Joan Smith: The whim of wealthy men

When Peter Mandelson remarked nine years ago that Labour ministers were "intensely relaxed about people getting filthy rich", he cannot have had any idea of how much trouble the party's relationship with wealthy businessmen would cause Tony Blair in the last 16 months of his premiership. Three days ago, it emerged that no one was to be charged in the so-called cash-for-honours investigation which led to Blair being interviewed by the police as a potential witness on three occasions. Four people, including two of his closest aides, were arrested in the course of the inquiry into whether honours were offered in exchange for party donations. Over a period of months, the nation was transfixed by the spectacle of Blair's chief fund-raiser and tennis partner, Lord Levy, angrily protesting his innocence; and the then prime minister's director of government relations, Ruth Turner, being arrested at dawn and taken in for questioning.

This weekend, after the Crown Prosecution Service confirmed on Friday that no charges are to be brought, angry questions are being asked about the way Scotland Yard conducted the £800,000 investigation. The inquiry repeatedly hit the headlines, inspired by a series of apparent leaks, and the perception persists that it has further damaged the public image of politicians in this country. Labour MPs and people close to the former prime minister are furious that the police devoted so much time and resources to what they say was a politically motivated complaint by a Scottish National Party MP, Angus MacNeil. The leader of the Liberal Democrats, Sir Menzies Campbell, said last week that the whole affair had "diminished politics and politicians in the eyes of the public".

The real problem for the Labour Party – not to mention David Cameron's Conservatives and the Lib Dems – is that the end of the investigation leaves important questions unanswered. One, obviously, is about how politics in this country should be paid for at a moment when there is little public enthusiasm for the idea of further state funding of political parties. Another is about the whole process of wealth creation and its relation to growing inequality, which brings us back to Mandelson's provocative observation in 1998. It was intended as a reassurance to the City, an illustration of how much Labour had changed under Blair's leadership, but for many it demonstrated a moral vacuum at the heart of New Labour.

After years of opposition, the Labour Party was so desperate to show that it no longer wanted to squeeze the rich that it ended up appearing to court people who did not share its egalitarian ideals. During Blair's premiership the wealth of Britain's top 1,000 quadrupled. The population is nothing like as tolerant of this extraordinary burst of personal wealth creation as Mandelson and his friends, with almost three-quarters of people in a 2004 British Social Attitudes survey saying that the gap between rich and poor is too large. Last week a new report from the Joseph Rowntree Foundation confirmed that there is a high degree of public frustration with current levels of inequality, no doubt fuelled by the realisation that some of the country's richest men (and they usually are men) are benefiting from tax breaks available to the bosses of private equity companies.

As the UK faces the highest levels of inequality for four decades, the Rowntree report paints a damning picture of a society in which poor and wealthy households are increasingly segregated. Rich areas in south-east England have become disproportionately wealthy, while in some inner-city areas more than half of all households are now "breadline poor"; they have enough to live on, but they do not have access to the opportunities that the rest of the country takes for granted. This trend accelerated during the 1990s, with the personal wealth held by the richest 1 per cent of the population growing as a proportion of national share from 17 per cent in 1991 to 24 per cent in 2002.

At the same time, the tradition of individuals joining political parties and paying regular subscriptions has been eroded, while the cost of fighting a general election has soared. Raising money is a top priority for all three main parties and they are increasingly reliant on a few big donors, some of whom are reluctant to have their contributions made public. This is the background to the cash-for-honours inquiry, which was set up to look into whether wealthy businessmen who made loans to the Labour Party had been promised peerages in return. The Labour Party isn't alone in running into trouble because of its connections with such entrepreneurs; last autumn the Lib Dems were acutely embarrassed when their biggest donor, the Scottish tycoon Michael Brown, who gave the party £2.4m, was jailed for two years after admitting perjury and obtaining a passport by deception.

There are numerous risks for politicians in chasing a group of men who are sometimes admiringly called the New Philanthropists, but there are few signs that bad publicity has deterred political parties from seeking donations from wealthy individuals. Last year, the Tories increased their donations from £20m to £24m, while Labour – which is facing an acute cash crisis – dropped from £21m to £12m. Last week it was the Tories' turn to find themselves in court when the son of one of their biggest donors, Serbian-born Branislav Kostic, argued that his father was suffering from "insane delusions" when he left £8.2m to the party in 2005.

Last week another modern-day philanthropist, the Scottish self-made retail billionaire Sir Tom Hunter, promised to give away at least £1bn to good causes – charities rather than political parties – before he dies. Hunter has joined an elite club of people who have made so much money that they are able to give away sums that most of us cannot even visualise; he has already donated £125m to charitable causes, including £50m to the Clinton-Hunter Development Initiative, which supports economic development, healthcare, water and sanitation projects in Africa. Hunter is usually mentioned in the same breath as the hedge fund investor Chris Hohn, who has promised £230m to a children's charity run by his wife, and the financial trader Peter Cruddas, who is giving £100m to good causes which include The Prince's Trust and Great Ormond Street children's hospital.

Such donations are usually regarded as non-political, a harmless exercise in what's called "soft" power; they inspire admiring profiles, as though it is a practice with absolutely no downside. Yet a moment's consideration is enough to demonstrate the lack of democratic oversight at most private foundations, and while wealthy people may choose to support causes of which we all approve, such as improving healthcare in Africa – one of the aims of the foundation set up by the Microsoft billionaire Bill Gates and his wife Melinda – they may just as easily make decisions which appear capricious or downright perverse. Some wealthy evangelical businessmen withhold money from organisations that support gay and women's rights, and the Gates Foundation has been criticised by conservatives for supporting NGOs that provide contraception and abortion.

Despite the generosity of men such as Hunter, there is a widespread sense that there is something wrong with a society in which growing numbers of wealthy people are able to use their money to fund pet causes – or keep it for themselves. Hunter himself is aware of this, admitting last week that "you've got to take care of these things if wealth creation is still going to be seen as a positive force by the rest of the population". No doubt the Labour Party under Gordon Brown would endorse his sentiments, but the fact remains that for every billionaire who decides to do something to combat Aids or malaria, there is another who prefers to buy yachts, wives or football clubs. Take, for example, the Russian oil tycoon Roman Abramovich, who was named the second wealthiest person in Britain last year in The Sunday Times Rich List, with a fortune estimated at £10.8bn. Abramovich supports Jewish charities in Russia and Israel and has sponsored art exhibitions in London. But he is best known for his collection of luxury yachts, jokingly known as Abramovich's navy, and his ownership of Chelsea football club, which he acquired in 2003.

Abramovich's purchase of Chelsea was controversial, fuelling spiralling prices for players, but it was also a smart political move, giving him a high profile in the UK. While he says almost nothing publicly, Abramovich has become instantly recognisable to football fans, protecting him from the jealous gaze of President Putin. Other Russian oligarchs have ended up in jail or claiming asylum in this country; only last week another Russian oil billionaire, Boris Berezovsky, claimed he was warned by British intelligence to expect an assassination attempt in London. Berezovsky is currently being tried in absentia in Moscow, accused of embezzlement, and his calls for Putin's government to be replaced may be seen as an extreme version of the kind of political manoeuvring other billionaires carry on behind the scenes.

While London's wealthy Russian exiles may be a special case, there is compelling evidence not just that we are entering a new age of oligarchy, reminiscent of the US in the 19th century, but that it is corroding public trust in the political process. The names of the men who literally built America – Carnegie, Frick, Vanderbilt, Rockefeller – are familiar to this day; in a striking parallel with contemporary Britain, some of these tycoons had a highly developed sense of social responsibility and gave most of their money away. The Scottish-American steel tycoon Andrew Carnegie, who was originally from Dunfermline, gave away the equivalent of $4.3bn in his lifetime; he founded more than 3,000 libraries in the US, poured money into good causes in Scotland and left the remainder of his fortune to charity when he died in 1919. Carnegie was politically engaged, devoting his spare time to writing books on politics, and regarded his enormous wealth as a means of promoting his ideas about education and democracy.

There could hardly be a greater contrast than the railroad pioneer Cornelius Vanderbilt, who has been described as the second wealthiest person in American history, with a fortune estimated at the time of his death in 1877 at more than $100m (a staggering $143bn in today's money). Vanderbilt was an admirer of Victoria Woodhull, a colourful advocate of female suffrage who in 1872 became the first woman to run for the US presidency, but he did little to promote women's equality, leaving only half a million dollars each to his wife and eight daughters. His son William got the bulk of his fortune, with next to nothing going to good causes.

The moral is that wealthy men are no more likely to be generous than poor ones; even such contemporary philanthropists as the Irish rock band U2, whose lead singer Bono never misses an opportunity to lecture political leaders about increasing aid to Africa, were revealed last year to have moved their financial affairs to the Netherlands in order to halve their tax bill. Private philanthropy is unreliable, in other words, and our increasing reliance on wealthy entrepreneurs to fund everything from clean water in the developing world to British political parties is a symptom of profound malaise.

Over the past couple of days, the players in the cash-for-honours affair have been having their say, with Blair and Lord Levy grinning ear to ear, and Scotland Yard forced on to the defensive. Speaking in Paris on Friday, Gordon Brown said he wanted to "move ahead" with modest reform of political funding, exactly a week after he had to order the return of £10,000 to a convicted rapist, the Blackpool businessman Owen Oyston, who was invited to attend a fundraiser at Wembley. If the Prime Minister really wants to signal a break with the past, he could start by being less relaxed about the party's relationship with wealthy entrepreneurs. Political leaders need to remember that it isn't called filthy lucre for nothing.

Further browsing 'Poverty and Wealth Across Britain 1968-2005' by the Rowntree Foundation: www.jrf.org.uk/knowledge/findings/housing/2077.asp

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