The next federal budget is expected to include a radical overhaul of the way Ottawa spends some $5 billion annually on business innovation programs, sources say.

Government officials say the 2017 budget will be heavy on measures to promote innovation and skills. Sources suggest the government has already reviewed the existing alphabet soup of grants and tax credits, concluding that there is very little evidence available to determine what is working and what is not.

That conclusion is backed by the latest report from the 14-member advisory council on economic growth appointed last March by finance minister Bill Morneau.

The council, chaired by Dominic Barton, global managing director of consulting firm McKinsey & Company, “strongly recommended” reviewing and retooling the billions of taxpayer dollars handed each year to companies in the hope they will successfully commercialize good ideas and boost the country’s exports. “Canada lacks data about program effectiveness to make evidence-based policy choices about how to allocate funds,” the council’s report found.

It suggested eliminating programs that are not effective and redirecting resources to fund programs to create a “coherent, agile and data driven” innovation-support system.

“We acknowledge the difficulty of closing programs that have been in existence for decades. However, the world is changing rapidly and Canada’s innovation performance is lagging. Doing more of the same is not going to create a successful Canadian innovation eco-system,” the report said.

Daniel Lauzon, Morneau’s communications director, said the growth council’s advice has been useful in giving the government a frank assessment of the current situation. “We are looking at their recommendations closely and will have more to say in the coming weeks,” he said.

The council did not make specific recommendations on which programs should be killed but made clear that it considers the current system “duplicative” and hard for businesses to navigate.

For example, companies seeking to expand or innovate can apply for funds from the Business Development Bank, the Canadian Small Business Financing Program, the Industrial Research Assistance Program, the Venture Capital Action Plan or from specific funds in the automotive, aerospace, forestry, agriculture or fisheries sectors. Government sources suggest a number of these sector-specific funds may be merged into a single innovation fund.

The reforms may also extend to the regional development agencies such as the Atlantic Canada Opportunities Agency, although one source suggested it may prove too politically sensitive to strip away their funding capacity.

The council pointed out that Canada relies far more on “indirect” support to fund industrial research and development, in the form of tax credits, than do its peer nations.

That points to the possibility of a major revamp of the $3-billion Scientific Research and Experimental Developmental tax incentive program that provides indirect support for commercial research and development.

The program is accessed by around 2500 companies but has been the subject of complaints about abuse, compliance costs and lack of effectiveness. The 2011 Jenkins task force on research and development concluded Ottawa spends too much on tax credits and not enough on direct investments. The Conservative government of the day subsequently cut the 20 per cent credit to 15 per cent, provoking a storm of protest from companies who argued it would hurt Canada’s R & D spending. However, even before the government took action, R & D as a percentage of GDP was sliding. In 2013, it was just 1.69 per cent, down from 1.79 per cent the previous year, well below the OECD average and behind countries like Israel, South Korea, Japan and the United States.

The advisory council suggested Canada suffers from complacency bred from regulatory protection, currency depreciation, easy access to U.S. markets and strong demand for Canadian resources.

It suggested a range of other measures to spur innovation besides reallocating existing funding resources, including the formation of business led “innovation marketplaces,” where the government would help link researchers and start-ups with corporate customers to generate growth, and a “matching fund” for small and medium sized businesses, where the government would provide minority equity on a $1 for every $2 of private capital basis. Again, the council suggested that, rather than devote new funding, the government should reallocate funds from existing programs.