This cost is expected to rise to £700m by 2018, or almost one-fifth of the BBC’s income, because the number of older people is increasing.
The BBC has agreed to pay the £600m-plus annual cost of providing free TV licences for the over-75s in return for being allowed to increase the fee in line with inflation.
John Whittingdale, the culture secretary, told the Commons that the BBC had offered to start paying the cost of the free licences, but Labour critics described the deal as an “assault on BBC independence” and a “shabby backroom deal”.
Providing the free TV licences currently costs the taxpayer £631m. This cost is expected to rise to £700m by 2018, or almost one-fifth of the BBC’s income, because the number of older people is increasing.
In return, the government has confirmed the survival of the licence fee funding mechanism for at least the next five years, until 2020, and allowed the fee – currently£145.50 – to rise in line with inflation as measured by the consumer prices index. CPI rose by 0.1% in the year to May 2015.
The first impact of taking on the cost of free licence fees for over-75s will be felt by the BBC in 2018/19, when it will amount to £250m. Its financial commitment will nearly double to £450m the following year, and £750m by 2020/21.
From 2020 the BBC will be handed full responsibility for the over-75s policy, which effectively means it can change the way the licence fee is subsidised for the elderly.
The government is also expected to legislate next year to close a loophole that allows people to avoid paying the licence fee if they only watch catchup television on iPlayer.
Last week, the BBC announced 1,000 job cuts to deal with the consequences of a £150m funding shortfall next year due to increasing numbers of people failing to pay their licence fees and watching live television.
Ben Bradshaw, a former culture secretary, was one of several Labour MPs to criticise the deal. “You have succeeded in making the BBC a branch office for the Department for Work and Pensions. This is a significant assault on BBC independence,” he said.
Bradshaw Whittingdale had promised to consult the house about changes to BBC funding. “He has broken that promise today and I’m extremely disappointed,” he said.
In an email to staff, the BBC’s director general, Tony Hall, confirmed that a deal had been done. “Discussions have been taking place over the last few days and my approach throughout has been to secure the best possible outcome for our audiences,” he said.
“I believe that the arrangements we have agreed with the government will deliver financial stability. This has been my primary concern, and indeed the concern of the executive board and the BBC Trust.”
The Treasury approached the BBC a week ago looking to pass on the burden of paying for free licence fees for the over-75s and decriminalising non-payment of the licence fee, which is expected to cost the BBC a further £200m a year.
BBC negotiators were understood to be pleased to have fashioned the deal that was announced on Monday given the timescale they were presented with by George Osborne and his team.
The BBC management is understood to be relieved that the government committed to linking the licence fee to inflation for five years and to closing the catchup loophole. Given the fact that the BBC is committed to investing in digital, it cannot promise not to cut further services.
In its manifesto before the election, the Conservative party pledged to continue the policy of free licence fees for the over-75s and to freeze the cost of the licence fee.