UK’s Failure to Recover from the Financial Crisis

The UK has been one of the poorest performing economies since the financial crisis. The economic shock of the financial crisis was greater than most other advanced economies and the UK took longer to recover and even before Covid-19 was considerably smaller than it would have been had it matched the recovery achieved by others.

Approach and Sources

This case study compares the economic performance of the UK with 21 other advanced economies, including both large advanced economies (LAEs, with populations of more than 20 million) and small advanced economies (SAEs, with populations of between 1 million and 20 million). The LAEs are Australia, Canada, France, Germany, Italy, Japan, Korea, Spain and USA. The SAEs are Austria, Belgium, Denmark, Finland, Ireland, Israel, Netherlands, New Zealand, Norway, Singapore, Sweden and Switzerland.

The main metric used in this analysis is Gross Domestic Product (GDP) per capita, which measures total economic output by person in each country. Comparable data on GDP per capita is available from the International Monetary Fund’s (IMF) World Economic Outlook Database.

The Economic Impact of the Financial Crisis and Recovery

Almost all advanced economies shrank between 2007 and 2009 as the effects of the financial crisis were felt globally (the only exceptions were Australia, Israel and Korea). The UK economic decline was greater than most, with GDP per capita falling by 5.8% in two years, a loss of £1,800 per person. This is more than the average decline in both LAEs (3.6%) and SAEs (4.6%).

The UK took longer to recover the economic output lost during the financial crisis than most other countries. On average the LAEs returned to their pre-crisis size in late 2011, for the SAEs it was early 2012 and for the UK it was 2014.

The UK consistently underperformed compared with both LAEs and SAEs in the period between the financial crisis and the Covid-19 pandemic. The UK entered the Covid-19 pandemic period with an economy that had failed to recover from the financial crisis as most other advanced economies, large and small, had.

Between 2007 and 2019, the cumulative economic growth achieved by the UK, LAEs and SAEs was as follows:

UK: 5.3%

LAEs: 9.8%

SAEs: 13.3%

Financial Crisis and Recovery (GDP per capita)

Source: Data on GDP per Capita Constant Prices (i.e. adjusted for inflation) in National Currency from IMF World Economic Outlook Database (October 2021), Indexed to 2017=100 LAEs are Australia, Canada, France, Germany, Italy, Japan, Korea, Spain, USA and SAEs are Austria, Belgium, Denmark, Finland, Ireland, Israel, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland

Rapid Recovery in the Small Advanced Economies

The above graph also shows the difference that there has been between performance of the LAEs and SAEs during and since the financial crisis. On average, the SAEs experienced slightly more decline than the LAEs between 2007 and 2009 (although not as much as the UK), and took slightly longer to recover the economic output lost (although much sooner than the UK). In the period 2014 to 2019, the SAEs outperformed the LAEs.

This demonstrates the benefits of the strategic coherence of the SAEs. Whilst each SAE followed a different path, each took strategic decisions on what was required for recovery, and those led to strong recoveries. In the same period, the UK, which was focused on Brexit and austerity, performed poorly when compared to the SAEs (and when compared to other LAEs).

The UK and the Slow Recovery from the Financial Crisis

Between 1980 and 2007, the UK economy, measured in real-terms GDP per capita changes grew at an average rate of 2.4% per annum. The financial crisis slump and slow recovery from it meant that this fell to 0.4% per annum between 2007 and 2019, a difference that can be widely felt across the economy, helping to explain why the current cost of living increases are have such a significant impact – people would have been in a much better position to deal with such increases had there not been more than a decade of lost growth.

The implications of the UK’s comparatively weak recovery from the financial crisis can be quantified in terms of what it means in GDP per capita in cash terms and what the gap that has opened up means for lost tax revenues that would have been available to invest in public services.

If the UK had matched the economic growth rates of other LAEs in the period between 2007 and 2019, the UK economy would have been 4.4% larger, the equivalent of £1,418 per capita. If it had matched the SAEs, the UK economy would have been 7.7% larger, the equivalent of £2,489 per capita.

Note that this comparison is only with the average LAE and the average SAE. If the comparison was made with the best performing countries the gap would be much greater.

The GDP and Tax Gap from Slow Recovery

Translating the UK underperformance to the Scottish economy, matching the 2007 to 2019 growth performance of the SAEs, would have added an additional £13 billion to the Scottish economy. In 2019 Scottish GDP (excluding North Sea oil and gas) would have been £181 billion instead of £168 billion[1]. In GDP per capita terms, this translates to £2,400.

This also matters for public services. Given that taxes raised in Scotland in 2019-20 were equivalent to 38.7% of GDP, the additional GDP would also have generated additional taxes, an additional £5 billion, increasing the tax revenues from £65 billion to £70 billion. This is very significant in the context of Scotland’s reported Current Budget Deficit of £11.9 billion in that year, demonstrating that the way to improve Scotland’s public finances is to boost economic growth, as the other SAEs have done.

[1] Source of GDP figures: Scottish Government, Government Expenditure and Revenue in Scotland 2019-20