Nick Clegg is to try to break the deadlock between the Conservatives and Labour over how Britain's political parties are funded.
The Deputy Prime Minister, who is responsible for reforming the political system, is considering ideas including a £50,000 cap on individual donations to parties so they do not rely on rich backers. In return, parties could qualify for tax relief on small donations in the same way as charities.
Although the Liberal Democrats have traditionally supported handing more taxpayers' money to parties, Mr Clegg is wary of proposing a huge rise in state funding while the Government is imposing big spending cuts.
Labour is nervous about his planned reforms. It suspects Mr Clegg is in cahoots with the Tories to produce reforms that harm Labour by including its trade-union donations in any cap. "That could bankrupt us," one Labour source said. Allies of Mr Clegg insist he wants to reach an all-party consensus. However, they do not rule out legislation if no deal can be reached. "This is not a stitch-up, it is a serious attempt at reform. But Labour cannot have a veto," one said.
Mr Clegg said it is unhealthy for Labour to rely largely on trade-union donations and taxpayers' grants to opposition parties. The Liberal Democrats lost their opposition money when they entered the Coalition last year and their officials are keen to see a new settlement on funding.
The Government's proposals will be finalised after an independent inquiry into political funding reports in October. The Committee on Standards in Public Life, chaired by Sir Christopher Kelly, will draw up its report next month. It is considering a cap on donations, with parties compensated by tax relief or matching state funds for small donations.
In evidence to the committee, the Tories and Liberal Democrats backed a £50,000 ceiling on donations, while Labour floated the idea of a much lower £500 cap.
Recent attempts to reform funding stalled after failing to resolve the big question of Labour's union links. The Tories want their donations included in any cap, but Labour argues it should be exempt because union-affiliation fees represent small gifts by three million members who pay the political levy.
Official figures published yesterday by the Electoral Commission highlighted Labour's dependence on its union founders. Between April and June, unions contributed about £2.7m of the £3.2m received by Labour. The biggest payments were from Unite, Unison, the GMB, the shopworkers' union Usdaw and the CWU communication workers' union.
Labour received £178,234 from individuals and £124,026 from companies. Labour also benefited from opposition party grants of £1.6m.
Between April and June, the Tories received donations that totalled about £4.2m, including £2.4m from individuals and £1m from companies.
The Liberal Democrats attracted £972,954 in donations, including £261,903 from individuals and £569,329 from companies, including two venture-capital firms – Brompton Capital Ltd and C&C Alpha Group.