Labour is to delay repaying its "cash for honours" loans for up to a decade as it attempts to plug a £16m black hole in its finances.
Senior officials are holding urgent talks with wealthy backers about restructuring the debts as the party struggles to stave off a financial crisis. Loans worth millions of pounds are due for review by the end of October – several of them from men who became embroiled in the honours police investigation after they were nominated for peerages.
Party bosses say their wealthy lenders will agree to put loan repayments on hold for a year to allow the debts to be restructured so they can be paid back over between seven and 10 years.
The delay will be deeply embarrassing for Gordon Brown, who had wanted to make a decisive break with Labour's controversial donors.
Accounts due to be published at the end of this month will show the party still has a net deficit of £16m and will need to slash spending this year – despite an existing programme of cuts meant to ensure Labour was living within its means.
The party has axed next year's spring conference to save £250,000 and plans to cut retainers to firms such as the advertising giant Saatchi and Saatchi and the Prime Minister's personal pollster, Deborah Mattinson.
Labour's parlous financial situation will be of deep concern to Mr Brown as he plans a political fightback starting in September. He hopes to cut the Conservatives' 20-point poll lead and silence critics calling for him to resign as Prime Minister.
Labour's fundraising has badly trailed the Conservatives' in recent months, with the cash-for- honours affair casting a pall over the party. Senior officials admit it has faced a "challenging" financial position and fear Labour's mountain of debt will stop potential donors opening their wallets if they think their cash will be swallowed up by debt repayments rather than funding campaigns. Labour sources insist bankruptcy is not imminent and that the party's operating surplus reached £7m last year, as the long-term programme to cut costs bore fruit.
Sources said that the party had increased income from subscriptions, despite a fresh fall in membership to around 175,000 from a peak of more than 400,000 in 1997. They also pointed to the success of the party's recent sports dinner, which is said to have pulled in around £600,000.
"A massive amount of liabilities have built up over many years," conceded a Labour source. "There is a huge amount of work to do for the party to achieve stability."
The loans include £1.5m from Chai Patel, the head of the Priory rehabilitation clinics, £250,000 from the curry magnate Sir Gulam Noon, £1m from the stockbroker Barry Townsley and £2.3m from the property developer Sir David Garrard. Labour sources said yesterday that all loans were at commercial rates and declared with the Electoral Commission. No one was charged following the 16-month police investigation; prosecutors found no evidence of an agreement to offer an honour for financial backing.
In a separate development yesterday, a think-tank with intimate links to Gordon Brown was found to have breached charity law by getting involved in party politics. The Charity Commission noted that the Smith Institute had employed the Brownite aide Ed Balls – now the Children's Secretary – and frequently held events at 11 Downing Street. Its trustees include three Labour peers and several Labour donors. Mr Brown had contributed to 23 of the institute's publications.
A Smith Institute event invite from January last year stated: "Britain is a better country because of the choices that voters made in 1997, 2001 and 2005. More people have what they aspire to: a job; a decent income; and a home in a community which offers support and security."
Following an 18-month investigation, the commission reported: "Due to the amount and nature of party political content in some of the institute's events and publications, the commission concluded that the institute's work was not always as sufficiently balanced and neutral as required under charity law." The commission voiced "concern" and gave the institute six months to bolster governance, affirm its independence and report back.
The shadow charities minister, Greg Clark, said the inquiry was "shocking", adding: "The Charity Commission confirms... that the Smith Institute was umbilically linked with Gordon Brown and the Labour Party."
The institute's deputy chairman, Paul Myners, a donor to Gordon Brown's leadership campaign, said that the commission's investigation had been "disproportionate" and "naive".
The creditors... and what they are owed
Richard Caring, restaurateur: £2m. The loan is under review on 180 days' rolling notice.
Rod Aldridge, chairman The Aldridge Foundation: two loans, each for £500,000.
Nigel Morris, co-founder of Capital One: £1m loan. Was due for review in June 2008.
Derek Tullett, stockbroker: £400,000. Was for review in March 2008 then rolling six months' notice.
Chai Patel, chief executive Priory Healthcare: £1.5m loan. Due for review in August.
Andrew Rosenfield, director of the Minerva property group: £1m loan. For review February 2009.
Sir Gulam Noon, founder Noon Products. £250,000 loan. Due for review in October 2008.
Gordon Crawford, founder London Bridge Software: £500,000 loan. Indefinite.
Barry Townsley, businessman: £1m loan. Due for review in October 2008.
Lord Sainsbury, businessman, Labour peer: £2m loan. Due for review in September 2008.