The BBC forecast is split into receipts and (current and capital) expenditure forecasts. The BBC receives most of its income from licence fee receipts. The other main source of income is a central government grant received from DWP, which currently compensates the BBC for providing free TV licences for over-75 households. The Government is phasing out this compensation gradually from 2018-19 and completely by 2020-21. The expenditure forecast covers the full cost of providing domestic broadcasting services to the public. This includes funding for the Welsh broadcaster S4C (the funding for which has been ring-fenced until 2022) but excludes broadband services.
The OBR commissions forecasts for both receipts and (current and capital) expenditure from the BBC for the full forecast period. The BBC produces the forecast in line with the latest assessment of its financial position and the latest information on viewer behaviour. The BBC then applies the relevant variables from our latest economic forecast (for CPI inflation and the number of UK households). Spending plans, including any requirements for efficiency savings, are then determined by forecast income. We scrutinise the forecast return, holding meetings with the BBC as necessary.
In the UK, any household (and some ‘non-households’) watching or recording television programmes as they are broadcast, or watching or downloading BBC content on iPlayer, must be covered by a valid TV licence. Concessions are made for over-75s, the visually impaired and for those owning black and white TV sets, among others. Our March forecast assumed a licence fee of £149.50 in 2017-18 (equivalent to the 2016-17 figure of £145.50 uprated by our forecast for CPI inflation and then rounded to the nearest 50p). The Government has now announced a licence fee of £147.00, but it was too late for us to include the effect of that in our March forecast. For the purposes of our forecast, the fee is expected to increase with CPI inflation each year. We estimate that the effect of including this change in our March forecast would have been to reduce fee income by less than £0.1 billion a year. As changes in licence fee receipts are assumed to feed through to equivalent changes in spending, such a change would have been neutral for borrowing in our forecast.
Licence fee receipts model
The BBC forecast for licence fee receipts is driven by the number of licence holders multiplied by the licence fee.
We forecast the number of licence fee payers as a share of the total number of households in the UK. This share is trending downwards slowly over time, mainly reflecting an ageing population (as over-75s receive a free TV licence) as well as decreasing TV penetration (reflecting a decreasing proportion of properties requiring a licence). We forecast this share to fall in line with previous trends. This decline is partly mitigated by the fact that a licence is now required for anyone consuming non-live content through BBC iPlayer, whereas a licence was formerly required only by those consuming live content.
Our current spending forecast is driven by licence fee income and historical experience that the BBC is able to manage its spending in order to live within its borrowing limit. Upward cost pressures from, for example, growth in wages and salaries or the cost of goods and services are assumed to be offset by expected efficiency savings. In reality, if total spending exceeds total income, this is financed by borrowing or drawdown of reserves.
Included in the current spending forecast is the Government’s decision to phase out grants that compensate the BBC for the licence fee revenue forgone by requiring it to provide free TV licences for those aged 75 and over. The licence fee is a tax in the National Accounts. Provision of free TV licences is therefore in effect a tax relief, so it does not affect overall public spending. DWP currently compensates the BBC fully for that forgone revenue, so that BBC income is unaffected. As the current arrangement is an intra-public sector transfer, spending and borrowing are also unaffected. However, the Government will begin to withdraw this funding gradually from 2018-19, with the BBC bearing the full cost of the change by 2020-21. This has the effect of reducing current AME spending by the BBC, relative to a situation where it was still fully compensated.
The small amount of BBC capital spending is aligned to the BBC’s capital spending plan, which is relatively flat over the forecast period (at between £0.1 and £0.2 billion a year).
Main forecast determinants
The main determinants driving our receipts and spending forecast are:
- CPI inflation: the licence fee was frozen for the previous charter period (up to 2016-17), but thereafter is assumed to rise in line with our CPI inflation forecast. This additional receipts income is assumed to finance current expenditure (since capital expenditure is forecast in line with the BBC’s capital spending plan); and
- households: the projected number of UK households, which reflects the latest ONS 2014-based principal population projections.
Main forecast judgements
The forecast for both spending and receipts is commissioned from the BBC directly given the BBC’s expertise in this area. The key forecast assumption that we focus on is the proportion of households expected to pay the licence fee, which drives the receipts forecast and, by assumption, the current spending forecast. This proportion has been on a downward trend, which we assume will persist over the forecast period despite requiring households consuming non-live content via iPlayer to purchase a licence.