Current director-general Lord Hall has described the agreement as the “right deal” in “difficult circumstances”.
But Lord Birt, in charge of the BBC from 1992 to 2000, led a chorus of criticism from peers for the plan, set out by Culture Secretary John Whittingdale.
“This is a deeply shocking announcement,” Lord Birt said in the House of Lords
“The BBC has been in existence for almost a century. It is unique in the world for a number of reasons, one of which is that very early on its history Winston Churchill tried to take it over at the time of the General Strike.
“The then director general, John Reith, resisted it and essentially established its independence in a way no other public service broadcaster around the world has managed.
“That independence was breached in the last parliament by the deal when overnight, without any debate of any kind whatsoever, essentially 16 per cent was taken outside the BBC’s budget and the government, not the BBC, decided to use the licence fee to fund the World Service, S4C and, amazingly, BBC Monitoring, which is a very specialist service not much to do with broadcasting.
“This has happened again, taking a huge slice out of the BBC’s budget.
“Again it happened with no public discussion of any kind.
“This government and the last government have essentially set a very dangerous precedent.”
Mr Whittingdale earlier told the House of Commons that the process would be phased in from 2018-19 with the BBC paying the full bill from 2020-21.
He also announced legislation would be brought forward in the next year to “modernise the licence fee’’ to cover public service broadcast catch-up TV – an apparent nod towards charging people who use the iPlayer.
The BBC licence fee of £145.50 is also expected to rise in line with inflation.
Shadow culture secretary Chris Bryant said Labour would oppose the government’s plans if they are a “smash and grab raid” on the BBC.
He criticised the “utter shambles” as he hit out at proposals being briefed to the media and spoken about by Chancellor George Osborne ahead of Wednesday’s Budget.
Mr Bryant said: “There was a time when Chancellors were forced to resign because elements of their Budget were leaked.
“Now we actually get every single element of it briefed deliberately and then he has the chutzpah to pretend this is a proper process.”
Mr Bryant said the process of charter renewal and agreeing the BBC’s financial settlement must be “open and transparent”, adding licence fee payers must be consulted.
Addressing Mr Whittingdale, the Labour frontbencher said: “I’m sure you’re going to agree this is no way to run a whelk stall let alone the world’s most respected broadcaster.”
He said the BBC must join all public bodies in making savings during straitened times, adding: “But the BBC is the cornerstone of the creative industries in this country and viewers and listeners want a strong BBC making programmes that inform, educate and entertain.”
Mr Bryant said the announcement from Mr Whittingdale revealed a “shabby little deal”.
He asked when the charter renewal process will be explained to Parliament, if the BBC will have the power to end free licences for the over-75s, and whether the government was planning to cut the corporation’s income by £650 million, £800m or £1 billion.
Mr Bryant also asked if the BBC would be allowed to charge for use of the iPlayer and if those who have a licence fee will be required to pay extra for iPlayer use.
He went on to say to Mr Whittingdale: “If there is a means of protecting the public finances and at the same time securing the BBC’s future, we will wholeheartedly support it.
“But if this is just a smash and grab raid on the BBC, if it ends up undermining the BBC, then we will oppose you every step of the way.”