#THIS ARTICLE IN DUTCH
by Tsjalle van der Burg | 19 May 2020
In recent years many amateur clubs have seen their financial positions dwindle to mediocre or even poor, with the coronavirus crisis making this situation even worse. Although professional sports have grown enormously, inequality has grown, too. In professional football, for instance, small clubs lag increasingly behind, both financially and sports-wise, which makes for less exciting competitions. Due to the coronavirus crisis all amateur and professional clubs run into difficulties. An overall plan for sports throughout Europe could solve all problems of both amateur and professional sports in one go. The plan envisages large-scale financial government support, drastic government-imposed salary cuts and future progressive taxation for (at least) professional football clubs. That way sports could emerge stronger from the crisis, without the government losing money on balance.
Let’s first discuss the importance of sports. Everywhere in Europe sports play a major role. In the Netherlands, for instance, 9.3 million people practice some type of sports every week. 4.3 million of these people are members of one or more amateur clubs, while some 3 million use the services of commercial sports and physical activity providers. Add to this the many who exercise individually. Professional sports offer passive entertainment to millions, encouraging some to become more active themselves. Exercise and fun contribute to health and happiness. Finally, sports have a major social function and make a significant contribution to the economy.
"As restrictions will continue after 1 June, more government support will be needed. But it is far from certain whether the government will indeed provide that support as money is scarce"
Problems
For several years, many Dutch amateur clubs have been facing grave problems. One of these is finding volunteers. Moreover, the 2008 financial crisis led to years of government cutbacks that also hit amateur sports hard. This is one of the reasons that the financial position of many clubs has become mediocre or poor, with all that this entails.
The coronavirus crisis has only added to the problems. Canteen sales have dropped to zero. Sponsor funds are expected to fall, as are memberships and thus membership fees. Meanwhile clubs still have most costs to cope with.1 Fortunately the government recently made EUR 110 million of funding available to amateur sports, of which 90 million consisted of waiving rent from 1 March to 1 June. The remaining 20 million have been earmarked for clubs having own accommodation. The support package furthermore includes the same measures provided to other sectors.
As restrictions will continue after 1 June, more government support will be needed. But it is far from certain whether the government will indeed provide that support as money is scarce. And just like the 2008 financial crisis, the coronavirus crisis might well result in amateur clubs having to make do with less funding in the long run. In short, amateur sports in the Netherlands are facing tough times, and the same goes for other European countries.
Professional football pre-coronavirus crisis
Until recently, professional football had been growing significantly. The average Dutch premier club’s earnings rose by 30 percent between 2015 and 2020. Long-term growth is even more impressive. In 2019 Dutch premier league clubs earned tens of times more than in 1960 and clubs in the highest English league even 100 times as much.
"On balance, professional football makes neither profit nor loss. The reason is simple. Clubs want to win games"
However, over the years the quality of the basic product – football matches – did not improve. Messi’s entertainment value to the average public is (about) the same as that of Pelé in 1960. Football, in fact, has become less fun than before. The increasing financial inequity widens the gap in performance, reduces the thrill and with it the viewing pleasure.
No profit, but economic rent
Do professional clubs make large profits thanks to the increase in earnings? Not really. While the odd club makes a tidy profit, other clubs sustain losses. On balance, professional football makes neither profit nor loss. The reason is simple. Clubs want to win games. Any increase in earnings goes primarily to the acquisition of better players. And they can be pulled in only by the offer of higher salaries. But all clubs have been making more money, with players’ salaries and therefore the costs also going up. Poof, gone is the profit.
But while professional football is not making a profit, there is something called economic rent. Economic rent means that the sector’s earnings exceed the amount necessary to make its product. Should, for instance, earnings fall by 90 percent, they would be at the 1992 level. Koeman’s, Laudrup’s and Stoitsjkov’s FC Barcelona, which won the European Cup final in 1992, proved that even at that level they were capable of making a good product.
This bodes well for the future. According to economic theory welfare thrives with the introduction of comparatively high taxes in economic rent sectors. Taxes will not go at the expense of production, for those sectors do just as well with less money. The additional tax revenue could then be put to good use, such as tax cuts in the many sectors where production suffers from taxes. Or the government could use the money on extra expenditure. We’ll get back to that.
Professional football and the coronavirus crisis
Due to the coronavirus many clubs are struggling. Small professional clubs have been hit hardest; some are on the brink of bankruptcy even. Many clubs try to cut back on costs. Clubs and trade unions in the Netherlands have agreed that the salaries of players and other staff will be cut by EUR 35 million on a yearly basis. Top earners will give up most: 20% of their salaries. Losses, however, will exceed EUR 35 million by far, especially if games will still be played behind closed doors after 1 September.2 Professional football has applied for an extensive support package.
"My suggestion to national governments in Europe would be to offer both amateur and professional sports a comprehensive support package consisting of gifts, loans and price controls"
But money spent by the government now will lead to more cuts later, for instance in education or amateur sports. This, too, could turn support for professional football into a thorny issue, in all European countries. Other professional sports suffer as well, and sound policies are required.
An overall plan for sports
My suggestion to national governments in Europe would be to offer both amateur and professional sports a comprehensive support package consisting of gifts, loans and price controls. At the same time at European level a new tax should be introduced for professional football by 2023. Perhaps such tax should be introduced also in other professional sport sectors but that is beyond the scope of this article. Let me explain the plan.
* Gifts and loans
National authorities would make a large amount of funding available for gifts and loans to ailing amateur and professional clubs in all sport sectors that have been hit. For Europe as a whole this would be many, many billions. Implementation could be entrusted in part to national associations and umbrella organisations like the Dutch NOC*NSF.
* Price measures
In addition, the government would help professional clubs to enforce larger cuts on salaries. This could be done by special legislation that would allow the government to temporarily introduce price measures in the sectors hit by the coronavirus crisis.3 For football this could mean that player salaries would be cut drastically, with the best players giving up most, i.e. 75% of their salaries. This would give professional clubs some breathing room.
* Future tax for professional clubs
Already, governments in Europe should announce progressive taxation for professional football in season 2023-24, levied on the amount spent by clubs on player salaries. Should games still be played behind closed doors after the summer of 2021, the introduction of these taxes would be deferred.
In 2023-24 taxes would still be low. But it would go up every season, and reach its final level by 2025-26. The first two million euros paid by a club to players would then be exempt from tax. On the next four million, taxes would be 10 percent. 20 percent on the next six million, 30 percent on the next eight million, and so on. The richest clubs would be paying 90 percent taxes on the last millions they pay to players.
What would have been the effects, had this tax been in effect in 2018? Let’s take FC Barcelona. In season 2018-19 this club paid out 270 million Euros in salary to its 23 selected players. Under the above scheme FC Barcelona would have had to pay 210 million, which would have left just 60 million for the 23 players together, bringing the average selected player’s salary down by 78 percent to 2.6 million.4
"200 million in taxes would of course be a considerable drain on clubs like FC Barcelona, but FC Barcelona would not go bankrupt"
FC Barcelona’s game would not have suffered. Pelé earned less than 1 million, but trained just as zealously as Messi today. In season 2018-19, the tax would have reduced players’ salaries at Feyenoord Rotterdam from 17 million to 14 million, and from 5 million to 4.7 million at FC Groningen. This illustrates the basic principle: the richer the club, the bigger the impact.
This principle will hold in the future, and would make it more difficult for richer clubs to poach players from poorer clubs. FC Groningen would beat Feyenoord Rotterdam more often, and Feyenoord’s chances against FC Barcelona would increase. 200 million in taxes would of course be a considerable drain on clubs like FC Barcelona, but FC Barcelona would not go bankrupt. It would simply have to pay its players less. With Real Madrid having to do the same, Barça would not lose more games from Real. And FC Barcelona-Sevilla would be more exciting and more fun for the fans in Camp Nou.5
This way the tax would bring in several billions every year. National governments could use this to help sports through the crisis without losing money in the long term. This would leave money for education and other causes.
Only fair
The public really enjoys players like Messi and Ronaldo and are willing to pay for that pleasure. Should the current, high, salaries of top players not be left intact then?
No. Had Messi and Ronaldo never been born, there would have been other players who would have brought the public perhaps just as much enjoyment. The popularity of football itself is the main reason why people are willing to pay so much. Messi and Ronaldo make just a marginal contribution and for that reason they could well earn much less.6
Over the years volunteers and yesterday’s modestly paid players have made football increasingly popular and made it to what it is today. And it is still the volunteers of amateur clubs who get people enthusiastic about football and eager to pay big money to see professional football. Professional clubs should in fact pay those volunteers for their promotional work.
Lucky for them the volunteers do not want any money. What they want is for their amateur clubs to give joy to the people. It would only be fair if amateur sports would receive unprecedented support in return for all the work volunteers have done and still do, and only fair if that support would go at the expense of the salaries of professional players.
"The European Union should ask England to work with other European countries in helping football and other sports overcome the crisis"
Football Comes Home
If at any point in the future the total in tax revenue would exceed the support provided earlier, that tax could be converted into a social levy. Every professional club could spend the proceeds on social projects, like helping amateur clubs or preventing school dropout. It would take football back to its social, typically European, roots.
The cradle of football is England, where in 1857 William Prest and Nathaniel Creswick founded Sheffield FC, the world’s first football club. They had a social purpose in mind: to give people enjoyment. Even today the English have a very soft spot in their hearts for the sport. The European Union should ask England to work with other European countries in helping football and other sports overcome the crisis. This could be a way for Europe to touch people’s hearts.
Notes
1. The above is based on J. Lucassen and J.W. van der Roest (2019) ‘Sportverenigingen in Nederland, Veerkrachtige verbanden voor sport’, Arko Sports Media, and R. Hoeijmakers and J. van Kalmthout (2020) Gevolgen coronacrisis voor sportverenigingen, Mulier Instituut.
2. W. de Boer, J. Gulikers en B. van Rossum (2020) Financiële gevolgen van de Coronacrisis voor de Eredivisie. Hogeschool van Arnhem en Nijmegen.
3. T. van der Burg (2020) How price controls can cut the number of COVID-19 bankruptcies. LSE Blogs, 14 May.
4. Some minor discrepancies apart, this outcome would have been inevitable. Barcelona has no desire to go bankrupt, and cannot borrow much more because of its huge debts. Moreover, UEFA’s Financial Fair Play system compels the club to avoid large deficits. So if they would have to pay more in tax, the only option is to adjust player salaries accordingly.
5. For this tax, also see T. van der Burg and A. Prinz (2005) Progressive taxation as a means to improve competitive balance, Scottish Journal of Political Economy, 52(1), 65-74.
6. See L. Borghans en L. Groot (1998) Superstardom and Monopolistic Power: Why Media Stars Earn More Than Their Marginal Contribution to Welfare, Journal of Institutional and Theoretical Economics, 154, 546-571.
Tsjalle van der Burg is a lecturer in economics at University Twente where he conducts research into a variety of areas including sports economics. He also teaches courses in the Honours Programme of his university. For more information: t.vanderburg@utwente.nl