The Chaotic Economy of the UK and its Broad Impact Upon Football/Soccer


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Introduction

For anyone with a vested or general interest in the political and economic situation of the UK, you will be aware of the current turbulence in the country amongst the government and the weakening of the Pound Sterling (£) currency. A cost-of-living crisis has been declared due to the significant increase in basic living costs. Many families and a majority of the population will struggle to afford sufficient heating and other necessities during the upcoming winter months.

The conflict in Ukraine has had a widespread impact on Western European countries and beyond. For the UK, it has meant that fuel and other products that are sources from the conflicted region have become more expensive. Consequently the living costs have risen. Furthermore, instability within the government has led to several inconsistent and detrimental measures being taken by various authorities to try and combat and mitigate against the challenges. This includes the raising of interest rates to stem inflation, changes to the taxation structure and other government intervention.

In this blog, I will focus on a specific impact of the financial situation in the UK; that on football. Football is the region’s most popular sport and is a staple feature during the Christmas period. However, fans and EFL clubs alike are impacted by the economic crisis. Players themselves are also affected by changes in the structure of taxes and otherwise. I will endeavour to explain these consequences within the blog.

The Proposed Changes to Income Tax

In September of 2022, Kwasi Kwarteng, who held the position of Chancellor of the Exchequer for a grand total of 38 days, proposed changes to taxation schemes and tax cuts to attempt to counteract the effect of rising living costs and the disposable income of the general population.

The suggestion of lowering basic income tax to 19% from 20% will not affect football players at the highest level and Premier League footballers are always in the highest-threshold tax bracket of 45%. However, such a change may assist the heart of the game of football; the fans. In the current economic climate, people are forced to give up certain luxuries that are not considered necessities. Unfortunately for some, this may mean less room for buying tickets and attending football games and even giving up season tickets. This will have a knock-on effect to less financially stable clubs within the EFL who rely on gate income from fans. Lowering the basic tax rate may help these fans continue to attend and support their local and adored clubs.  

Another significant change that was proposed in the mini-budget was the abolition of the 45%  income tax rate. This would reduce the effective tax rate for Premier League players to  40%. As mentioned previously, with an annual income of well over £150,000, the top players are in the top income tax-bracket of 45%. After the  changes were announced on September 23rd that the proposal to abolish the 45% tax rate  was scrapped on October 3. The decision was swiftly reversed due to widespread criticism that this reduction in the top bracket of income tax served only to protect the wealthy. Consequently, the value of the pound plummeted, particularly against the US dollar, and the Bank of England again threatened to hike interest rates.  Below I explain the impact that the 45% tax rate cut would have had on English football were it to be set at 40%:

  1. Players, who average wages in excess of £3million in the Premier League, would have  seen significant net (after-tax) wage increases
  2. This would have been great for player  recruitment and could have led to even more talent being drawn to the UK.
  3. On average, every starting XI Premier League player would have received a net pay rise of £2,700 a week, totalling £144,000 annually. This is based on their average salaries.
  4. In an extreme example, Cristiano Ronaldo with a reported salary in excess of £26million would have received a  £1.3 million raise.
  5. This net wage increase alone would have been more than 3.5 times the average UK wage before tax.
  6. These numbers only consider first-team players and ignore academy and staff salaries.

For the UK treasury, the Premier League tax cuts alone would have cost more than £72m.  To some extent, this may illustrate why the decision was reversed as the government wishes to protect their tax income. Furthermore, football players  already have a reputation in some circles for being „overpaid“. This change in taxation would only fuel the fire and create a further economic inequality between the general public and these athletes.

Corporation Tax & National Insurance

In addition to the proposed income tax changes, the government and His Majesty’s Revenue and Customs (HMRC) announced additional changes to other taxable assets and income, such as repealing the proposed corporate income tax hike. In other words, the Government is hoping to raise corporation tax in order to increase their revenue sourced from the profits of corporations.

Presently, this would only have a limited impact on football clubs as they have traditionally made taxable losses. However, with profitability for clubs in English football increasingly sought after, clubs could become corporate taxpayers in the future. Increasing players wages, stadium maintenance costs and other expenditures may result  in clubs deferring their taxpayer status for a while. Energy bills are a significant consideration for clubs that are not financially powerful. Some EFL clubs have trialled and advocated for earlier kick-offs to avoid the cost of floodlighting that is required during the winter when darkness sets in earlier. This is just one example of measures being taken by clubs to try and be financially sustainable against the economic crisis and avoid bankruptcy, administration and worst case scenario, liquidation. EFL clubs will inevitably feel the impact of the financial crisis greater than Premier League clubs due to their financial foundations being far inferior to these bigger clubs already, as demonstrated in the graph below which shows the average revenue across a single season for clubs according to their division:

Source: Deloitte

There may be one welcome change from the club’s perspective.  The government has proposed removing the 1.25% social security cost increase. If it remains approved, this will come into force on November 6th. Providing clubs with relief of £1m a year, particularly in the lower tiers of English football, will provide an economic boost to the clubs. This is based on the average payroll. Clubs with bigger payrolls like Manchester United and Manchester City, despite no realistic financial fears, are expected to benefit from savings of around £4million from the change. The reduction in national insurance benefits all employers (clubs) and employees (players  and non-playing staff) to some extent. However, the benefit to top-level players will not be as significant as getting  rid of the previously proposed 40% income tax rate!

The State of the Economy 

As outlined, the UK economy is currently in a fragile state, experiencing inflation and the pound is  weak. Foreign players are interested in the value of the pound, the currency in which they are likely to be paid with. A weak pound means a devaluation in a currency that a foreign player might have previously preferred and sought after an opportunity at a UK club. This could cause recruitment problems or drive up the cost of  player salaries in the UK going forward in order to continue to attract players. If the current economic situation were to continue this could materialise quite dramatically in the future and UK clubs will struggle to compete in European competitions as they are unable to recruit foreign talents as easily as currently.

The graphs below show the exchange rates between the Pound and the Euro and the Pound and the Dollar respectively over the last 40 years. Note the general pattern of decreasing value for the Pound Sterling (GBP):

Pound to Euro Exchange Rate.
Source: Google Finance

Pound to Dollar Exchange Rate.
Source: Google Finance

This would have another knock on consequence as the weakening pound will lead to an increase in the value of prize money in other currencies. For example, Premier League clubs may struggle to compete in the UEFA Champions League which is a major source of income for the top clubs. The money is also paid in Euros so it becomes even more valuable to these clubs to reach the latter stages of the competition as the Pound Sterling declines. This will also have a notable impact upon Financial Fair Play statements and clubs will have to be careful when navigating around the value of losses when converted into Euros.

US investors already have significant holdings in the Premier League, including  Manchester United (Glazers), City Football Group (Silver Lake), Arsenal (Kroenke) and  Chelsea (Todd Boehly/Clearlake Capital) to name a few.. With a weakening  pound, we may see more US investment in the Premier League. Everton FC is the latest  club to attract interest from US investors. It makes sense that as the Dollar grows stronger, investors with the financial capacity will look to purchase shares and invest in clubs in the Premier League for less of an expense.

Summary  

This blog has demonstrated that football is not immune from the fragile and erratic financial situation in a country. All through the footballing pyramid from owners, to clubs, to players, to fans at the very core of the game will be affected in some way by financial changes and measures taken to mitigate against a cost-of-living crisis. For some this may be positive benefits although on the whole, if the rest of the country is suffering, so will football. It is an ongoing situation that may play out over several years before the full extent of its effect upon UK football is understood in its entirety.

by Dr. Erkut Sogut, Jamie Khan & Luis Kircher

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