Pubs and clubs wanting to offer live music would no longer be forced to apply to the local council for an entertainment licence under a planned deregulation aimed at supporting grassroots music.

The proposal is part of a government consultation to be unveiled by John Penrose, the tourism and heritage minister, amid warnings that small venues have been abandoning live music because of the bureaucracy introduced by the 2003 Licensing Act.

While there has been an explosion in music festivals over the last decade – mirrored in sell-out audiences at large, modern venues such as the O2 in east London – research conducted in 2007 suggested there had been a 5% decrease in the amount of music played in pubs, clubs and other so-called "secondary music" venues, venues whose core business is not staging live music.

Feargal Sharkey, chief executive of UK Music, which represents the UK's commercial music industry, said: "We're optimistic that this will be positive news for the industry, and especially for emerging talent."

He added: "I'd wager that all of yesterday's Mercury music prize nominees started their careers playing in pubs or clubs. In the meantime, we'll have to wait for the actual detail of the consultation, and under what specific circumstances the requirement for a music licence would be removed."

Schools are also likely to benefit from the rules, as the requirement for an entertainment licence covers any public performance where tickets are sold. Ministers hope that "school PTA fundraisers" will also benefit from the changes.

Parliamentarians have been calling for several years for the restriction to be removed. Prior to the 2003 Act, a "two-in-a-bar" exemption existed, allowing venues of any size to put on a performance of acoustic music by one or two musicians without the need for a licence.

In 2009, MPs on the culture, media and sport select committee recommended that "the government should exempt venues with a capacity of 200 persons or fewer from the need to obtain a licence for the performance of live music" and called for the reintroduction of the old "two-in-a-bar" exemption.

However, the ministerial proposals are understood to go further than that. Large venues with a capacity of more than 5,000 would continue to be subject to premises licensing as before, but small venues would save on average £1,600 a year and be freed of the requirement to register with the council.

The Department for Culture, Media and Sport declined to comment ahead of the announcement of the consultation. Ministers are expected to legislate for the changes at the earliest opportunity, but it is unclear when the deregulation would come into effect.