Leading article: The State must make its contribution to democracy

Party funding was the issue that tormented Tony Blair during his final years in office. Towards the end, he governed against the background of a police investigation into "cash for honours". Now a whiff of sleaze hovers over Gordon Brown, with the revelations that a donor gave large sums of money through the names of individuals who had no association with the Labour Party.

Is it not extraordinary that, after Mr Blair got into so much trouble, a senior Labour official appears to have tolerated other ways in which a donor could retain his anonymity? Not surprisingly, the resignation of the party's general secretary has prompted questions about whether others also knew what was happening.

At his press conference yesterday, the Prime Minister was unequivocal about the limit of his awareness, stating that he had no information about the donations until the news broke last weekend. At very least, his ignorance suggests the working arrangements of the Labour Party need to be urgently reviewed. It is bizarre the leader was not informed of such large donations.

If we can take his words at face value, Mr Brown did not know and so cannot be held responsible. The deputy leader, Harriet Harman, is in a more awkward position, having accepted a donation for her deputy leadership campaign. Hilary Benn, it transpires, turned down a similar offer – which makes it odd for Ms Harman to claim she had no idea that the donation to her campaign came from someone seeking anonymity.

Mr Brown has done what leaders tend to do when an embarrassing story erupts around him. He has called a review. The investigation must be thorough and candid. It must not be a vehicle for killing off a story. Labour made much of its new rules for transparency of party funding, yet the party seems to have gone to great lengths to avoid being transparent ever since.

There is, though, a much bigger question lurking than the one relating to individual ministers and Labour officials. Both Labour and the Conservatives have been tainted in their attempts to raise money. As with the naval arms race in the build-up to the First World War, the parties compete for the biggest war chest, as if the cash itself brought victory. Even some Conservatives are uneasy about their current dependence on the cash of Lord Ashcroft and the influence it gives him within their party.

Labour's crisis is even worse given its previous problems over cash for honours. The apparent failure to learn from the traumas of the immediate past is further evidence that major reforms of party funding are required. They should proceed from the premise that healthy political parties are essential for a properly working democracy. If parties did not exist, there would be a dangerous vacuum.

Clearly, there should be strict limits on the amount the parties can spend, as they have a tendency to waste money in an attempt to keep up with the equally reckless expenditure of their opponents. And there must still be scope for voluntary contributions that are transparently donated.

But there must also be a proportion of money provided by the state. There would then be less temptation for parties to bend or break the rules. Sir Hayden Phillips has been seeking a consensus on funding, so far without success. His route has been blocked by the parties' posturing self-interest. After this latest crisis for Labour, and others that have erupted in the past over the Conservatives, it is surely in the parties' self-interest to agree on a package with Sir Hayden and implement it as a matter of urgency. This would be a tiny price to pay for democracy.