Australia's IT industry is awaiting the outcome of the independent Review of the National Innovation System, to be submitted to the Federal Government on Thursday.

The Government is not expected to respond to the report's findings until November but the industry will continue to count the cost of punitive cuts to innovation funding announced in this year's federal budget.

The full implications of those cuts have now sunk in and it is clear that smaller companies that rely on grants such as the now defunct Commercial Ready scheme have been stopped in their tracks.

The demise of that important innovation support program, along with changes to depreciation laws, cuts to the Building Entrepreneurship in Small Business program, the Global Opportunities Program and the National Nanotechnology Strategy, and the loss of access to a special entrepreneurs' tax offset, have left the industry reeling.

The chairman of Software Queensland, Grant Cause, says: "For small business and innovation in this country the budget represented death by a thousand cuts. Many of our member companies had Commercial Ready grant applications in train ... and had invested heavily to get them to that point. The Federal Government's budget overnight wasted those investments and the time and effort expended by these businesses, not to mention the new jobs and innovations they would have produced."

It seems no one expected the Government to cut research and development funding while the review was under way. It was expected that changes to funding policy would only be made after the Government had studied the findings of the review.

The review committee, chaired by CSIRO board member Dr Terry Cutler, is scheduled to submit its Green Paper on July31 and the Government to respond in November. By then, however, it's likely that several promising Australian companies will have hit the wall.

"We were caught flat-footed," says Wayne Fitzsimmons, an executive with venture capital investor MGroup, "The unannounced, unplanned surprise cancellation of the Commercial Ready program undid all of this good will in a stroke of the pen, or a one-liner in a budget speech."

With venture capital in short supply in Australia, MrFitzsimmons says there is an opportunity for the Government to provide incentives to entrepreneurs and the private sector in raising risk capital and making early-stage funding work, rather than leaving it all to Canberra bureaucrats to dispense grants.

Sensory Networks chief executive Darren Williams agrees. "In my view the closing of this important and effective program ... sends a dire signal regarding the Government's position on encouraging innovation in Australia. It increases the already significant hurdles to be overcome by innovative Australian companies."

When the Review of the National Innovation System was launched in January, the Minister for Innovation, Industry, Science and Research, Senator Kim Carr, said: "This represents a watershed opportunity for the development of ideas that will ensure Australia reaches its full potential as a dynamic, internationally competitive and prosperous nation."

He warned that central to the Government's approach would be examination of what he described as a "bewildering array of government innovation and industry assistance programs" - at last count 169, he said - that spanned all levels of government.

What no one expected was that some would be cancelled before the Cutler review had had a chance to do its job.

Technology Venture Partners director Allan Aaron describes Commercial Ready grants as a fundamental plank for companies working in development in Australia but adds it seems unlikely the Government will reverse its decision to axe the scheme.

"The best that can be hoped for is that it will come up with a program that emulates it in some form," he says. "But sadly it will be starting with a blank sheet. Many of our skilled people are now gone and many more will see this as the last straw for technology development in Australia."