The BBC is facing deep funding cuts under proposals to stop prosecuting people for non-payment of the licence fee as the government launches a consultation on the issue.

Ministers acknowledged that any change would inevitably result in a reduction in income for the national broadcaster – requiring further cuts to its output – but suggested that it was unfair to pursue individuals through the criminal courts if they watch live television without subsidising the BBC.

The culture secretary, Nicky Morgan, said that “the time has come to think carefully about how we make sure the TV licence fee remains relevant in this changing media landscape.”

She added: “Many people consider it wrong that you can be imprisoned for not paying for your TV licence and that its enforcement punishes the vulnerable.”

The results of the public consultation are likely to form a bargaining chip in the forthcoming licence fee negotiations, which will set the cost of the annual charge from 2022 onwards. The government will not challenge the existence of the licence fee itself, which is guaranteed by the BBC’s royal charter until 2027.

A total of 129,446 people were prosecuted for non-payment in 2018, and the vast majority were found guilty through fast-track prosecutions. Three-quarters of those prosecuted are women, potentially because they are more likely to be at home during the day when licensing officers call, while five people in England and Wales were ultimately sent to prison for failing to pay a fine issued by the court.

One BBC executive questioned the purpose of the government’s plans, suggesting it was setting out to undermine the corporation’s funding model: “If the courts aren’t being clogged up, if lots of people aren’t being sent to prison, what’s the issue this consultation is trying to solve?”

They suggested that the BBC instead should be supported, in line with the government’s objectives, both as a British brand exporting its material abroad and as institution that can help bring the country together at a time when it needs national healing.

The BBC’s director general, Tony Hall, stepped down last month in order to allow a successor to be appointed to handle the delicate negotiations, which come at a time when the BBC is facing both political and structural challenges. Although audiences for its traditional broadcast channels remain substantial and it continues to dominate online news consumption, executives are concerned about failing to capture the attention of younger Britons.

The television licence fee currently brings in around £3.7bn a year to the BBC. When the government last considered decriminalisation in 2015 it decided against turning non-payment of the licence fee into a civil matter, similar to how non-payment of an electricity bill can be pursued through civil courts and with bailiffs, on the basis that it would cost the BBC hundreds of millions of pounds in funding as evasion increased.

Boris Johnson’s government has shown itself more willing to take on the media and the BBC, already pulling ministers from the Today programme. The prime minister himself suggested that the licence fee is not a sustainable long-term model for the corporation.

Media analysts at Enders Analysis said the British broadcasting system was not set up to deal with a subscription service, since much television is still consumed through services such as Freeview, which have no way of making television channels password-protected. They said there was no way the BBC could compete with services such as Netflix, which is heavily indebted, especially given the US streaming service does not provide any news coverage or invest substantial amounts in distinctive British programmes.

They also dismissed a call by Match of the Day presenter Gary Lineker – one of the BBC’s highest-paid stars – to make the licence fee voluntary: “The overall result would be that some households choose to pay more as they value the wide variety and quality of output across numerous genres that the BBC provides. However, for every household that didn’t pay, another would have to pay double to compensate. The numbers simply do not stack up, and the BBC’s funding would disappear at an alarming rate, never to return.”