Paying for cyclones

Step back in time with me. Six months ago or thereabouts, there was a lot of discussion about the size of the tax cut in the coming budget. Or, rather, the long-overdue inflation adjustment to the tax brackets. Tax bracket creep has been enormous since the brackets were last adjusted over a decade ago. It would be a cut in taxes relative to the large inflation tax increases that otherwise would continue to bake in.

What seemed most likely, at least to me, was that Labour would undo some of the bracket creep in the lower bands, perhaps taking things back to where they were in 2020 before the Big Inflation. But they would hold the 39% rate at $180k. And I expected that National would criticise them for not taking it all the way back to 2017 (ignoring the more minor bracket creep that they allowed to happen after 2011). And I hoped very much that National would pressure for indexing the bands going forward so that this sort of thing wouldn't keep happening. And in some best of all possible worlds, there'd be agreement to index the tax thresholds so the adjustments happen automatically (5% chance?).

Remember that the forecast path for tax revenues was based on no adjustment. It always has to take current policy as being the forward policy. That path continued to have a lot of inflation-driven tax increases built into it. Remember that this isn't just "well, everyone pays 7% more in tax but everything costs the government more". It's that people get pushed into higher marginal tax brackets, resulting in tax increases that outpace inflation - and considerably if you let them accumulate.

This substantial tax increase since 2011 was not voted for by anyone. It was not legislated. It had no democratic deliberation. It just happened, and especially from 2020 when RBNZ went off the hook.

And it will keep happening in the absence of changes.

Flip to the spending side.

As of six months ago, government was only slowly retrenching from continued ludicrous levels of 'Covid' spend. Government issued tons of debt to deal with Covid, and spent it very liberally on non-Covid things. It added to inflationary pressures that the Reserve Bank has to lean against. 

So where did that leave us? A Labour-led government seemed most likely to want to entrench a higher ongoing government-spend proportion of GDP. They'd package a minor inflation adjustment to the indices as a tax cut but maintain things at a level well beyond 2017. They'd cut some of the more ridiculous Covid spend and present a reasonable path back to surpluses but at a higher level of government spend and tax relative to the overall economy. And that's fair enough so long as there's long-term balanced budgets. 

Now what does this have to do with cyclones?

Let's remember standard drill. Here's what I said after the Christchurch earthquakes. And it's the same thing that Paul Krugman said about other similar spend. This is mainline econ stuff. I'll pull-quote Krugman again:

Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts.

But wait: even more important, the government can borrow (or, in principle, lend, if it pays off all its debt). So it should balance its budget in present discounted value terms, not year by year. This means that the tradeoffs should include future spending and taxes as well as this year’s spending and taxes. And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters. [emphasis added]

This is the case against temporary levies and surcharges. Unless a government is debt constrained, you want to spread the cost over time. And you want to cover that cost through a combination of higher taxes than you otherwise would have had and lower spending on other stuff than you otherwise would have had. 

So if it had been the case that Labour was going to inflation-adjust brackets back to 2020, indexing them only going forward would be a tax increase relative to the path we would have had. If it had been the case that Labour was going to have locked in a permanent increase in the relative size of government on non-cyclone stuff, then a reallocation from whatever that stuff would have been toward cyclone is a spending cut. 

The case for an actual tax increase looks awfully weak given the massive increase in real government takings in the leadup to the cyclone. Thomas Coughlan pointed to the numbers yesterday. Core Crown revenues increased from 27.5% of GDP in 2017 to 30.2% of GDP in 2022. 

Core Crown revenues will have to be above the levels we'd had in the mid-2010s for a while - there's Covid debt to pay off. 

But the forecast expenditure track in HYFU had core crown expenses rising from $126 billion in 2022 to $150 billion in 2027. Surely there's room for greater reprioritisation in there, combined with slightly smaller inflation adjustments to tax bands than we otherwise might have had. 

We're still using borrowed money to fund over a billion dollars in discounted road user charges - when there are piles of roads to fix. It's nuts to consider a deadweight-cost-ridden income tax increase when government is using general tax revenue (in the end - it's what pays off debt) to avoid charging road-users for the use of the roads. That subsidy induces a deadweight loss! You're putting thorns in the heart of Baby Pareto! Can't you hear him crying?

Anyway - bottom line:

1. You spread the cost of this kind of thing over time with higher taxes than you otherwise would have had and less spending on other stuff than you would have had. You don't try to do it with a large temporary tax increase. Unless you're debt constrained. Maintaining low steady-state debt levels matters so that there's room to use debt for these kinds of shocks. 
2. Views on counterfactual taxation and spending paths will really matter in deciding what's here appropriate. If you think that it is right and proper that government take 30% of GDP as Core Crown revenue forever for regular spend or some amount higher than that, then you'd want a higher tax path to accommodate this spend. But everyone was expecting that government was going to be reversing at least some of the inflation bracket creep. Have views on appropriate size of government changed, or is this opportunistic? Or we all just crazy to expect that there'd have been an inflation adjustment to the tax brackets in May?
3. A smaller inflation adjustment to the tax thresholds really ought to be able to get the job done. Core crown revenue is about 2.5 percentage points higher, as fraction of GDP, than it was in 2017. If they can't use that increase to get this job done, you've gotta wonder how much work they're actually putting into reprioritising spend. 

Around the traps

A few bits from me in these:

• Charlie Mitchell on the IDI. I note that we still need something like an IPUMS front-end to enable greater confidentialised access. I also wish that IDI weren't an afterthought for the government. I'm still annoyed that they wasted time and money on a completely pointless Indicators Aotearoa New Zealand project rather than fixing up systems that should be considered core. Even Infoshare fell over for a few hours yesterday. 


• A chat with Sean Plunkett on student loans, student cost of living, and the case for charging interest on student loans.


• Talked with the Environment Committee about the Emissions Reduction Plan - about 20 minute in on this video. I'd thought I'd seen Brent Edwards in the room. My submission is here.


• Chatted with Jenée Tibshraeny about government debt.


• Anne Gibson noted my submission on building materials supply in her piece in the leadup to yesterday's release of the ComCom draft report. I really liked the report - at least on a quick look through. It hits very well, in detail, on the horrible regulatory and consenting mess facing anyone considering using unfamiliar materials. 


• Had a chat with Hosking about the unemployment numbers, in advance of their release. I don't do unemployment figure forecasting though.
  
  

Another case for Cat Bonds

This week's column in the Dom draws on the joint RBNZ-Treasury workshop on post-Covid macroeconomic policy that preceded last week's Covid-truncated NZ Association of Economists conference. 

A snippet:

Overall, the workshop felt designed to warm the economic policy community to higher public debt levels for a longer period. The risks of the approach were noted: interest rates can rise, and there will be problems if they do.

And the approach only makes sense if projects funded by that debt really do pass cost-benefit assessment. That conventional cost-benefit assessment processes ensuring value for money seem out of fashion was not noted as any substantial constraint.

Higher levels of government debt bring risk not only in case of interest rate increases, but also in case of natural disaster. Maintaining headroom to take on a lot of debt in a crisis has been important. If public debt is higher for longer, and global credit conditions become less friendly, the Alpine Fault becomes even riskier.

If the public sector is determined to encourage politicians’ imprudent pursuit of higher debt levels, it should encourage that some of that debt be funded more prudently: through catastrophe bonds.

Catastrophe bonds pay investors more during normal times but void most or all of the bond if a triggering event happens. If an earthquake required substantial government funding, existing catastrophe bonds would void and would provide some necessary headroom.

They may be a more prudent approach in imprudent times.

Nightmare scenarios do still exist. 

There were other interesting bits on the day. One presentation went through some simulations of different paths for fiscal consolidation (getting debt back down); the least costly approach, which also yielded long-run benefits, was through increased consumption tax - GST - and/or reduced transfer spending. The worst approaches were increased taxes on capital, and/or reduced government investment spending (on the assumption that that investment spending is on stuff with positive BCRs, which is a bit heroic). 

One option put up by that paper's discussant, which hadn't come up in the paper, was to use migration settings. You can drive down net debt to GDP by increasing population size - though you'd have to be careful on how the necessary infrastructure were financed.  

Michael Reddell has a good run-down on the macro session. 

Dear Prudence: Welcome to my Nightmare

My Newsroom column this week worries about the government's abandoning of normal measures of fiscal prudence. 

Prior to all of this mess, the government's targeted prudent debt levels were 15-25% of GDP. It made a lot of sense in a country subject to substantial risks. Treasury had always figured there had to be room to accommodate one big crisis or two minor ones within a maximum debt to GDP ratio of 60%. We're going to be hitting 53.6% in 2023 and 2024 - low by some standards, very high for a small country that likes to be able to borrow in its own currency and without backstop from someone like the EU or ECB and with very high levels of private debt from foreign lenders. 

And that could be fine if every single dollar of it were absolutely needed in Covid response. But there's been a ton of spending in and since the budget that has little to do with Covid, or mitigating its economic consequences, and absolutely no effort to reprioritise spending from other areas. 

And that's putting us close to a terrifying cliff. 

Remember that we need headroom more than other countries. A big earthquake hitting one city in a country with dozens of major cities is more manageable than one hitting Wellington, or Christchurch, or both. 

Here's my nightmare. Welcome to it. I hope that it's just dreamland stuff and that Treasury's Debt Management Office has done a whipround suggesting that there'd be appetite for further debt on reasonable terms even up to much higher ratios. 

But here's the nightmare nevertheless.

In 2023 the Alpine Fault opens up, as a foreshock. Damage is substantial enough to trigger reinsurance, but GNS predicts a high probability of a bigger earthquake to come - and the Wellington Fault is also under pressure. Kinda like September 2010, but bigger because it's the Alpine Fault, and with higher probabilities of a February 2011 to come.

The debt-to-GDP ratio is already around 54% of GDP. While Treasury and others had been comfortable with those kinds of debt levels because credit agencies said everything was fine and because nothing obvious was happening in the spread between inflation-indexed bonds and standard ones (not that any such spread could open up under QE), there's a very very big difference between international agencies' assessments of creditworthiness for marginal changes around one debt level and appetite for lending another 20% or 30% of GDP. Treasury's modelling had always said to leave room for another 20% in case of a Wellington earthquake; GNS worries that Wellington and the whole South Island are ready to go - say 40% chance of a bigger quake hitting both. Reinsurance obviously becomes absolutely unavailable. The entirety of the predicted shock will hit the government's books because the government backstops EQC and EQC has basically nothing in reserve consequent to the Christchurch earthquakes - or at least nothing relative to the scale of what's expected. Either the government will be taking on more debt to cover EQC's liabilities, or it will find ways of short-changing claimants in ways that would make EQC's Christchurch record look positively generous. 

The government puts a good face on it, reminding everyone of NZ's strong reputation for fiscal prudence and that we're a sound borrower. But quietly, in the background, all of the usual larger buyers of NZ government debt are telling the government, a bit sheepishly, that they're just not able to help us out this time. The risk is too great if the government needs access to another 25% or 30% of GDP on top of its current borrowing. It's been able to get through the foreshock, but if the bigger one comes, things are going to be rather dicey.

In 2024 the bigger one comes. The government needs to take on the debt but knows it has no buyers. Its options are not good. JP Morgan, or a comparable agency, comes round and says "Look. We know you're in a tight spot and we can help. Here are the terms. I expect you'll find them hard to refuse. Your extra borrowing is now denominated in other peoples' currencies because we all know you'll be too tempted to devalue your way out of this mess at these levels. And the interest rates will be high because of the risk. You'll find those interest rates become even higher in real terms for you if your dollar drops in the ways you might need it to to sort things out. You can likely expect that any old debt you want to roll over will likely have to take on similar conditions, at least until you've gotten things back in line. You're going to be back into the world of the 1980s in which the government was spending over 6% of GDP as financing costs on debt. But you really have no other option. It will take you a good couple of decades to get out of it, even with tight control on your spending, and you and I both know that you've forgotten how to do that. You're going to have to learn it again. The Gods of the Copybook Headings have limped up to explain it once more. They always do. They're reliable like that.

The odds of the scenario are low because the odds of the Alpine Fault opening up in any particular year are low. Last time I asked GNS about the risk of the Wellington Fault opening up, it was on the order of 0.83% per year. But it's overdue. It could happen tomorrow; it could happen in fifty years. The longer it takes to get debt-to-GDP ratios down to levels where the government can stand to take on an additional 20%+ of GDP in borrowing, the more likely it is that the earthquake comes before the books are ready for it. If they're projecting ratios of 42% by 2034, well, that's not prudent.  

We must be feeling awfully lucky, if the government is running its accounts the way it currently is. Again - none of this is argument against taking on debt to deal with the pandemic. This is rather argument against the current very lax spending controls in areas unrelated to pandemic response, and the push from many quarters to implement measures that will make it harder rather than easier to grow our way out of this.  

I desperately hope the Debt Management Office at Treasury has had its chats with the usual suspects and that I'm entirely crazy to be worried about this. If they're all very happy to continue with normal kinds of practices up to 80% or 85% of GDP, then I'd sleep easier. 

Anyway, here's a snippet from the Newsroom column:

The Government’s projected path for paying off new Covid debt is very slow, and predicated on some perhaps optimistic assumptions about core government spending returning to more normal levels after 2024. Combined with its willingness to take on more debt to fund ongoing initiatives like higher pay in childcare centres and expanded school lunch programmes, it appears the solid bipartisan consensus about prudent debt levels has been broken.

Before Covid-19, the targeted net core Crown debt range was 15 to 25 percent of GDP. During the budget lockup, Finance Minister Grant Robertson was asked if his projected debt levels in 2034 represented a “new normal” for prudence, or if he expects a continued slow path back to pre-pandemic levels. Unfortunately, he declined to answer – simply defending the new debt as necessary and prudent.

But prudence in a crisis like this also requires making it easier to win back the necessary headroom for dealing with future misfortunes. Treasury’s modelling was based on the likely need to increase debt by about 20 percent of GDP should Wellington be hit by a major earthquake. Since no one knows when a geological fault might open up, taking a decade or two longer than necessary to win back that headroom seems just a little imprudent.

Well, I haven't stopped worrying

Justin Giovannetti over at The Spinoff has a column titled "How New Zealand learned to stop worrying and love government debt." 

I'm quoted in it, but I haven't stopped worrying or started loving government debt. 

Taking on debt during a crisis is necessary when that's needed for crisis response. Its being necessary doesn't mean you have to love it. 

But the government has gone rather past that, piling in lots of additional spending unrelated to the pandemic. 

I suppose folks who think tax is love recognise that more debt is more future taxes, and so figure that debt is also love. 

I agree with Cameron Bagrie's concerns about paying the thing off - especially when the debt is larger than it needs to be because the government has not kept other spending in check, and when that extra spending comes with ongoing commitments that will take up room in future budgets that could have been used for debt repayment. 

Eric Crampton, chief economist at the free-market think tank the New Zealand Initiative, said while he shares some of the opposition’s concerns about new spending, the country is entering this economic crisis from a good position.

“The rest of the world has gone absolutely crazy and either we’re sane or staying sane longer than anyone else,” he told The Spinoff.

“Throughout all of New Zealand’s recent history all governments have maintained reasonable debt levels. There have been problems like the Christchurch earthquake, they run up a deficit and then they get it back in line. You don’t have those big structural deficits that are hard to fix,” he said.

Crampton said the government’s current plans, for a debt half the size of the country’s economy, is about as large as New Zealand should go. Anything bigger risks possible trouble in case the economic situation worsens or natural disaster strikes.

Cameron Bagrie, the former chief economist at ANZ, said that New Zealand needs to keep a “squeaky clean public debt” because of the country’s small size and high private debt levels. However, he says the response to Covid-19 was the right one.

“The government needed to go big, leaning on the government balance sheet is the best response in the near-term. I have two concerns. I don’t think we have a well thought out economic plan on the other side and I think people will get increasingly concerned about how we’ll get debt down,” he said.

According to Bagrie, his biggest concern is that taxes will need to go up to finance debt repayment in the future. It could be a defining question for the coming election. National under Muller will promise to do a better job of managing the books and keeping taxes low. It’ll be difficult for Labour to promise the same spending restraint, which could mean less infrastructure investment in the coming years, he said.

Meanwhile, Shamubeel is happy for there to be even more borrowing. He used to care about the quality of expenditure; perhaps that part didn't make it into print? 

Shamubeel Eaqub, an economist who is respected by many on the political left, said Crampton and Bagrie are just wrong. New Zealand doesn’t have a debt problem, he argues.

“Not only can we handle the debt that we’re planning to borrow, but we can take on a lot more if we need to. I’m not sure where this idea comes form that we’re so small we can’t borrow money. Some people are stuck in the 1980s when it comes to interest rates and borrowing,” he said.

Countries like Belgium and Portugal went into this economic crisis with public debts larger than 100% of GDP and are looking to borrow more, he said. Nearly any ranking of advanced economies has New Zealand as one of the least indebted countries in the world for decades to come.

Don’t look at charts that show debt approaching the same level as 1992 and freak out, according to  Eaqub. “The world is different now,” he said. “Banks will look at us and see a debt to GDP ratio of 55% while Belgium is at 150%. Who do you think they’ll want to borrow to?”

Belgium and Portugal have the ECB to bail them out if it came to it, and no opportunity to inflate or devalue their way out of debt. Their debt is then less risky. 

New Zealand's currency can devalue in a really big hurry if things go badly - which would also worry investors looking at New Zealand government debt. New Zealand bonds paying off in New Zealand dollars could suddenly have a rather poor return if the dollar crashed in a crisis. 

Shamubeel would have us in a perilous position come the Big Earthquake. 

Bottom line: it makes perfect sense to spread the costs of a massive pandemic over time by using debt. Adding to that debt to fund additional baseline activities is a bad idea. 

But hey, if you figure I'm just some 'stuck in the 1980s' dinosaur, here's Prof Gemmell, Vic's Chair of Public Finance. He's saying the same thing I did, which is a good thing because it's based on the same principles that I taught when I lectured Public Finance at Vic. Fine to increase debt to deal with the pandemic; we have capacity for it. But we need to get back to prudence rather than aim to be freaking Portugal. 

Secondly, plan a future debt trajectory. Much current debate surrounds the eventual taxpayer cost of massive public debt increases, perhaps rising from 20-50% of GDP. As with the post-WWII debt response, this will need to be brought back down, but more slowly than after the GFC, for example.

Public debt increases are global, and New Zealand will not look like a bad international credit risk for the foreseeable future. Plus, with interest rates almost certain to remain low for years, the government’s debt servicing costs have never looked better. Nevertheless, a credible plan towards lower debt is essential if we are to be well prepared for the next crisis – as we were for this one. 

Update: See also Tony Burton's piece over at Interest.co.nz. 

Is it kind to bequeath debt to your children?

The theme of New Zealand’s approach to the pandemic Covid-19 is “be kind”.

It motivated a prolonged lockdown requiring $22 bln of government spending commitments and a further contingency of $39.3 bln. Since borrowing is a core part of this policy, it is reasonable to ask if kindness will determine how we deal with the debts the policy creates?

Update 2: And Norm Gemmell's other excellent piece at Newsroom 

From a healthy Crown net worth of 43 percent of GDP at the time of last year’s Budget, this FSR forecasts net worth at 34 percent in 2020. Fair enough – we are coping with extra crisis spending and lower revenues. But, following the Budget, Crown net worth is projected to drop to just 9 percent of GDP by 2024 and only get back to 12 percent by 2030. In other words, a decade from now, during which time another serious crisis could easily have hit us, the Government’s plans for net worth are so diminished that we would be woefully unprepared financially for another fiscal bail-out of the economy.

Let’s be clear. New Zealand economists are not calling for future ‘austerity’ to get the Government’s books back into balance within a few years. Instead, there is widespread support for suitable, not profligate, spending to assist faster growth of the economy to reduce the debt burden to previous levels over, say, a decade or more.

But the Crown’s projected financial vulnerability a decade on reflects Robertson’s failure to offer any credible plan to raise net worth through fiscal prudence down the line. This is despite official forecasts of quick economic improvement: real GDP growth is forecast to be massively positive at 8.6 percent in 2022, and 4.6 percent in 2023.

Net debt

I don't get the Salvation Army's push against the net debt target.

Salvation Army social policy analyst Alan Johnson said there was a real danger that the crisis in mental health, social housing and well-being of older New Zealanders would become ingrained.

"One of the things with those caps is that they were literally straight out of the National Party rule book, which was disappointing that both the Greens and the Labour Party signed up for them even before the election.

"They are unnecessary and they could be relaxed I think without a massive impact on our credit rating, and the cost of capital and borrowing," Mr Johnson said.

Finance Minister Grant Robertson does have some wriggle room.

Core government spending is forecast to be about 28 percent of the value of the economy for each of the next four years.

In the 2018 financial year, the gap between the Mr Robertson's spending plan and the 30 percent cap equates roughly to an extra $6bn.

Net debt already sits just above its 20 percent of GDP target - four years early.

That's still not enough for Ricardo Menendez March from Auckland Action Against Poverty.

He wants the cap set much higher.

"I would say their limits should be at least twice as much.

"Some European countries have established 60 percent of core Crown spending in relationship to GDP and I don't think that's unreasonable," Mr Menendez March said.

"But ultimately the spending limits should be based on what society actually needs."

It is consistent to argue for higher taxes and higher spending in support of more government social service delivery. I'd rather like government not to expand relative to the overall size of the economy, but reasonable people can disagree with me on that. But pushing for increases in social services and the government's share of GDP on the back of higher debt targets rather than as part of a higher tax regime I don't think is consistent with the Public Finance Act.

Nana's argument for more debt for infrastructure funding is more coherent - you should use debt to finance long-lived infrastructure. But that infrastructure still has to pass a CBA. And if we're looking at infrastructure for urban growth, we should be thinking about mechanisms that set the incentives for long-term growth and not just the current crisis.

Role reversals: Greens for Austerity

When it comes to funding the Christchurch rebuild, the Greens are our austerity party and I'm looking mildly Keynesian. Strange world.

My read of public finance theory, a read that seems supported on both the left and right of the mainstream economic spectrum, is that you finance things like earthquakes mostly through debt. Even if you're not looking at reasonable threats of recession, you want to do it with debt. If the threat of recession is stronger, debt's even better. As reminder, here's Krugman:

And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters.

The Greens disagree.

The Government has put earthquake recovery costs "on the credit card" rather than implementing a nationwide $1 billion levy, Green Party co-leader Russel Norman says.

In the final act of the party's annual conference at Silverstream, near Wellington, yesterday, Norman focused on the environment and the economy.

Soon after the February 2011 Christchurch earthquake last year, the Greens proposed a quake levy that it calculated at the time would raise $457 million a year, which would be tagged for disaster relief and reconstruction.

Norman said yesterday a levy set at a higher rate than originally proposed would have raised more than twice that – $1b.

That plan would have seen a levy of 1.5 per cent applied to an individual's income between $48,001 and $70,000, 3 per cent on income greater than $70,001, and the corporate tax rate bumped back up to 30 per cent from the 28 per cent it was lowered to this year.

Business would have contributed an additional $340m to the levy under that scenario.

"This is one of the best ways to get in behind Cantabrians at their time of greatest need. An earthquake levy is our way to say, as a nation, that we're all in this together," Norman said.

"National chose to put the earthquake on the credit card and leave the cost for another generation to pay off."

I love future generations as much as the next parent of young kids, but infrastructure around the Christchurch rebuild ought to last until my grandkids are in adulthood. Why would we want to bear all of the burden of it out of current income? As for credit cards, how many of them currently charge a low low 3.3% nominal interest rate for 10-year debt?

Austerity has its place. The structural deficit needs addressing - especially in the medium to longer term where superannuation costs loom large. The Greens propose a few other tax increases to plug the gap but the case for capital gains taxes seems weak; spending cuts seem more effective for achieving longer term fiscal balance.

Paul Walker also has a few reasonable concerns about the Greens ability to pick winners in enviro-industrial policy.

Easton vs Krugman on Earthquake Finance

Brian Easton argues for a 3% earthquake levy in The Listener.

Prudence suggests the Government should be developing a backup strategy. One possibility is a Canterbury earthquake levy, a surcharge of, say, 3% on each person’s income tax bill. The levy would be used to pay off the government’s earthquake expenses that couldn’t be recovered from insurance and the like. There would be a special account to which these expenses were charged (including those already incurred); proceeds from the levy would be credited to it as long as the account was in deficit – probably for at least 12 years.

This only makes sense if the government faces serious constraints on debt issuance. Again, here's Paul Krugman on how to handle natural disasters:

Now suppose a disaster strikes. What this does is raise the marginal benefit of spending on disaster relief. The appropriate response is to move all the marginals to get them in line: spend less on everything else, and also raise more in taxes. So even there it shouldn’t be all offsetting spending cuts.

But wait: even more important, the government can borrow (or, in principle, lend, if it pays off all its debt). So it should balance its budget in present discounted value terms, not year by year. This means that the tradeoffs should include future spending and taxes as well as this year’s spending and taxes. And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending 
in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters. [emphasis added]

Recall that the standard theory says that, if everything were optimal ex ante, you'd want to cut spending on non-earthquake stuff, issue debt, and raise future taxes. The equilibrium size of government is a bit higher in total but spending on non-earthquake things has dropped. If you think government was too small ex ante, you should push for smaller non-quake cuts, larger debt, and higher post-quake taxes; if you think it was too large ex ante, bigger cuts to non-quake services, less debt, and smaller post-quake tax hikes.

Easton ruled out those options at the outset: spending cuts "could be politically and economically disastrous"; increased debt isn't on the table as he reckons it would make credit downgrades too likely.

But Easton also worries that the "loose fiscal stance" we'd have if we used debt to fund earthquake recovery would give RBNZ cause to tighten monetary policy. Maybe we're in some kind of knife-edge case where earthquake damage is sufficiently large that government cuts to other programmes sufficient to fund the earthquake reconstruction would be seriously damaging while debt issuance sufficient to fund the recovery would be a really large injection in need of partial offsetting; it's otherwise hard to reconcile his fear of big bad things happening with spending cuts and other big bad things happening with debt-funded spending. But standard theory says to fund things by both cutting current spending and increasing debt and future taxes rather than either alone.

And, it's hard to find much evidence of strong constraints on demand for our debt in the auction data; the last offering of government bonds found a weighted average successful yield of 3.8% on bonds maturing 2019. You can make a case for substantial tax increases if you think government is just way too small, but it's perhaps a bit mischievous to hang it on earthquakes.

But as Brian Easton was NZIER's Economist of the Year a couple of years ago, it's likely that I and Krugman and the standard theory of public finance going back to Ricardo are wrong on this one.