Funding cap to hit Labour union donations hard

Political parties face a £10,000 cap on donations but would be compensated by a big rise in state funding, under proposals from an inquiry into how politics is financed.

The Committee on Standards in Public Life, the anti-sleaze watchdog, wants all parties to become less dependent on big donations. In a report next month, it is expected to propose small donations be matched by tax relief to encourage parties to recruit new members and supporters.

The plan to channel millions of pounds of taxpayers' money to the parties may prove highly controversial at a time of spending cuts and squeezed household budgets. However, it may provide political cover for Nick Clegg, the Deputy Prime Minister responsible for political reform, to propose a rise in state funding, a long-standing Liberal Democrat goal.

The proposed £10,000 ceiling, ending the £1m gifts from rich individuals, is much lower than the parties expected. The Conservatives and Liberal Democrats have backed a £50,000 cap. Labour may suffer the biggest headache from the review because of its heavy dependence on the trade unions, which provide about 80 per cent of its donations.

The committee, chaired by Sir Christopher Kelly, met yesterday but sources said later it had not finalised its report. If the draft blueprint is approved by the committee, it could throw Ed Miliband's plans to reform the link between Labour and its union founders back into the melting pot.

Mr Miliband wants to maintain the union link and allies say he does not want to "pick a fight" with the unions. But some advisers are urging him to dilute the unions' power in the party – perhaps by reducing their 50 per cent share of the vote at the annual conference. They claim this would help Mr Miliband throw off Tory attempts to portray him as "Red Ed" after he defeated his brother David for the Labour leadership a year ago on the back of union votes.