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Ditching union funds is Ed Miliband's sound investment

The Labour leader is resigned to fighting the next election with less cash than the other side

Ed Miliband seems to have backed down in his dispute with Unite over the power of trade union officials in the Labour Party. The streetfight in Falkirk over the selection of a Labour candidate has been settled. Miliband has accepted that Karie Murphy, the Unite contender, had "not been guilty of any wrongdoing", while she has withdrawn from the selection.

Of these, however, the second part is more important than the first. The Unite leadership is busy claiming vindication and demanding apologies, but Falkirk has already served its purpose for Miliband. It was the opportunity for one of the finer moments of his leadership two months ago. A speech telling trade union leaders what they didn't want to hear, namely that, when their members' money is used to support the Labour Party, it ought to be as the result of a positive choice made by each individual member.

This week, Miliband will go to the Trades Union Congress in Bournemouth to restate his case in front of the very officials whose power is threatened by his reform. He will face down the ugly threat to cut off Labour funding made last week by Paul Kenny, general secretary of the GMB. I don't know if Kenny was doing it on purpose, as part of a morality play designed to make Miliband's case, but his performance as a mafioso could not have done so more effectively.

Miliband said he wanted his party's funding to come directly from trade unionists, not to be cream-skimmed from union subs by a form of inertia selling and bundled by union bosses into large cheques with conditions – implied or overt – attached. A lot follows from that, which Miliband has not yet spelt out, but which union bosses understand full well.

The union block vote – 50 per cent – at Labour conference will have to go, for a start. If union money comes direct from union members, those members will be, in effect, party members and will not need separate structures of representation. Or of misrepresentation, as opinion polls suggest: 86 per cent of Unite members support the benefit cap at the level of average earnings, for example, while their union's policy is to oppose it.

The same goes for all the other rules that give union officials a say in Labour policy, including seats on the National Executive and the National Policy Forum.

I say that Miliband will stand his ground when he addresses the TUC on Tuesday not because I have been leaked a copy of his speech or because top sources close to the leader have told me so. I know he will stand his ground because he has to.

One of the people to whom I spoke last week was a Labour MP "ashamed" of Ed Miliband's position on Syria. "Obama said chemical weapons were a red line – we should have supported him because the US is our ally and he is a Democrat." This MP said that the union link posed a similar question of "integrity and principle" for the Labour leader: "Ed said he wanted these changes – that's his red line. If he fails on this he's finished."

This is the correct analysis. Not that I think Miliband wants to avoid that test. His speech in July was a moment of leadership. The who-said-what-to-whom of Falkirk matters to the individuals involved. But for the rest of us, what matters is that Miliband set out a principled position that could cause him a lot of trouble and lose the Labour Party a lot of money. When he made the speech, he had no idea how precisely the new arrangements would work. Indeed, he still has no idea, and there isn't much time to sort out the details in time for the special party conference to vote on the rule changes next March.

But Miliband will stand firm, because he has to. Union leaders will bluster and threaten to withhold money, which will impress the hard-left factions that run these hollowed-out, unrepresentative structures. But new rules will be drawn up to give effect to Miliband's requirement that no one should be "paying money to the Labour Party in affiliation fees unless they have deliberately chosen to do so". The special conference will vote for them, with a certain amount of ritual denunciation of the leadership for its betrayal – the Labour equivalent of strobe lighting and dry ice – which will help to dramatise the change.

Then the Conservatives will be on the defensive, because their funding will be unreformed. For years they have been happy to pretend that they want to see limits on donations to political parties, but to respond to any constructive suggestion by saying that money from trade unions should be limited in the same way. Now that Miliband is ensuring that union donations should become, in form as well as in theory, thousands of individual donations, Tory stalling on limiting donations will be exposed.

David Cameron will bluster and accuse Miliband of wanting taxpayers to pay more for political parties. But Miliband knows voters don't want that. He will simply try to embarrass the Tories into imposing any limit at all, but he is resigned to fighting the next election with less money than the other side. He calculates that the political advantage is worth millions – which is a brave gamble that deserves to be rewarded.