Gordon Brown is set to outlaw big donations to local political parties between general elections to prevent the millionaire Lord Ashcroft bankrolling Tory campaigns in marginal seats.
If the Tories refuse to back new limits on constituency spending, ministers are expected to bring in new curbs. Such a move would be controversial, since Labour would risk being accused of changing the rules to enhance its election prospects.
Labour would prefer to proceed by all-party consensus. It hopes the Tories will back new local spending limits in return for Labour promising that one-off donations by trade unions would count towards a new cap on individual contributions worth about £50,000.
But there is little sign of agreement as talks between the parties resume. Some Tories favour a limit and believe Lord Ashcroft's huge donations are unhealthy for democracy. But David Cameron is thought be reluctant to halt the operation in key marginal seats being funded and mastermined by his deputy party chairman.
Labour MPs fear Mr Brown's decision to scrap plans for an immediate election will allow Lord Ashcroft to mount an 18-month election campaign in the marginal seats that will decide the next election, now widely expected in 2009. They say their constituents are already receiving personalised letters from the Tories in mailshots costing tens of thousands of pounds, and that Labour does not have the money to compete.
At present, the law allows parties to spend £30,000 in each constituency and candidates about £10,000 on their election campaign but the limits kick in only when the poll is called. There is nothing to stop parties campaigning before then.
Ministers admit the issue is sensitive but believe they could justify a change in the law as fair, arguing that a "level playing field" would also help the Liberal Democrats and smaller parties.
They are studying the impact of spending by Lord Ashcroft and two other wealthy Tory donors at the 2005 election. Between them, they funded 24 of the 36 seats gained by the Tories, allowing the party to outspend Labour in 19 of the 23 constituencies it won from Labour. The Tories spent 2.4 times as much as Labour in these seats. The average swing in the targeted seats the Tories won was 4.5 per cent, compared with a national average of 3.1 per cent. Labour MPs pressing Mr Brown to act say the problem will be more serious at the next election. In 2005, the local spending by Lord Ashcroft and his allies had to be disclosed to the Electoral Commission because the money was given to constituency parties. According to Labour, the "Ashcroft money" is now being paid by Conservative Party HQ and so will not be revealed.
Although a cap on donations could form part of the proposed law on party funding, that would not stop the Tories using money already given by Lord Ashcroft unless new local spending limits were introduced. The Tories are said to have already built up a £10m war chest.
The Tories claim the current system gives an unfair advantage to the sitting MP, who can spend a new £10,000-a-year communications allowance on letters to his or her constituents.
The Opposition will claim Labour's reluctance to weaken its financial link with the unions is the stumbling block to an agreement on funding. Labour would include one-off union donations in the £50,000 cap but argues that affiliation fees should count as individual gifts by union members because they have opted in to paying a political levy.
The money man
* Michael Ashcroft, the 61-year-old deputy chairman of the Conservative Party, who is in charge of target seats and opinion research, is putting his own money into the marginals that will decide the next election. Critics claim he is running a "party within a party" and has more staff at Tory HQ in Westminster than the party leader and chairman combined. It emerged during the "cash for honours" affair that the peer, a former Tory treasurer, had lent the party £3.6m. He is said to be worth £800m and is ranked 89th in The Sunday Times Rich List. He is chairman of BB Holdings, which has banking and other interests in Central America, and was once the Belize government's permanent representative to the UN. Lord Ashcroft's peerage, initially blocked by a scrutiny committee, was approved after he promised to bring his tax affairs "onshore"
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