Financial crises have devastating impacts on the public finances. The impact is also most severe where the pre-crisis excesses were greatest. Among members of the Group of Seven leading high-income countries, this means the bubble-infected US and UK. The question both countries confront is how soon and how far to tighten. Tightening will have to be substantial. But premature action could be a devastating error.

In their work on the history of financial crises, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University note that “the real stock of debt nearly doubles” in crisis-hit countries.* This will be true for the US and UK. It is only in small part the result of bail-outs of the financial sector or of stimulus programmes. According to the International Monetary Fund, in the UK none of the 10.6 percentage point rise in the ratio of fiscal deficits to gross domestic product between 2007 and 2010 will be due to crisis-related discretionary measures.** In the case of the US, 1.8 percentage points of a 6.5 percentage point deterioration will be due to such measures. Most of the change is structural: the levels of GDP and fiscal revenue will not return to the previous path.

How, though, does one assess this fiscal slippage? One way is historical (see charts). In the case of the UK, the crisis is forecast by the IMF to raise the ratio of net public debt to GDP by close to 50 percentage points between 2007 and 2014. The only comparable previous episodes are wars. The increase this time is smaller than that in the wars with revolutionary and Napoleonic France or the world wars of the 20th century. But it is as large, or larger, than in other 18th-century wars.

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