Labour could be ruined by proposed cap on political donations

Annual limit on funding would affect all major parties, with Labour facing a potential deficit of �13.5m

Labour could face financial ruin under plans being developed to cap the biggest donations to political parties, a Guardian analysis shows.

The independent standards watchdog is said to have agreed to recommend a new limit on donations, introducing an annual cap with figures ranging from �50,000 to �10,000 being considered. Such a move, in an attempt to clean up political funding, would end the six- and seven-figure donations to the Labour party from its union sponsors, as well as the Tories' reliance on the richest city financiers.

An analysis of five and a half years' worth of donations to the parties reveals the move would most dramatically affect Labour's funding base. If the �50,000 limit had been in place over the period, Labour's donations would have been reduced by 72%, the Conservatives' by 37% and the Liberal Democrats' by 25%.

A source close to the Committee on Standards in Public Life, which has been reviewing the party funding system and is due to report in October, said it was trying to find a way to impose a cap without bankrupting any one party.

Some committee members are arguing for more public funding for political parties, but most believe this is not achievable in the current economic climate. The debate now appears to rest on whether union money should be treated as single large donations or as multiple small donations from individual members' affiliation fees, and whether those affiliation fees should automatically go to Labour.

Union members could be given the option to donate their fee to another party in what would be the most radical shakeup of Labour's relationship with the unions in a generation, which would be fiercely opposed by union leaders.

"The thing we are going to have to decide is whether to bite the bullet and suggest public funding," the source said.

The committee, chaired by Sir Christopher Kelly, is due to meet on Thursday to decide the core issues. Nick Clegg, who is responsible for political reform, has promised to start cross-party talks on funding reform after the committee reports.

There is deep suspicion in Labour that senior ministers want to use the reforms to destabilise the financial foundations of the party. A spokesman said: "We would expect the Conservatives to stick to their promise that they will recognise that this issue needs to be resolved through cross-party consensus.

"We value the link with the trade union movement and any attempt to rewrite our constitution and deprive Labour of millions of working people's voices would leave politics a poorer place."

A Conservative spokeswoman said: "If the purpose of a cap is to deal with the perception that money can buy influence then it must apply equally to individuals, companies and trade unions, from whom the Labour party receives 85% of funding and who get extensive policy concessions in return."

A Liberal Democrat spokesman insisted that the coalition would not impose a deal on the parties. "The history of party funding reform is littered with corpses. You have to do it in consultation with the other parties," the spokesman said.

The analysis also reveals the impact a potential cap of �50,000 would have on all the political parties' already fragile balance sheets. Party accounts show that the Conservatives' extravagant spending at the last election ? outspending Labour by two to one ? and restructuring of their pension liabilities left them temporarily more in deficit last year, with a shortfall of �6.2m in 2010, which would jump by around �13m to �19.6m had their donations been capped at �50,000.

Despite its lower spending, the potential impact of the changes on Labour finances would be more severe, with more than �16m of funding disappearing from party coffers, transforming a surplus last year of �3.2m into a �13.5m deficit.

The Liberal Democrats' deficit of �335,000 expands to �1.9m. Labour separately has outstanding debts of nearly �10m, the Tories �2.6m and the Liberal Democrats �411,000.

Previous negotiations over funding failed in 2007 with the parties unable to agree a cap. Those were chaired by Sir Hayden Phillips, a former civil servant.

Phillips said the problem of the party funding system was "chronic". He urged the parties to make changes before the next scandal emerged.

But he warned that the hurdles facing reform have grown, because of the perceived closer links of the Labour leader, Ed Miliband, to the unions and because the economic climate makes it harder to justify public funding.

"When I produced my report and negotiated with the parties, public funding wasn't a big bone of contention. I think there would be much more reluctance now even though I still believe it is the right solution. The political party system is essential to democracy. It is a perfectly reasonable thing to provide a stake in the way parties are is funded."

Polly Curtis

James Ball

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