The focus for business in the government's budget on Thursday will be on changes to rules surrounding property investment and the detail of the well-signalled switch to lower income tax funded by a higher goods and services tax (GST), according to analysts.
Overall, a slightly improved economic outlook will deliver slightly improved deficits from the government December economic and fiscal update, but the debate in the business community will be about what Finance Minister Bill English does to reduce the size of government and prompt investment in the productive sector, rather than in property.
"The overall thrust of changes are likely to be designed to deliver a tax system which is less distortionary and more conducive to economic growth," ASB economists said in a budget preview.
Taxation of property is the mystery item ahead of the budget as a rise in GST to 15 percent from 12.5 percent has been well signalled.
And, according to economist predictions, personal tax rates are likely to fall from 38c, 33c, 21c and 12.5c in the dollar to 33c, 19c and 10c from October. This is in line with what economists have been forecasting.
This would give someone on $50,000 an extra $20 a week in the hand but when the GST rise is included, it reduces to $6.
Revenue Minister Peter Dunne said on TV One's Q and A that New Zealand had a low wage economy and had to do more to boost incomes. The country had repeatedly failed to encourage investment in the productive sector of the economy.
This is the issue that any tax changes to property investment is expected to address.
Deutche Bank expects the Government to move to ring fence losses made on property income from other sources of income to discourage people from investing in property solely for capital gains.
The Tax Working Group noted that $200 billion of investment in rental housing generated net rental losses of $500m and $150m in tax revenue losses in 2008. It also noted that loss attributing qualifying companies were one of the main mechanisms used by investors. The so-called LAQCs are companies with a special tax status that enable losses to be offset against shareholders' personal incomes.
The other issue raised by the Tax Working Group was that it was illogical that investors often claimed depreciation, which reduces taxable income, on buildings which were appreciating in value. The group suggested changes to depreciation rates on buildings or taxing gains on depreciable buildings.
Deutsche Bank said that depreciation loadings on property may be reduced or removed entirely.
ASB said changing depreciation rules would increase government revenue and discourage unproductive investment and debt accumulation in rental housing.
"Tax changes will aim to address the situation where highly uneven tax rates apply between taxpayers with similar incomes, due to property investors' use of property related losses to reduce tax liability," ASB said.
Deutsche Bank points out that Treasury's economic forecasts were finalised in mid-April before a surprisingly large fall in the unemployment rate was revealed and before European financial worries rattled financial markets.
Economists think the Reserve Bank of New Zealand will be looking for evidence of a removal of fiscal stimulus to the economy but that the central bank is prepared to look through the increase in inflation resulting from the GST increase and take a long term view of the economic impact of the budget.
They will also be watching closely to see how ratings agencies react to the budget.