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

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.