Working Paper: CEPR ID: DP13428
Authors: Nicholas Crafts
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 Codes: F15; G01; H12; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking crisis (F65) | UK potential output (E23) |
| Banking crisis (F65) | Structural budget deficit (H68) |
| Structural budget deficit (H68) | Austerity measures (E65) |
| Austerity measures (E65) | Political sentiments (D72) |
| Political sentiments (D72) | Brexit vote (F69) |
| Brexit (F19) | UK potential output (E23) |
| Banking crisis + Brexit (F65) | Total potential output loss (E23) |