Free DP Download 16 January 2019: The Fall in UK Potential Output due to the Financial Crisis: a Much Bigger Estimate

Wednesday, January 16, 2019


The Fall in UK Potential Output due to the Financial Crisis: a Much Bigger Estimate
Nicholas Crafts
CEPR DP No. 13428 | 4 January 2019


It can be argued that the total fall in UK potential output due to the banking crisis of 2007-09 is approximately double the conventional estimate, according to a new CEPR study by one of the country’s top economic historians, Professor Nicholas Crafts.

Conventional estimates suggest that the financial crisis reduced UK potential output by 3.8% to 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. 

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