Labour 'bankrupted' by secret loans

Insiders fear the party won't be able to afford to fight the next election as repayment days loom on £10m

Labour is in no fit financial state to fight the next election because it has been "bankrupted" by the cash for honours affair, senior Labour MPs have warned.

MPs, including those on Labour's ruling body, say the party does not have the cash to pay back almost £10m in loans due to be repaid this year.

Labour figures are also bracing themselves for a massive legal bill for advice to party figures caught up in the police investigation into cash for honours.

The scale of Labour's debt is so large that all money coming into the party, which could have been channelled to vulnerable seats, will have to be diverted to pay off a huge number loans.

They include £2.3m owed to Sir David Garrard on 28 April this year; £1.5m owed to Dr Chai Patel in August and £250,000 to Sir Gulam Noon in October.

Party insiders say the party does not have enough money to pay back the loans and will have to beg the lenders to give them more time, or convert them into donations.

They say it will have to divert every penny it raises, including from the unions, to repaying the debts and will have no cash left for a general election campaign fund. In 2008, the party will have to make millions of pounds more in loan repayments, including £1m it owes to Barry Townsley who was proposed for a peerage by Tony Blair.

They warn that the cash for honours affair has brought high-value fundraising to a halt because rich donors are now wary of giving to Labour. The state of the party's finances is so bad that it is making drastic cuts, including cancelling this year's spring conference. The National Policy Forum, which helps to formulate party policy, is also cancelling weekends away to save money.

With the Tories posing a renewed threat and already investing resources in target seats, Labour insiders say the need for an election fighting fund is more crucial than ever. They warn that if Gordon Brown wanted to hold a snap election the state of the party's finances is so bad it would not be able to afford it.

The party will this year have to find £9,684,500 to repay loans ­ most of which were secret loans taken without the knowledge of party chiefs.

Bob Marshall-Andrews, the Labour MP for the Medway, said: "One of the consequences of the loans debacle is that Gordon is going to inherit a completely bankrupt party. The political implications are enormous."

Angela Eagle, the Labour MP for Wallasey and a member of its National Executive Committee, said Labour was already at a financial disadvantage to the Conservatives, who have gained about £5m a year in "short" money (grants given to opposition parties from public funds to help pay their expenses).

"Our funding is at a complete halt, partly because of the police investigation," she said. "We are well aware that unless something happens we are likely to be facing the election with no money."

The party fears that Sir Hayden Phillips' review of party funding, due at the end of the month, will propose a cap on donations at £50,000. It believes that this could put the party at a disadvantage because it does not have the number of wealthy donors that the Tories have.

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