Debt and the crisis: How did governments get it so wrong?
There's something for everyone in new research from the International Monetary Fund today on the damage done to government balance sheets by the great financial crisis of 2008-9.
Or at least, something for everyone who takes an interest in the rise in government borrowing and who's to blame for it: People like George Osborne, for example, and Ed Balls.
The study looks at the ten countries that have seen the biggest unexpected increase in debt as a share of GDP between 2007 and 2010 and asks why it happened.
Some will think the answer to that question is obvious: Governments borrowed more than they expected. The point of the IMF study is to ask why, exactly.
One first, obvious point from the study: Britain was not the only country to see a large and unexpected rise in public debt between 2007 and 2010.
On average, total public debt in the 10 countries highlighted by the researchers was 31.8 percentage points higher, as a share of GDP, in 2010 than governments had forecast back in 2007.
The figure for the UK is only slightly higher than average. In 2007 we expected out our gross debt in 2010 would be 42.5% of GDP in 2010. The actual figure was 75.1% of GDP: In other words, the forecast was 32.6 percentage points too low.
That's a slightly smaller overshoot than in the US and much less than in the Republic of Ireland. But, George Osborne would no doubt point out, significantly larger than in France or Germany, where debt ended up 20-23 percentage points higher than forecast.
Of course, the financial crisis explains this massive forecasting error, but the study finds that relatively little was due to fiscal stimulus programmes in response to the downturn.
In the case of the UK, such policy changes account for just under 5 percentage points of that 32.6 point overshoot in the debt forecast.
So, what did explain it? One common explanation - favoured by the coalition - is that Labour took a much too rosy view of the underlying state of the public finances in the years leading up to the crunch.
The study looks at this, and finds that quite a lot - 23% - of the debt overshoot in these ten countries was due to "an incomplete understanding of the country's underlying fiscal position on the eve of the crisis".
But you might be surprised to hear that it does not seem to have been a large part of the story in the UK.
According to the IMF, just 3.7 of that 32.6 percentage point overshoot was due to this kind of error. Much more important for us, they claim, was "exogenous factors" like the unexpected fall in national output in the recession, and the unexpected need to bail out Britain's enormous financial sector.
On the peg
Whether or not Gordon Brown's Treasury had an excessively optimistic view of the budget deficit, he certainly severely underestimated the degree to which Her Majesty's Government would be on the hook if Britain's world-beating financial system got into trouble: The financial sector bailouts account for eight percentage points of the overshoot in our debt.
An even larger part of the unexpected rise in our debt - about a third of it, in fact - is due to the fall in GDP after 2007. This raised the debt ratio, arithmetically, by nearly five percentage points, simply by shrinking the denominator.
It also raised debt directly by about eight percentage points, by boosting government spending and cutting revenues.
The big conclusion of the study is that governments - and the IMF - need to understanding their 'contingent' liabilities as well as the liabilities they can see right now, especially in the financial sector.
This became blindingly apparent in the US in the autumn of 2008, when it became clear that the US government was on the peg for all of the liabilities of Fannie Mae and Freddie Mac - government-sponsored mortgage institutions which had not previously been formally included in the federal government's accounts. These two alone increased the government deficit in 2008 by 2% of GDP - or nearly $300bn.
But the study is also a reminder of something more basic: In considering the fiscal position, governments need to consider not just what will happen if the economy continues broadly on track, but also if it gets into trouble.
That sounds like the most obvious advice imaginable. But - looking back through history - it's the advice that governments almost never follow.