The government will have to make some tough decisions in the next six weeks.
Now that the potential cost of rebuilding Christchurch is becoming clearer, the government faces the choice between increasing its debt or imposing an earthquake levy on income earners.
Unfortunately, insurance and reinsurance payouts will not be enough to rebuild Christchurch.
The EQC will pay out $1.5 billion as an 'excess' before a further $2.5 billion of reinsurance kicks in. That will all go to residential property owners rebuilding homes. Then private insurers will stump up with the rest. This of course does not cover those home owners or landlords who did not have home and contents insurance. They are naked.
Then commercial insurers and reinsurers will cover some of the cost of rebuilding commercial buildings destroyed in the central business district. Prime Minister John Key has estimated they could pay around $5 billion to $6 billion and the EQC would pay out around $9 billion for the two earthquakes, including reinsurance of $5 billion.
The council will have some reinsurance for buildings and local council owned infrastructure, but it will not be enough to rebuild local roads, water and sewerage.
This is where the central government is going to have to step in. Fulton Hogan has already estimated billions of dollars of spending to rebuild roading infrastructure. Most, if not all, of that will have to be paid for by central government.
Then there will be many, many government owned schools, offices, hospitals, police stations that will have to be rebuilt.
Prime Minister John Key has estimated a total repair cost from the two earthquakes at around $20 billion. See more here.
Key reckons, therefore, there is a gap of about $5 billion to pay.
Finance Minister Bill English has already indicated the government expects to increase its borrowing programme this year from the (already increased) $13.5 billion or $300 million a week.
So the choice is clear: does the government borrow the NZ$5 billion over the next couple of years or impose a special income tax to raise the funds.
No worries. Just borrow?
On the face of it, there seems a lot of room for the government to borrow. The government's debt to GDP tracks remains very low by any international comparison and as recently as December was forecast to double to around 28 per cent over the next four years.
New Zealand's problem is a total net foreign debt of around 90.5 per cent by 2015. See Treasury's latest forecasts here. That is a Portugal/Irish/Greek/Spanish (PIGS) level of net foreign debt. The difference for New Zealand is that most of it is debt held by the big four Australian-owned banks.
Both the banks and the government face a ratings review for possible downgrade from Standard and Poor's.
The Reserve Bank, the Treasury and Prime Minister John Key (as recently as last month) warned of the dangers of adding to New Zealand's net foreign debt.
They are right to worry about the future. Higher interest rates would force New Zealanders to pay anyway, with the increased costs going to foreign creditors.
We are entering a potentially dangerous period over the next decade or so where sovereign debt crises will abound. Developed nations such as the PIGS, Britain, the United States and Japan will all be borrowing monstrous amounts from bond markets. America is again set to borrow more than 10 per cent of GDP over the next year.
Up until now, the vigilantes in the bond markets have remained relatively quiet. They are spooked by the dramas in Europe and the Middle East and have kept their money in the 'safest' assets, which are still seen as US Treasury bonds.
But as the reality of rapidly increasing government borrowing and ageing populations hits, the bond vigilantes will become restless. We are already seeing it in parts of Europe where interest rates are at such high levels that 'Minsky moment' debt spirals beckon.
The risk is that choosing to borrow more simply delays and compounds a moment of reckoning for the New Zealand economy.
At some point we have to face up to the point that our wealth has been significantly reduced, our earning power has been damaged and we need to reduce our standard of living in order to save and build up our capital stock again.
So lets get to work
The fastest, fairest and safest way for New Zealand to save as a nation and use those savings to rebuild infrastructure is to impose an earthquake levy on those who can afford it.
The Greens have proposed one that gathers $921 million a year. Earners outside Christchurch earning more than $48,000 a year would pay an extra 1 per cent, while those earning more than $70,000 would pay a 2 per cent levy. See more here on the Greens' proposal.
The elephants in the room of Working For Families and Interest Free Student Loans also need to be addressed.
At some point New Zealanders need to save.
We can't kick the can down the road any more.
This earthquake should really be seen as a national day of reckoning when we finally decided to sacrifice some consumption to save and rebuild the economy.