New research highlighting a further slump in private sector spending on industry innovation has re-ignited the controversy over the Howard government's 1996 slashing of the tax concession on R&D funding.

The Australian Bureau of Statistics (ABS) figures - showing R&D spending by Australian business plummeted for the third consecutive year - prompted one prominent IT executive to describe the Howard government as "the most Luddite government Australia has ever elected".

Meanwhile Sun Microsystems managing director Russell Bate said the government's approach left Australia in danger of becoming "the biggest retirement village in the South Pacific". Bates warned that unless we built an intellectual property base in this country, our children would become the country's biggest export.

The figures prompted fresh calls for the government to promote a broadly based innovation strategy to facilitate industry development and encourage R&D investment in the information industry. The government cut the tax concession on R&D in 1996 from 150 per cent to 125 per. Many information industry players such as the AIIA say that figure should now be boosted to 200 per cent to give Australia a chance to compete with countries like Israel, which is becoming a major technology exporter on the back of huge government expenditure to support IT&T innovation.

The government will come under further pressure to boost R&D spending in August, when the high-level Innovation Summit Implementation Group (ISIG) reports to the Prime Minister's Science, Engineering and Innovation Council.

The embarrassing figures forced the Coalition government into damage-control mode. Industry Minister Nick Minchin added his own spin to the data, implying the slump in R&D expenditure from the "artificially high numbers of 1995-96 when systematic abuse of the R&D tax concession was at its height under the previous Labor government" was entirely expected. Minchin also labelled critics of the decline as the Coalition's "political opponents".

But IT industry players weren't having a bar of it. The Australian Information Industry Association (AIIA) said the figures highlighted the need for action to facilitate increased spending on innovation and R&D.

AIIA executive director Rob Durie said: "R&D expenditure has fallen dramatically since the reduction of the R&D tax concession in 1996, in sharp contrast to the preceding decade when Australian R&D grew by 16 per cent a year."

"Appropriate tax concessions are necessary to provide a positive climate for R&D, and to facilitate and encourage investment in R&D by Australian and international companies.

The figures showed Australian R&D spending lagging the Czech Republic and well behind Canada, with Australian companies spending only 0.67 per cent of GDP compared to 2.08 per cent in America, 1.57 per cent in Germany and 1.37 per cent in France.

Tony Benson, national chairman Software Engineering Australia (SEA), said the R&D funding cut had had a significant impact on the Australian IT&T industry.

"The government argues that the R&D start-grant more than compensates, but from my point of view the start-grants are discretionary, they're hard to get, and the lag on them is typically six months. And for most small companies that six months can kill you, whereas with the tax rebates you basically are saving it as you go," he said.

For the IT industry the 150 per cent tax concession was partly replaced by the $78million Building on IT Strengths (BITS) initiative which was set up to establish incubator centres in each mainland state and territory.

But Meta Group Asia Pacific managing director William Ehmcke criticised the BITS scheme, saying it favoured larger, well-resourced companies that probably needed the incentives least of all.

"BITS is not the way to go because it doesn't actually favour innovation," Ehmcke said.

"Perhaps an alternative is to have some sort of a system that somehow focuses on the capital market, as we did with the film industry.

"The 21st century is the information age, and Australia doesn't actually have a coordinated policy to stimulate an information industry," Ehmcke said. "We're in the process of outsourcing all our public sector IT assets to predominantly foreign-owned companies; we are reducing our R&D incentives and the capital markets in Australia do not favour technology stocks. So you have a scenario where we're not redeploying assets we already own, we're not encouraging R&D and we have a capital market that is sceptical of technology - all of which are the three things that you would potentially need to develop an information-based economy," he said.