Economic Climate Impact on Football Clubs in the UK

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The global recession has affected all sectors and industries negatively. The recessionary phase in the UK also had a negative impact on the earnings of the UK football clubs as well as individual players as the recession hit. The reason lies in the adverse economic condition and government policy. The 20 English Premier League clubs were expected to generate revenue of £1.9bn for the 2007/2008 season; however, this was thwarted due to a lack of investor incentive (Ruddick). The recession has led to slashing of the budget of Premier football grounds and salaries of club CEOs (Ruddick). This raises the question of the impact of the present and future economic trend of the UK on football clubs of the country. This essay reviews the current trend of the UK economy and the way it may affect the UK football clubs and their earnings.

The UK economy has been reported to enter economic recession since 2008 (Blanchflower 1). It was in 2008 that the economic deceleration led to a reduced growth rate to 0.7 percent 2008 (Datamonitor 1). The economy shrank by 1.8 percent in the last quarter of 2008, which is supposed to worst ever downfall. The UK has faced an increase in inflation from 3.19 percent in 2006 to 3.72 in 2008 and is expected to rise further (Datamonitor). The economic recession has increased the employment rate (Datamonitor 16). Further, the government has been increased tax rates, reduced social benefits, and reduced interest rates in 2009 to fight the recession (Datamonitor 35).

With the recession, there have been tensions of its negative impact on the UK football business and especially the UK football clubs (M2PressWIRE). The recession had led to the depletion of finances for the football clubs, which had made the future of the clubs uncertain. The English Premier League recorded total revenue of £1.9bn in 2007/8, which was an increase of 26 percent and a profit increase of 95 percent (Management Today). However, there is expected to be a slight dip in the revenue in 2009 (Management Today). The main reason for the decline can be found in the wages given by the clubs to their football players (Management Today). Another woe of the English football clubs is their ever-increasing debt, which amounts to £3.1 billion (Management Today). Therefore, clubs like Portsmouth, Leeds United, West Ham United, etc. have faced financial upheavals in 2009 (Sauer).

Evidently, the English football clubs have found themselves in a pile of debt and increasing wage liability. This pressure has become more evident due to the recession. However, the negative effect of the UK financial crisis on the football clubs is evident, but the nature of the effect is not explicit. So the question arises, how has the present UK economic condition affected the football clubs? A few factors that have affected the English Clubs are the increase in taxes, interest rate lowering, unemployment, and the inflation rate.

The tax increase in the UK was initiated in the 2009 Budget with an increase of income tax for higher-income earners in the UK, which postulates that earnings over £150000 will be taxed at a 50 percent rate (Datamonitor 70-1). The English tax system has been affecting adversely due to higher tax rates as many famous footballers have chosen to move out of the UK as well as many players due to higher income tax:

“A European player singing a contract worth £3 million a year on June 2007, would have received a post-tax salary of £1.8m. At the prevailing exchange rate of £ 1 to €1.5, this would have resulted in a take-home pay of € 2.7 m. However, from April next year, the 50 percent top rate of income tax would mean post-tax salary would be reduced to £1.5m; and based on the current exchange rate of approximately £1 to €1.15, this leaves take-home pay at €1.725, a decrease of around 36 percent.” (Balow).

Therefore, the adverse effect of the income of foreign footballers is due to an increase in the tax rate as well as degradation of the value of the UK pound to the euro. Further corporate taxes are also high ranging between 21-28 percent (Datamonitor 70). An increase in the tax system has also adversely affected the profit earnings of clubs.

Inflation in the UK has increased from 3.19 percent in 2006 to 4.29 in 2007 (Datamonitor 52). This has brought down the disposable income of individuals, as they have to spend a higher amount of money for the same goods purchased over a period. This has led to less money in hand for individuals to spend on leisure activates like football tickets, which has led to a fall in the football revenue from matchday earnings. Apart from this, an increase in inflation has also increased the cost of the football clubs. A lowering of interest rates has led to less investment for football clubs, which has made their debt problem harder. Therefore, overall, the recession has had a negative effect on the performance of UK football clubs.

According to the forecasts of HM treasury, the economy is expected to grow at a growth rate between 0.7 to 2.2 percent in 2010 and 0.9 to 3.4 in 2011 (HM treasury 3). PricewaterhouseCoopers (PWC) has predicted that the economy will grow at a rate of 1 percent in 2010 and 2.5 percent in 2011(1). In 2010, inflation is expected to increase at an annual average rate of 2.1 percent and 1.8 percent in 2011 (HM treasury 3). Further, consumer spending had been hit due to the recession, will remain low behind a subdued growth rate even in the recovery cycle. This would subdue the growth of consumer spending to 0.75 percent in 2010 and 2 percent in 2011 (PWC 1). Further bank rates are expected to remain low during 2010 even though they are expected to rise to 2.5 percent (PWC 1). Therefore, GDP growth is expected to stay low and inflation to remain low indicating recession for the country even in 2010. Therefore, though the economy is recovering, the rate of growth is slow (PWC 3).

During the recession, the pound to US dollar exchange rate has been going down. In figure 1, both daily spot rate, as well as daily effective exchange rate from the Bank of England data, show that the UK pound was devaluating vis-à-vis the US dollar (Bank of England). A linear trend line drawn for the daily data from 2008 until 15 April 2010 shows that the spot exchange rate is expected to fall further through 2010. However, an effective exchange rate forecast demonstrates that the future trend is more stable, will a gradual upward trend. Thus, effectively, the pound will not devaluate, rather will gain in 2010.

References

Balow, Matt. “Tax rise shifts the balance of power from England to Spain.” 2009. Mail Online. Web.

Bank of England. 2010. Web.

Blanchflower, David. “Where Next For The UK Economy?.” Scottish Journal of Political Economy 56.1 (2009): 1-23. Print.

Datamonitor. United Kingdom: Country Analysis Report – In-depth PESTLE Insights. Country Analysis Report. London: Datamonitor, 2009. Print.

HM treasury. “Forecast for the UK economy: a comparison of independent forecasts.” 2010. HM treasury. Web.

M2PressWIRE. “The Business Of Sport – Football In The Red.” 2010. EBSCO. Print. Web.

Management Today. “Football: the UK’s most recession-proof business?” 2009. Management Today. Web.

PWC. “UK Economic Outlook.” 2010. PricewaterhouseCoopers. Web.

Ruddick, Graham. “How recession-proof is British sport?” 2008. Telegraph.co.uk. Web.

Sauer, Skip. “Great recession’ catches up with English Premier League.” 2010. The Christian Science Monitor. Web.

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Economic Climate Impact on Football Clubs in the UK

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