Before the Budget: What Recent Cuts Tell Us About the Government’s Appetite for Innovation Spending
Author: Shaun van Dijk
Over the past 12-18 months, a consistent message has emerged from government, industry and independent reviews: Australia is underinvesting in research and development, with business R&D intensity declining and commercialisation outcomes lagging global peers. The recent Strategic Examination of Australia’s R&D System has resulted in a call for stronger, more coordinated intervention, particularly to support industry-led innovation, translation and scale-up.
At the same time, a quieter shift has been occurring across successive budget updates. Recent decisions, including a $102 million cut to the Industry Growth Program (IGP) in the Mid-Year Economic and Fiscal Outlook (MYEFO), reprioritisation of $73 million for Australia’s Economic Accelerator (AEA) to non-research areas in the Education portfolio, funding and capacity pressures within the CSIRO, and a forecast contraction in R&D Tax Incentive (RDTI) expenditure, point to a tightening of support across key parts of the innovation system. Individually, these changes can be framed as fiscal reprioritisation. Taken together, they suggest a more consistent pattern and raise a more fundamental question ahead of the 2026-27 Budget announcement:
What do the cuts to key innovation support programs and shifts in R&D funding signal about the Government’s approach to innovation spending going forward?
The emerging pattern appears to be targeted contraction, not expansion. A number of key innovation and R&D support mechanisms have been reduced, delayed or constrained, particularly those that support:
SME-led commercialisation
Industry-research translation
Applied and mission-oriented R&D.
The takeaway seems to be that when fiscal pressure emerges, innovation funding, especially contestable and SME-facing programs, fail to be protected.
1. Industry Growth Program (IGP): A clear signal from MYEFO
The IGP remains the most visible, recent example of innovation funding pressures. In the December 2025 MYEFO announcement, a $102 million reduction in funding for this popular, oversubscribed commercialisation program was revealed. It signals that even programs directly aligned to National Reconstruction Fund priorities, sovereign capability development and support of start-up and innovative SMEs are not immune to budget tightening.
In our view, it will be fascinating to see whether the 2026-27 Budget innovation spending announcements address the following questions.
Whether the IGP's ongoing $68.2 million annual commitment is confirmed, expanded or left in ambiguity?
Whether any new commercialisation grant funding is announced that supplements or replaces the IGP?
Whether the Ambitious Australia report(the key output from the Strategic Examination of R&D) and its language around grant alignment and scale will be backed by new funding, or whether the recommendations remain aspirational?
2. Australian Economic Accelerator (AEA): A slower path to translation
The Australian Economic Accelerator (AEA) was designed to address one of the most persistent weaknesses in Australia’s innovation system: translating publicly funded research into commercial outcomes. However, since its announcement, the program has:
Experienced slower rollout and staged deployment
Experienced multiple funding reallocations and faced greater scrutiny over funding allocation
Delivered less immediate capital into the system than initially anticipated.
As part of the December 2025 MYEFO announcement, approximately $73 million in AEA funding was redirected as part of “Education reprioritisation” (cited as redirection of unallocated funding from this program). This followed a similar “reprioritisation” of $46 million of AEA funding in the previous 2024-25 MYEFO.
While not framed as cuts, the effect is similar. A delay in funding reaching the critical “proof-of-scale” and translation stages. This is particularly relevant given that multiple reviews identify translation and research-industry colloboration as key failure points in Australia’s approach to R&D.
3. CSIRO: Real funding pressure behind the headline stability
At a headline level, CSIRO funding has remained relatively stable. However, over the past year the organisation has encountered turbulence including:
Efficiency dividends and internal cost pressures
Program reprioritisation and workforce reductions driven by 350 job cuts announced in November 2025 (impacting as many as 11 research units)
A $233 million funding boost via MYEFO, although no reversal in the workforce reductions.
Despite the MYEFO funding boost in December, the picture is one of long-term underfunding and infrastructure pressure. CSIRO has indicated that its appropriation funding has risen 1.3% per year since 2010, compared with average annual inflation of 2.7% and estimated a $80mill-$135mill per annum funding gap over the last 10 years.
The impact represents a significant challenge for Australian research. CSIRO funding pressures underpin less discretionary capacity for long-term, high-risk or industry-partnered research programs. For businesses, this can translate into:
Reduced access to collaborative R&D opportunities
Tighter alignment requirements for co-funded projects
More competition for limited research engagement capacity.
4. R&D Tax Incentive: Contraction via administration and compliance
Another significant shift, though less visible in policy announcements, is the forecast contraction in R&D Tax Incentive (RDTI) expenditure. Forward estimates in recent Federal budget announcement show:
Declining projected RDTI spend over time
Continued emphasis on compliance and integrity measures
No major expansion in program generosity or scope.
There has also been significant administrative change within the RDTI program via expansion of the information required to register R&D activities, as well as observations of increased compliance activity.
While these administrative and compliance changed are partly cyclical, they have the potential to deter applicants and reduce the R&D support received by Australian businesses. This reflects a policy environment where the Government is not currently using the tax system to materially expand business R&D investment.
Given the RDTI remains Australia’s largest single innovation support mechanism, even modest contractions have system-wide implications.
The contradiction: policy ambition vs funding reality
These funding cuts sit in contrast to the Government’s own policy narrative. The recently completed Strategic Examination of Australia’s R&D System and its final report (entitled Ambitious Australia) highlight:
Declining business R&D intensity
Weak commercialisation outcomes
The need for stronger, more coordinated intervention.
At the same time, recent funding decisions appear to point to:
Reduced availability of grant-based commercialisation support (IGP)
Slower deployment of translation funding (AEA)
Constrained long-term public research capacity (CSIRO)
Flat or declining tax-based incentives that are not motivating expansion of industry R&D investment (RDTI).
This creates a clear tension. The policy diagnosis is calling for expanded R&D investment, but recent funding settings are moving in the opposite direction.
What to watch in the 12 May Budget
We think there are five key signals to watch in the upcoming Budget:
IGP funding clarity: Whether the $68.2 million annual commitment is confirmed, expanded or quietly discontinued?
New commercialisation pathways: Whether any new program is introduced to replace or supplement the IGP and facilitate translation of Australian innovations into commercial success?
AEA acceleration: Whether meaningful additional funding is deployed to support translation
RDTI direction: Whether forward estimates stabilise and whether any bold program reforms to improve R&D investment by industry are implemented?
System-level alignment: Whether recommendations from Ambitious Australia are backed by real funding and brave new R&D policies?
A final observation
The coming Budget will do more than allocate funding. It will answer a broader question:
Is innovation and R&D investment being treated as a structural priority, or as a discretionary line item?
The timing is fascinating following the release of the Ambitious Australia report. The answer has the potential to shape not just individual programs, but to begin plotting a new course for Australia’s R&D innovation system over the next decade.