This is taken from The Observer:

BBC licence fee increase to be slashed
Ned Temko, chief political correspondent
Sunday November 12, 2006

The government is poised to refuse the BBC's request for a massive increase in the TV licence fee and will demand a below-inflation increase to be reviewed in four years' time. The planned review in 2010 - less than halfway through the recently renewed period of the BBC's charter - marks an escalation in hostilities between the corporation and the government and prompted accusations last night that the aim was to keep the public broadcaster on a 'political leash'.

The BBC last month scaled down an initial request for a licence fee increase of 2.3 per cent above inflation to 1.8. per cent above inflation for 10 years. BBC officials made clear that anything less than that could endanger the country's switchover to digital transmission, as well as the proposed move of key departments to Manchester.

Government sources said last night, however, that both Number 10 and the Chancellor, Gordon Brown, were pressing for a settlement of 1 per cent below inflation. The sources added that even that deal was now set to be reviewed after four years. The BBC wants a deal to run for the majority of the 10-year charter period,

The message is understood to have been delivered to the BBC director-general, Mark Thompson, in a meeting with Brown earlier this month.

The latest development in the tug-of-war over the corporation's request for increases to its £3bn budget comes on the heels of calls by commercial rivals and opposition politicians for much closer scrutiny of the BBC's above-inflation request.

Senior government sources said that it still remained possible that the Prime Minister and Brown - who have been in rare agreement over the BBC - might yet be prepared to soften their stance before a final settlement is announced. That is now expected by the end of the year.

But they said the best funding deal that the public broadcaster seemed likely to get was an inflation-level increase in the licence fee - and a review period of five, rather than four, years.

Exact calculations of the effect of the current government proposal on BBC finances are difficult, because they depend on future inflation levels and the number of households in the country. But the difference between what the BBC seeks and what it is likely to get could be hundreds of millions of pounds.

Supporters of the BBC request argued last night that the prospect of a four-year review of the deal could pose an even greater problem, with what one source termed the prospect of 'keeping the BBC under political control' by forcing a renewed bout of negotiations in 2010.

But a cabinet source said that the aim of the review would be 'financial' and managerial. There was a consensus among ministers, the source said, that there was a 'need for a tighter efficiency target than the BBC has got'. The source added that the BBC's public lobbying for the increased funding, and the suggestion that major projects such as the digital switchover and the Manchester move could be imperilled, was hardening opinions towards the corporation even among sympathetic ministers.