This week's £50 billion bank recapitalisation plan - together with the nationalisation of Northern Rock and Bradford & Bingley - looks set to push the Government's debt to 50 per cent of national income. This would be the highest for 30 years and well above the 40 per cent ceiling that Gordon Brown set himself when he became Chancellor.

Extraordinary circumstances call for extraordinary measures. Mr Brown's fiscal rules were never designed to cope with a meltdown in the banking system and it would be ridiculous to suggest that adhering to them should take priority over the need to stabilise the financial system. The costs of failing to do so would probably be even larger.

But even in the absence of the current turmoil, the underlying level of debt was already perilously close to the Government's ceiling. Mr Brown did not leave his successor as Chancellor with the fiscal room to cope with even a modest economic slowdown, let alone the problems we currently face. To that extent the Government failed to learn the lessons of the last slowdown.

Alistair Darling's first Budget in March 2008 projected that public sector net debt would be 38.5 per cent of national income this year and would peak at 39.8 per cent in 2010-11. But this excluded the impact of nationalising Northern Rock, and the Government has since been forced to nationalise Bradford & Bingley and to purchase £50 billion of preference shares in some of the remaining banks. Taken together, these add £175 billion, or 11.6 per cent of national income, to public sector net debt.

All of this increase in debt reflects measures that the Treasury hopes will be reversed. Consequently, the long-run cost, if any, to the taxpayer remains uncertain. So it still makes sense to focus on a measure of net debt that excludes them in assessing the medium outlook for tax and spending decisions.

But the underlying health of the public finances has also deteriorated for other reasons.

Every other month since the Budget the Chancellor has chosen to announce a further giveaway to some taxpayers. This process began in May when he chose to cut income tax for most basic rate taxpayers at a cost of £2.7 billion. Then in July he chose to help motorists by suspending the inflation increase in fuel duties planned for October at a cost of £0.6 billion. Most recently in September he helped some home buyers by announcing a one-year suspension of stamp duty on the purchases of residential properties worth between £125,000 and £175,000 costed by the Treasury at £0.3 billion this year.

Taken together, these three giveaways will increase borrowing this year by nearly £4 billion.

In addition to these new measures, so far this year growth in tax revenues has been disappointing and there has been stronger than expected growth in public spending. If continued over the whole of this year these alone would lead to the Government borrowing an extra £18 billion. This increase in borrowing reflects other developments in the UK economy such as a sharp fall in housing transactions, which has reduced stamp duty revenues, and a rise in unemployment, which has increased benefit expenditures.

Taken together, the cost of Mr Darling's policy choices and the additional borrowing arising from developments in the economy would add £22 billion to borrowing this year. This is equivalent to £700 on average for each family in the UK.

This increase would lead to overall Government borrowing this year reaching 4.4 per cent of national income this year. While this would be a large increase relative to the Budget forecast of 2.9 per cent it would not be unprecedented: borrowing exceeded this level every year from 1992-93 to 1995-96. An increase in borrowing of this magnitude, let alone any further increase in borrowing next year, would be sufficient for underlying net debt to rise above the 40 per cent of national income to which Mr Brown chose to adhere.

This is somewhat ironic given that shortly after new Labour came to office in 1997 the Treasury published a document entitled Fiscal Policy: Lessons from the Last Economic Cycle. In this document two key lessons were identified. First: “Adjust for the economic cycle and build in a margin for uncertainty.” Second: “Set stable fiscal rules and explain clearly fiscal policy decisions.” Even setting aside the worst of the recent news, it becomes apparent that, in fact, neither lesson was sufficiently learnt.

Given where we are now, allowing borrowing to rise, and therefore debt to breach the 40 per cent of national income ceiling, is the appropriate strategy. But the underlying principle behind the ceiling remains sensible. So the Government should set out what level of public sector net debt it would like to see in the medium term and over what period it will take action to get there.

Having done this it should then learn the lessons from both the previous and the current economic cycle and not allow itself to get into a position where a moderate increase in borrowing can lead to the rules being broken. As Jane Eyre said to Mr Rochester: “Laws and principles are not for the times when there is no temptation: they are for moments such as this... If at my individual convenience I might break them, what would be their worth?”

Carl Emmerson is deputy director of the Institute of Fiscal Studies. Additional work by Gemma Tetlow, IFS senior research economist

Times Recommends

• Paralysed while the Hamas hydra lives
• Wanted: a superhero to save America
• Blind faith in experts fails justice