Hamish McRae: It's a beautiful game - just ask builders, retailers and the flat-screen TV makers

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The Independent Online

The World Cup is one of the big three global sporting events - only the Olympics and Formula One can compare in terms of revenue, and the motor racing season comes round every year. But what are its economic effects? What will Germany get out of it? Or the winning country? Or the electrical retailers selling flat screens?

To see the beautiful game in such terms might seem a bit prosaic. But of course it is an economic event and so there has been a great wodge of information, speculation and analysis about its impact. This includes everything from concerns that productivity will fall as people skive off to watch the box, to an econometric analysis that predicts Italy has a 54 per cent change of beating Brazil in the final. That prediction, by the way, comes from the investment bank UBS.

Amid this churn of ideas there seem to me to be three important truths. One is that any event on this scale creates a spike in economic activity, but it requires requires careful management to bring a lasting benefit. The second is that money does matter in generating sporting excellence. And the third is that the markets have a collective wisdom on what might happen.

The first point is pretty straightforward. Consumption is brought forward globally and investment is brought forward in the host location. The advance of the big flat-screen TV is a very good example, in that people pondering whether to get one see a clear case for doing it now. So there is a spike in consumption. But not everyone gains for some consump- tion is reallocated: non-sporting leisure activities will tend to suffer as people's time and cash is diverted to the World Cup.

But if, overall, people spend a bit more, that is good for retailers. Here in the UK we have had a pretty flat period for retail sales, so this comes at a good time. Mervyn King, Governor of the Bank of England, pointed out that it was a bit like Christmas, except that the statisticians could allow for the Christmas effect but would find it hard to allow for the World Cup.

Victory, however, might have a longer-lasting impact. ABN Amro has calculated that the economy of the winning team would get a boost equivalent to 0.7 per cent of GDP. That may not sound a lot but it would be enough to be noticeable.

That is consumption. The investment side is arguably more important, at least to the UK, for we need to try and learn the lessons of Germany hosting the World Cup and apply these to the London Olympics. Lesson one is probably that we should not over-build.

It is easier to plan for the World Cup than for the Olympics because the football championship uses existing capacity and is more widely spread geographically. But Berlin, where the final takes place, has already put too much into its infrastructure, and not necessarily in the right way.

Berlin is in a terrible financial shape, partly because both bits of it were artificially supported by West and East Germany, and partly because when unification came and the government moved from Bonn, the large firms refused to follow. As a result, the city is too large for the economic activity it generates. Communications are also surprisingly poor: there are only two direct flights a day to New York and none to Washington or Los Angeles.

On the other hand, Germany has used the event to carry out a general sprucing up of its facilities, and that will have positive effects in the future. Barcelona remains the best example of a city that used an event, the Olympics, to rebrand itself and has built a solid tourist and conference business on the back of it.

The second lesson is that money may not buy you love but it can to some extent buy success. The graph above, prepared by Goldman Sachs, plots GDP per head against the competing nations' rankings in the Fifa table. It is a slightly odd ranking (should the US really be number four?) but it is a useful proxy. The correlation is quite weak but there is a relationship between wealth per head and Fifa ranking. Brazil most notably does far better than it "ought" to when ranked by GDP per head, as do the Czech Republic, Mexico and Argentina. On the other hand Switzerland and Australia do rather worse - well, not such a surprise in the case of Switzerland perhaps, but Australia is supposed to be good at sport, isn't it? Nevertheless, countries that have financial resources and choose to apply those to football do better than those that don't have the resources in the first place.

This raises an intriguing possibility. Were the US to deploy its huge resources to the international model of football rather than the domestic version, it could change the nature and economics of the global game.

The third point is the range of the odds, shown on the right above, taken from the Ladbrokes website on Friday. Leave Brazil aside because it is a phenomenon. Aim off a bit for England because there is a natural inclination for people to back their own team and much of the money going into this comes from here. But now look at the others: that is an amazingly even spread of odds down to the Netherlands, ranging from 7-1 to 12-1. If you think about it, this is one of the things that makes football work as an entertainment industry. There is a clear favourite but there is also a very broad pack of premier league countries, any of which the market reckons might win. This is not like Formula One, when after a few races it becomes pretty clear who, barring accidents, is going to win.

One final thought: is this really a useful economic activity? You could argue that it's all a bit pointless - a classic ephemeral service industry. There are no "things" being made. Would it not be better for the effort to go into something lasting - more homes or more hospitals?

Actually the World Cup is a wonderful example of the market knowing what people want and meeting those desires. If people would prefer to spend their money and time watching a spectacle instead of buying a new bit of furniture, or whatever, then that is their choice. Consumption is the only point of economic activity. You may need to invest to facilitate that consumption, and that is what investment is for. But when anyone worries about the growing dependence on service industries, rather than manufacturing, to generate economic activity, then tell them to watch the World Cup.

How about 'Brown freedom day'? This Government never listens

Yesterday, it seems, was "tax freedom day". The idea is that we worked up until then for the Government, but now we spend the rest of the year working for ourselves; on Saturday we stopped paying tax.

I suppose that if you have 40 per cent of GDP going through the Government, you could argue that you work 40 per cent of the year for it. Or you could say you work the morning for the state and then the afternoon for yourself. As a way of reminding people of the impact of government spending on our own pockets, this is a useful enough PR device. It is legitimate, too, to ram home the point that our tax levels are going up while those of most other developed countries are coming down.

But I am not sure it is really helpful in explaining the underlying nature of the tax and spending decisions of the Government, and it diverts attention from more fundamental issues.

For example, it makes no distinction between spending on services and spending on transfer payments. If a government puts money into education and health, it is manufacturing a service, which we as citizens would have to acquire somehow. If, however , it is paying a pension, it is taking money from one group of people, those in jobs, and giving it to another, those drawing pensions. So tax does two completely different things. There are legitimate reasons for thinking that services could be better provided by other means, but transfers between different chunks of society have to be done by government. Griping about the level of tax ignores that.

The second objection to the focus on a tax freedom day is that some taxes are more effective than others and that the quality of the UK fiscal system has deteriorated under Gordon Brown. It has become more complicated but it has also become technically worse.

There is, for example, a plan to bring forward the dates for filing tax returns from 31 January to 30 September the previous year. This, you might think, is simple enough. But the professional bodies that have to handle all this point out that it will increase paperwork and costs because reports will have to be prepared without full information and then corrected manually. It will be particularly difficult for the self-employed, a group the Government is supposed to be promoting, and it will encourage businesses to move their accounting year end away from the formal fiscal year end, because that would give them more time to file.

The key point is that the Treasury doesn't listen to the professionals before trying to change the way the system works. It is a similar pattern to the chopping and changing in the management of the NHS, and the various responsibilities of the Home Office. None of this may be as obvious as the rise in tax levels, but I suspect when we look back on this Government's record, its refusal to listen to the experts will appear as its greatest single error.

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