SMEs do. For the latter group, with leaner budgets, such incentives can significantly improve the bottom line and enhance the competitive market position of SMEs, 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 would 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 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.