Money – the bad smell that lingers on in politics

This attempt to clean up party funding may go the way of all the rest, says Andrew Grice

The cloud has hung over British politics for years. How our parties are funded has added to the bad smell which has turned off many voters.

They suspect that donors expect – and get – something in return for their money. The MPs' expenses scandal added to the stench. Money and politics are a dangerous cocktail, as Liam Fox discovered a week ago. The funding of his self-styled adviser Adam Werritty by businessmen contributed to his downfall as Defence Secretary. Although the official inquiry found that Mr Werritty was not a lobbyist, the affair shone a light on the murky world of lobbying.

There have been some attempts to clean up political funding. The arms race between the Conservatives and Labour, as they ran more professional election campaigns, peaked at the 1997 election. The Blair government brought in a ceiling on general election spending. It unintentionally made a painful rod for its own back by forcing donors giving more than £7,500 to be named.

But parties still needed money. More than half their income goes on day-to-day running costs, although that is not what the public see. The "cash for honours" affair, in which some people who made secret loans to Labour were nominated for peerages, fuelled voters' suspicions.

Most politicians agree in principle with the goal of "taking big money out of politics". But they can't agree how to do it. Inevitably, they come to the negotiating table determined to protect their own interests. There was a deal to be done in 2007, when an inquiry headed by Sir Hayden Phillips produced a sensible blueprint including a £50,000 cap on individual donations to parties, which would be compensated by sharing about £25m of state funding.

But Labour wanted to curb the money being channelled into marginal seats by Lord Ashcroft, while the Tories wanted a tougher line on Labour's donations from the trade unions. Some involved in the process believe the Tories didn't really want a deal, preferring to play the union card against Labour at the forthcoming election.

"Cash for honours" frightened off Labour's millionaire backers so the party became even more dependent on its union drip-feed. It is unhealthy, but Labour had nowhere else to go. The unions contribute less than some headlines suggest – about half of Labour's total income, but about 80 per cent of its donations over £7,500.

The unions will again be the potential stumbling block when another attempt to clean up the funding mess is made next month by the independent Committee on Standards in Public Life. The Tories want Labour's income from affiliation fees counted as a donation from each union, while Labour argues it should be viewed as a series of small gifts by the 2.7 million trade unionists who pay the political levy.

The committee cannot impose a settlement and the Government will make the final call. The task of trying to square the circle will fall to Nick Clegg, whose remit includes political reform. Of course, the Liberal Democrats are not unbiased observers. Lacking the big donors of the two biggest parties, the Liberal Democrats have long supported more taxpayer funding.

The word "more" is important because any talk of "state funding" for parties sends many people into a rage. It shouldn't. In addition to the aid for opposition parties, they already receive policy grants and free TV airtime for election broadcasts.

The introduction of a cap on donations by individuals and organisations would almost certainly have to be matched by some extra taxpayers' money. But the parties could and should be forced to earn it. The state could match small donations – of perhaps £5 or £10 – to give the parties an incentive to recruit more members and supporters, which would be healthy for democracy. Membership of parties has declined markedly: in the 1950s, one in 11 people were members. Today the figure is one in 100.

The problem with providing more state funding is that there is never a good time to do it. Tony Blair could probably have managed it during his walking-on-water phase, but was frightened of a voter and media backlash.

Now the Conservatives, who have long opposed more taxpayer aid for parties, argue that it is the wrong time because we are in an age of austerity. They say the public would never understand why politicians were feathering their own nest while cutting public spending and imposing a squeeze on living standards.

In fact, there probably won't be a better time to reform party funding. We are a long way from the next election, due in 2015. Instead of being on the sidelines, the Liberal Democrat leader is centre-stage, ideally placed to bang the other two heads together. Labour suspects he will favour his mate Dave and fears the legislation that follows the committee's report could bankrupt it by cutting off most union funding.

However, the signals from Mr Clegg suggest he will try to find a consensus, and not play party politics. Let's hope he can finally sweep the smelly stables clean.

Power and Money: Political Donor Scandals

Liam Fox

Resigned as Defence Secretary eight days ago after it was revealed that Adam Werritty, his friend and self-appointed "adviser", had received £147,000 in donations from businessmen to fund his foreign trips at Mr Fox's side. The official inquiry said there was a perceived conflict of interest but no evidence that the donors had sought to influence Mr Fox's decisions.

Michael Brown

The Liberal Democrats accepted £2.4m from the "offshore trader" living in Majorca before the 2005 election, their biggest ever donation. He has been on the run for three years after being convicted of a multimillion-pound theft from his clients. It emerged last month he is living in the Dominican Republic. The Liberal Democrats have declined to repay the money.

David Abrahams

In 2007 it emerged that the Labour Party had received more than £500,000 from the North-east-based property developer, channelled through several third parties including a builder and secretary. The Crown Prosecution Service again decided there was not enough evidence to prosecute.

Lord Ashcroft

The billionaire former Conservative Party treasurer and deputy chairman has donated more than £4m to the party since David Cameron became leader. Labour claims his grants to Tory candidates in marginal seats gave them an unfair advantage. It was revealed last year that he had not given up his non-domiciled tax status when he became a peer in 2000.

Cash for honours

To sidestep the Blair government's new law on disclosing donations, the Labour Party took out secret loans (not then subject to the disclosure rules) before the 2005 election on the advice of its chief fundraiser, Lord Levy. Some of the lenders were nominated for peerages. Despite a police inquiry no one was prosecuted.

Bernie Ecclestone

The Formula One boss donated £1m to Labour in 1997. It emerged after the Blair government said the sport would be exempt from its ban on tobacco advertising. Mr Ecclestone personally lobbied the PM for the exemption. Mr Blair told voters he was "a pretty straight kind of guy". The money was repaid.

Andrew Feldman: The Bullingdon Donor

A close friend of David Cameron since they met at Oxford University, Feldman worked as a management consultant before becoming a commercial barrister. He later left the Bar to take over his family's textile business Jayroma in 1995, soon quadrupling its sales and profits. In 2005, he raised money for Mr Cameron's campaign to win the Tory leadership. He was appointed deputy treasurer of the party, and helped the Tories draw up their plans to boost economic competitiveness. In 2008, he was made chief executive, with a brief to overhaul Tory HQ and oversee the general election campaign. After Mr Cameron was installed as Prime Minister, Mr Feldman was promoted to co-chairman of the party, along with Baroness Warsi. He too was rewarded with a peerage. This week, the Tories denied reports Lord Feldman was involved in raising money to fund the overseas trips of Adam Werritty.