The Fall in UK Potential Output Due to the Financial Crisis: A Much Bigger Estimate

15 Pages Posted: 11 Jan 2019 Last revised: 14 Jan 2019

Date Written: January 2019

Abstract

Conventional estimates suggest that the 2007-9 financial crisis reduced UK potential output by 3.8 to 7.5 per cent of GDP. This implied a need for fiscal tightening as the structural budget deficit had increased considerably. The austerity that followed led to the rise of UKIP, the EU referendum and the vote for Brexit. Brexit will reduce potential output by somewhere between 3.9 and 8.7 per cent of GDP. Thus, it can be argued that the total fall in UK potential output due to the banking crisis is approximately double the conventional estimate.

Keywords: austerity, Brexit, financial crisis, Potential Output

JEL Classification: F15, G01, H12, O47

Suggested Citation

Crafts, Nicholas, The Fall in UK Potential Output Due to the Financial Crisis: A Much Bigger Estimate (January 2019). CEPR Discussion Paper No. DP13428. Available at SSRN: https://ssrn.com/abstract=3314047

Nicholas Crafts (Contact Author)

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

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