Labour faces cash crisis after going £26m into red

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The Labour Party has plunged £26m into the red despite securing £14m of secret loans at the heart of the "cash-for-peerages" affair.

Accounts submitted by Labour to the Electoral Commission, the official watchdog, show that the party lost £14.5m last year, on top of a deficit of more than £11.5m.

And Labour member-ship, which peaked at more than 400,000 in 1997, has dropped below 200,000. The party tried to play down the cash crisis. A spokesman said: "The Labour Party is in a stable financial position despite the period after a general election always being extremely challenging."

But some officials fear the party will struggle to raise funds from individual donors because of the damaging publicity over the four donors whose nominations as peers were blocked by the Lords Appointments Commission. Officials say it is important for Labour to reach a cross-party agreement for parties to receive millions of pounds more of taxpayers' money.

But any attempt could provoke a huge internal Labour row by questioning the party's traditional links with its trade union founders. This week's left-wing weekly Tribune says that some of Tony Blair's senior aides are backing Tory proposals for a £50,000 cap on individual donations, putting the unions' funding of the party in doubt.

And Electoral Commission figures are expected to show that the Conservatives have a record deficit of almost £30m after spending £18m on Michael Howard's unsuccessful campaign to dislodge Labour.

The Liberal Democrats spent their record donation, a £2.4m gift from Michael Brown, a Majorca-based tycoon, during the election. He now faces charges in Britain including forgery, perjury and false accounting, which provoked fears that the party might have to repay the money.

Four people who invested funds with Mr Brown, including Martin Edwards, the former chairman of Manchester United, allege they were defrauded, and have threatened to sue the Liberal Democrats. The party says it has been advised it will not have to return the money because it was accepted in good faith.

The Tories, who borrowed £16m from 13 wealthy supporters, have repaid £5m to other lenders, including foreign nationals, who wished to remain anonymous. The Liberal Democrats owe £850,000 to three backers, their trade and industry spokesman Lord Razzall, the businessman Paul Marshall and the textile millionaire Lord Alliance.