Members of Labour's ruling national executive were given no indication of the party's financial plight at its meeting attended by Tony Blair in London yesterday.
Some ministers believe that the debts explain the leadership's "softly softly" approach to breaking the link with the party's trade union paymasters. One source said: "While we are in the red, we need them."
But once the debts have been cleared, there will be no further obstacle in the way of the covert leadership plan to cut loose from the union barons. There is a strong suspicion at Westminster that Mr Blair will seek state funding for political parties once the Committee on Standards in Public Life has reported, next year, on party fund-raising.
In addition to a pounds 4.75m overdraft, which is expected to increase in the run-up to the annual party conference in October, The Independent has been told that Labour has a pounds 2.5m debt on its general fund, used for day-to-day running costs, and a pounds 1m debt on its general election fund. It is hoped that the unions will help to clear that debt by the end of the year.
But there are signs that the unions are becoming less co- operative. The right-wing Amalgamated Engineering and Electrical Union (AEEU), one of the party's biggest financial backers, is withholding pounds 250,000 in protest at the alleged imposition of middle-class parliamentary candidates. The union, previously noted for its diehard loyalty, took the unprecedented step of stopping the donation just before the general election campaign and has refused to release the money since.
The revelation comes in an article today in The Independent by Ken Jackson, general secretary of the AEEU, in which he defends union influence on the party and attacks Labour for marginalising "ordinary people".
A spokesman for the union yesterday accused the party of mounting a "conspiracy" against trade unionists who aspired to become MPs. "We are withholding the money as an expression of deep concern at the way candidates were selected," the spokesman said.
"We are not in a huff over the fact that our people were not chosen. There is a wider problem about the kind of people who are being promoted. The professionals are getting the seats and working people are being phased out."
Last year, the AEEU took legal action against the party over the imposition in Swindon North of Michael Wills, a television producer, as candidate instead of Jim D'Avila, an AEEU convenor.
Uncharacteristically, the engineering union has been one of the most vociferous opponents of Mr Blair's plans to reform the party's decision- making process, seemingly aimed at diluting the power of unions, which was passed 19-1 at yesterday's national executive committee meeting. In a private memorandum to Labour over the proposals, the union denounced top party figures for acting like "right-wing Trotskyists", attempting to outdo each other in the revolutionary nature of the changes they are proposing.
t The Prime Minister was facing rumblings of discontent from his own backbenches last night over growing speculation that tomorrow he will include a number of former Labour MPs who stood down at the last election in his list of working peers, writes Colin Brown.
Labour MPs said the list was expected to include Stuart Randall, whose departure in Hull West made way for Blairite trade union leader Alan Johnson, and Roy Hughes, who made way for Alan Howarth, the former Tory minister who is now Labour MP for Newport East and a member of Mr Blair's government.
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