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Last Updated: Friday, 22 December 2006, 16:45 GMT
Disappointment - or fair deal?
Torin Douglas
By Torin Douglas
Media correspondent, BBC News

How bad a blow is the reported below-inflation licence fee deal for the BBC?

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A tough decision from the Treasury means tough choices for the BBC

The BBC director-general Mark Thompson has told staff it "would be a real disappointment" if it turns out to be true. It would "mean some very difficult choices", given that the BBC had asked for an annual rise 1.8% above inflation.

The National Union of Journalists said such a deal would be "catastrophic", coming on top of the cuts already being imposed within the BBC and in commercial television.

The shadow culture secretary Hugo Swire said it raised "very serious questions" as to how the BBC would deliver all the commitments the Government had asked for in its new Charter.

Fuzzy picture

The problem in trying to assess the real impact - on listeners and viewers as well as broadcasters - is that only part of the picture has so far emerged.

The top-line figures were leaked by Government sources to political correspondents at Channel 4 and some national newspapers, but they haven't yet been agreed by the Cabinet or given to the BBC.

Officially, both the Department of Culture, Meda & Sport and the BBC insist that discussions are still going on. Mr Thompson told BBC staff there were important aspects of the settlement about which he had heard nothing.

But he admitted the reports were credible and it seems clear that the top-line figures are settled: a 3% increase for each of the next two years, followed by a 2% rise in each of the next three years.

It's suggested that there'll be a smaller - as yet undecided - increase the year after that, 2012. But that is when digital switchover is due to be completed; and who knows how life will have changed by then?

The increase significantly less than the BBC asked for - and is well below the current retail price index of 3.9% - but it is not as bad as reports were suggesting earlier in the autumn, when the Treasury let it be known it was driving a very hard bargain indeed.

Culture minister Tessa Jowell
Tessa Jowell is believed to have argued for a higher licence fee

Sources in the Culture Department claim they've squeezed an extra billion pounds out of the Treasury across the period as a whole.

It's also a six-year deal, so the BBC can plan ahead in a way that commercial broadcasters - faced with a dramatic decline in advertising revenue - cannot.

The Treasury had been threatening a much shorter settlement and some people - such as the Labour MP Derek Wyatt - argue that technology is changing so fast that the BBC should not be given the luxury of such a long deal.

The settlement is no longer linked to inflation, which may not be such bad news for the BBC, since the rate of inflation is forecast to fall.

Indeed the Consumer Price Index, which Gordon Brown prefers to the RPI, is targeted to grow by just 2% in the next year or so. Against that, the licence fee deal would compare quite favourably.

There's a hidden dividend for the BBC too. The number of UK households is growing by around 0.7% a year, which means more people paying the licence fee.

Relocation at risk?

But although it may not all be bad news, the settlement still leaves question marks against major items on the BBC's shopping list.

The above-inflation licence fee bid was intended to pay for better programmes, the switch from analogue to digital TV by 2012, and the move of programmes and thousands of staff to a new regeneration zone in Salford in Greater Manchester.

Will the Salford move still go ahead?

The BBC governors and management favour the plan, as part of a drive to spend more of the licence fee outside London and the south-east, but they've also said it depended on a reasonable financial settlement.

Proposed site for BBC move to Salford
Is the move to Salford in the balance?

When Mark Thompson reinforced that message in a recent speech, it went down badly with the Government and many Northern Labour MPs - not least the Labour Party chairman Hazel Blears, whose constituency is in Salford.

Some called it a gaffe, but some BBC insiders believe this put as much pressure on the Treasury as it did on the BBC, and has helped shift its position.

Tessa Jowell has told the House of Commons she believes the Salford move will happen and said the licence fee settlement had been structured to achieve this.

That does not mean this money is ring-fenced, but it does mean the deal is "front-loaded" - so the biggest increases come in the early years - which allows to BBC to make major capital investments, provided they come within its borrowing limits.

Think again

What about digital switchover?

The BBC's investment here comes in several forms - new and better digital programmes and services; new transmitters and digital technology; and "targeted help" for the elderly, to enable them to switch over to digital equipment when the analogue signal is switched off.

The "targeted help" was not included in the BBC's licence fee bid, but the Culture Secretary has told Parliament this money will be ring-fenced at around 600 million. It seems this figure is included in the licence fee settlement, which may put a further squeeze on the BBC's programme spending.

The rest of the BBC's plans will now have to be reviewed and prioritised.

Some schemes - such as new local television services or a proposed 300 million investment in British films or investment in High Definition Television - will be looked at particularly closely. There may be cuts in channel and programme budgets and increases in the number of job losses.

And if the worst comes to the worst, the BBC may have to reconsider its plans to cut the number of repeats.

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