People stand outside Broadcasting House, the headquarters of the BBC, in London Britain July 2, 2015. The BBC said it will cut more than 1,000 jobs because it expects to receive 150 million pounds ($234 million) less than forecast from the licence fee next financial year as viewers turn off televisions and watch programmes on the Internet. REUTERS/Paul Hackett

The BBC has agreed to a funding settlement, allowing the licence fee to rise by inflation in exchange for the corporation covering the £650m annual cost of free television licences for the elderly.

Relations between the national broadcaster and the Conservative government have been difficult, with some Tories convinced the BBC has an inbuilt leftwing bias and executives complaining the government is determined to pare back the corporation.

John Whittingdale, the culture secretary, has confirmed the BBC would take on the phased payment of free licences for the over-75s from 2018 as its contribution to £12bn of welfare cuts in this week’s Budget. Free licences are currently funded by the Department for Work and Pensions.

In return, the BBC would in future be allowed to charge for its iPlayer catch-up services, which can be watched without a licence at present. It would also benefit from guaranteed increases in its £3.7bn licence fee income, in line with inflation measured by the consumer price index.

Mr Whittingdale said the licence fee would reflect the scale and scope of the BBC, which would be determined during forthcoming negotiations on the renewal of its charter.

He added that a green paper on charter renewal would be published before parliament ended for summer recess. The BBC charter is due to be renewed at the end of 2016. The burden of providing free television licences for over-75s will be phased in from 2018, but the BBC will only need to take on the full cost from 2021.

The responsibility for the benefit will also be handed over to the BBC, which raises the possibility of the corporation modifying it before it takes on the full cost. For example, pensioners could be means tested to see if they qualify.

The cost as it stands will be about one-sixth of the corporation’s budget, according to Enders, the media consultancy, equivalent to the entire budget of its radio broadcasting and more than four times the cost of its online output.

However, the additional income from iPlayer services and the inflation-linked rises in the licence fee would help to offset some of that cost. In addition, the BBC will no longer be expected to contribute towards the government’s rural broadband programme from 2020, saving about £80m a year.

Chris Bryant, shadow culture secretary, described the agreement as “another back room deal”, and called for an open consultation. “It is no way to run a whelk stall, let alone the world’s most respected broadcaster,” he said.

Mr Whittingdale said renewing the charter would allow the BBC to “adapt to a changing media landscape”, adding it was playing its part to tackle the government’s “challenging fiscal position”.

The full extent of the additional cost to the BBC will come after George Osborne’s deadline for balancing the structural deficit in 2018. The chancellor said the BBC as a publicly funded body “should make savings.”

Lord Hall, BBC director-general, said: “We have secured the right deal for the BBC in difficult economic circumstances for the country. This agreement secures the long-term funding for a strong BBC over the next charter period.”

Five years ago, the heads of the BBC and its governing trust were prepared to resign at the government threat to make the corporation cover the costs of free television licences for the elderly.

But just one parliamentary term later, the prospect of the £650m additional burden for the BBC has now been accepted.

Additional reporting by Robert Cookson

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