For much of the post–World War II period, budgets remained roughly in balance over the economic cycle in industrialized countries. There were exceptions, such as in Fourth Republic France, but most countries performed well. The Bretton Woods system played an important role in keeping fiscal policies in line. European countries were pegged to the U.S. dollar and under the supervision of the International Monetary Fund. With strong and effective capital controls in place, weak finances meant that a country would have to borrow from the Fund.

Once Bretton Woods collapsed in the early 1970s, however, many countries liberalized their capital accounts and the IMF ended its role as a fiscal supervisor. There were two oil shocks, and one would have expected some increase in deficits and debts resulting from macroeconomic stabilization policies. Yet what one observes are high, and rising, levels of public debts and deficits in many countries through a much later period, or the early 1990s. The general government debt figures as a percentage of GDP are particularly revealing – while the average debt level for the European Union-15, the United States, and Japan was only about 28% of GDP in 1973, it increased in virtually every year to a high of 73% of GDP in 1996. The average then dropped to about 65% by 2000 and stabilized at that level through 2004. These figures, however, mask a divergence in budgetary performance.