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

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  • Nicholas Crafts

    (University of Warwick)

Abstract

Conventional estimates suggest that the 2007–2009 financial crisis reduced UK potential output by 3.8–7.5% 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% of GDP. Thus, it can be argued that the total fall in UK potential output due to the banking crisis is between 7.7 and 16.2% of GDP—approximately double the conventional estimate.

Suggested Citation

  • Nicholas Crafts, 2019. "The Fall in Potential Output due to the Financial Crisis: A Much Bigger Estimate for the UK," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(4), pages 625-635, December.
    • Handle: RePEc:pal:compes:v:61:y:2019:i:4:d:10.1057_s41294-019-00094-z
    DOI: 10.1057/s41294-019-00094-z
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    References listed on IDEAS

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    Cited by:

    1. Crafts, Nicholas & Mills, Terence C., 2020. "Is The Uk Productivity Slowdown Unprecedented?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 251, pages 47-53, February.
    2. McMahon, Michael & Malherbe, Frédéric, 2020. "Beyond Pangloss: Financial sector origins of inefficient economic booms," CEPR Discussion Papers 15180, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Austerity; Brexit; Financial crisis; Potential output;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • G01 - Financial Economics - - General - - - Financial Crises
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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