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BBC funding arrangements

James Heath

Director of Policy, BBC

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The Government’s decision to transfer the cost of the over 75s TV licence fee concession to the BBC has been widely reported – less so, the other elements of what has been agreed. To understand the net financial impact on the BBC, both sides of the equation need to be considered.

In short, the effect of the agreement will be flat cash funding for BBC content and services over the first five years of the next Charter period, after implementing a programme of £1.6 billion of cumulative savings over this Charter period by 2016/17.

The agreement means we will continue to make tough choices and simplify the BBC in the next Charter, building on the savings already planned to close the BBC’s £150 million per annum funding gap and manage the on-going inflationary pressures in our cost base. But, alongside, we now have the planning certainty we need to give the BBC financial stability and the opportunity to continue our reform programme.

Let’s first look at the cost part of the equation. The cost of over 75s TV licences will be transferred to the BBC on a phased basis, starting in 2018/19 with the full liability met by the BBC from 2020/21. We estimate this will reduce the BBC’s licence fee income by around £725m pa. We will give those eligible households an opportunity to voluntarily pay for a TV licence and so make a contribution to the cost of the BBC’s services. In the next Parliament, the BBC will take-on responsibility for the over 75s policy and how this balances with funding services to audiences.

As part of the new arrangements, the BBC has agreed a package of funding benefits to compensate for the over 75s obligation. In yesterday’s Summer Budget speech, the Chancellor said: “the BBC has agreed to take on responsibility for funding free TV licences for the over 75s and in return we were able to give our valued public broadcaster a sustainable income for the long term.’’

The new arrangement includes a commitment to:

  • modernise the licence fee, to adapt it to cover catch-up as well as live TV. This will make the licence fee model sustainable, fairer and safeguard the funding available for our content and services over the period. We estimate that the financial benefit will be around £100 million pa against our baseline. The Government has said it will bring forward legislation within 12 months to make this happen;

  • phase-out the ‘ring-fenced’ money from the licence fee – £150m a year – which is being used to support broadband roll-out; and

  • increase the licence fee in line with CPI over the next Charter period, subject to Charter Review conclusions on the purposes and scope of the BBC and us undertaking equivalent efficiency savings to other parts of the public sector. The licence fee has been frozen for seven years at £145.50. Linking the licence fee to CPI would deliver income of around £350 million per annum, at the Bank of England’s target inflation rate of 2%. If CPI is below this level over the period then the planned efficiencies in the BBC’s cost base will be available for offsetting the loss of over 75s income rather than offsetting inflationary pressures

Forecasting how all these factors will add-up over the period is complex; we anticipate that the new arrangements will result in flat cash funding for BBC services over the first five years of the next Charter period. In real terms, the licence fee funding available for BBC services will be down by around 10%.
The way the financial settlement is structured gives the BBC some room for investment in digital transformation in the early years of the next Charter before the full cost of over 75s is absorbed. This will help us to manage the transition we all know is coming to an online world.

We believe that the substance of what has been agreed is a strong deal for the BBC in very tough circumstances.

Of course, once the Charter Review process starts there could be further pressures faced by the BBC such as decriminalising the licence fee which would, in our view, lead to an additional cost of £200m pa. As part of the agreement, the Government has said it will consider decriminalisation in light of the Perry Report and the need for the BBC to be funded appropriately.

James Heath is Director, Policy 

  • Read the letter received by Tony Hall on 3 July 2015 from Rt. Hon George Osborne MP, Chancellor of the Exchequer and First Secretary of State, and Rt. Hon John Whittingdale MP, Secretary of State for Culture, Media and Sport.
  • Read Tony Hall's letter (sent by email on 6 July 2015) to Rt. Hon George Osborne MP, Chancellor of the Exchequer and First Secretary of State, and Rt. Hon John Whittingdale MP, Secretary of State for Culture, Media and Sport. 

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