Making F1 Budget Caps work

The plan for a budget cap in F1 has been announced. Realizing that most of the current team would find it impossible to cut their budget down to 40 million pounds in 12 months, the FIA has decided instead to let teams that do use the cap to have greater technical freedom, like more off-season testing and no rev limiters on the engines. Unsurprisingly, the current teams don't like it, and feel it is creating two classes of teams.

McLaren's Martin Whitmarsh:

Equally, we recognize the excellent work done recently by the FIA in the area of cost-reduction. Having said all that, we understand that some teams' operational budgets may still be unnecessarily high in the challenging global economic situation in which we now find ourselves. Nonetheless, we believe that the optimal solution - which may or may not include a budget cap, but which ideally would not encompass a two-tier regulatory framework - is most likely to be arrived at via measured negotiation between all parties.

Sir Frank Williams:

Williams has supported the introduction of a budget cap since the idea was first put forward early in 2008," said Williams. "Since then FOTA has made tremendous steps forward on costs but the rationale for a budget cap has also grown even stronger. We would like to see all the teams operating to one set of regulations and under a budget cap in 2010 and that is the position we will be advocating within FOTA when we meet next week. We understand that this will represent a serious challenge for some of the teams but we expect that FOTA will work together to find a unified and constructive way to take the FIA's initiative forward.

Having two sets of technical rules is a weird way to handle it, and it goes against the general spirit of F1. There definitely has to be an incentive for teams to join in the budget caps, but there is another way to do it.

Make it financially viable

When I think about a soft budget cap like the one the FIA is proposing, I consider what the NBA has done with their salary cap. Like the F1 cap, it is not mandatory to follow thanks to the NBA's dozens of exceptions. However, not upholding the cap comes at a price - the teams have to pay money back to the league for going over.

Idea #1: Luxury Tax

Like the NBA, going over the limit by a certain amount causes a constructor to pay a "tax" back to the FIA. For instance, if Ferrari was 100 million GBP over the cap, they would have to pay back some percentage of that money to the FIA. The money could then be distributed to the teams that did follow the cap, a la the NBA.

The advantage of the luxury tax plan would be that big spenders could still remain that way, albeit with a financial cost. After a certain point I'd assume that those teams, particularly factory teams, would not want to spend money on something with no possible return, and as a result the Toyotas, Ferraris, and McLarens of the world would reduce their budgets either to the cap or to a level where the tax is not so taxing.

The problem that might be perceived by the use of the luxury tax is could essentially be team welfare if done incorrectly. Capped teams would have their budgets entirely covered by the big spenders. To prevent this, I'd propose a limit to how much money a team could recieve from luxury tax sharing and either redistribute leftover money back to taxed teams or give it to charity.

Idea #2: Changing how teams share the money

The other idea follows how F1 teams earn money through the year from FOM. For more information, read F1 Fanatic's story about where the money goes in Formula One. Essentially, what would happen under this plan would alter the share each team gets. While teams exist outside the budget caps, FOM money that goes to teams would be split into two pools: one for teams with budget caps, one for teams without them. The distribution within each pool would be even, but the percentage of money goes to each pool would be different. The percentage would have to be as such that capped teams would ultimately get more money back from FOM than the teams without the cap.

Let's say for example that the FOM money given back to teams is 180 million GBP (I have no idea what the actual amount FOM gives out is). There are twelve teams in F1 in 2010 in this scenario, with the capped teams being newbies Lola and USGP along with Force India, while everyone else is uncapped. Let's split the money in half, with each pool being 90 million pounds . With three capped teams sharing one pool, they'd each get 30 million, while the uncapped teams would get only 10 million each.

For teams on the low end of the current F1 spending, having the budget drop covered somewhat could be an incentive to join the budget cap brigade. Still, a twenty million pound windfall like in my example would hardly be an incentive for a Toyota or Ferrari to be more thrifty.