Articles / Rubric: Global

Londons Spending Habits
July - August 2012 | Global

London has spent the last seven years, and 9.3 billion pounds from the pockets of British taxpayers, preparing for the upcoming Summer Olympics. Now, the city is waiting for the reward for their hard work – the games themselves, which need to stay within budget and give the weakened British economy the impetus it needs.

The British capital won the right to host the 2012 Summer Olympic Games back in the summer of 2005, when no one even suspected the oncoming financial crisis. And in the seven years that have been spent preparing that for the international event, no one could have imagined that the country’s economy would find itself in a recession a total of two times – first in 2009, and again in the spring of 2012. Even in a worst-case scenario, the British government couldn’t have imagined that the final stage for the long-awaited event would take place in the midst of such economic turmoil. But unfortunately, that’s where the country stands today. The British economy has been steadily declining in the last quarter of 2011 and in the first quarter of 2012, a turn of events that has led Finance Minister George Osborne to announce additional measures that would reduce public spending by over 100 billion pounds ($154 billion) over the next four years. And it’s only natural that the United Kingdom is taking a vested interest in the upcoming Olympic Games; for one thing, the Olympics have been the country’s major expense for the past seven years, a burden that fell directly on the shoulders of the already-suffering taxpayers. And on the other hand, the event is a potential source of revenue that, according to authorities, can give the weak economy strength.

The Accounting Games
In recent Olympic Games, the experience of the event’s organizers shows that the cost to maintain such a high-level project is snowballing out of control. Seven years ago, after receiving the right to host the Games in 2012, the British government estimated the project’s budget to be close to 2.4 billion pounds. However, just a year after this amount was calculated, the figures increased to 3.3 billion pounds just to build the Olympic Park, and by the time the plans were approved, the budget swelled to 9.3 billion pounds (about $18 billion, according to the exchange rate back then, and approximately $14.3 billion at its current rate), including a reserve fund for unforeseeable expenses. The lion’s share of this money has been allocated by the British government, less than 10% came from London City Hall, and a quarter of the funds were provided by National Lottery ticket sales. Public funding should cover the construction of the Olympic Park, as well as all the necessary infrastructure and security needed to prepare for the Olympic Games and its participants. Additionally, if the Organizing Committee cannot get back some of the costs of the Olympics by attracting private sponsors and through ticket sales, the deficit will also have to be taken from the taxpayers.

Earlier this year, the Public Accounts Committee of the British Parliament Lower House renewed the status of the preparations for the Olympics, and to give credit to the organizers, all the construction for the event is not only being executed on time, but it’s also staying within budget. The Olympics will still cost more than expected: according to the Committee, the total costs could reach 11 billion pounds (or $17 billion), because of increasing security costs, which have reached 271 million pounds. The budget originally provided the organizers with 10 thousand people to work as security staff, but the budget’s authors have, since then, admitted that the number was just a “ballpark figure”. In actuality, up to 23.7 thousand people will be employed as security staff. Parliament representatives were particularly angry when the G4S security company forced the Organizing Committee to renegotiate their government contract – the management costs to ensure the safety of the Games increased by nine times, and the operational costs increased by 20 times.

The opening and closing ceremonies of the Olympic Games have also increased in price, to a total of 41 million pounds. And the budget originally did not include two important articles. The first was purchasing land for the Olympic Park, which cost 766 million pounds. And the second was the maintenance and development of the “Olympic Legacy”, for which 826 million pounds were allocated. Over half of this money has already been spent. These projects were originally expected to bring together 100 million Britons to watch the sports, but recent estimates are showing that these forecasts are too optimistic, and the Committee is now questioning the validity of such generous funding. However, the Department for Culture, Media, and Sport, which is responsible for preparing for the Olympics, considers the MPs claims unsubstantiated; according to them, the money invested in the purchase of land and the “Olympic legacy”, they claim, should be considered as an investment rather than an expense.

The final price of the Olympics will only be calculated after the completion of the celebrations, when the final balance sheets will be drawn up by the Organizing Committee. Representatives of the Committee have ensured that there will be no surprises, and that any costs will be fully recouped. The budget for the Organizing Committee has now reached 2.2 billion pounds ($3.4 billion), and a plan to attract sponsors has already been put into place by the organizers, who have already collected 700 million pounds from various sources and may collect over 600 million pounds from ticket sales, instead of the expected income of 400 million.

Perhaps Sports are Not the Answer
Assessing the economic effect of the Olympics will be more difficult than the costs, and opinions already range far and wide. In this aspect, the authorities are the most optimistic. According to the Mayor of London, Boris Johnson, 37 thousand residents can find jobs or improve their skills by engaging in projects that are directly or indirectly related to the preparations for the games. On top of this, owners are hoping that the Olympics can stir the interest of potential tourists and buyers. According to a survey conducted by Deloitte, 80% of the participants from China and India want to visit the UK due to a widespread media campaign, and almost two-thirds expressed a desire to buy more British products.

The experts of the Moody’s rating agency are more reserved in their hopes. They believe that the Olympics, at the macro level, are unlikely to give a significant impetus to the British economy. The billions of pounds invested in the construction of the infrastructure are already reflected in the dynamics of British GDP levels in recent years, and any further effect could be negligible. In fact, the completion of the Olympics could lead to a decline in activity, and even lead to layoffs, in the construction sector. Moreover, the positive effects of tourism will be relatively small, short-term, and localized to a few industries, such as hospitality and trade. The main advantage will be getting companies to sponsor the games. And there is also an additional risk – there could be a partial leveling of economic benefits due to the downturn of local businesses, whose normal operations may be disturbed due to the influx of international tourists.

Text: Anna Kim

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