Labour Party financial woes worst in its history

Labour leaders are planning an emergency package of spending cuts and membership fee increases in an attempt to stave off the biggest financial crisis in the party's history.

Departmental heads have been ordered to draw up plans to cut their budgets by up to 20 per cent, a move that will mean redundancies among the 100 staff at Labour's Millbank headquarters and 130 others working in the regions. Labour bosses hope the redundancies will be voluntary but one insider warned: "We are approaching crunch time."

At a meeting tomorrow attended by Tony Blair, Labour's national executive committee (NEC) will be told that the party has plunged about £8m into the red because of a "triple whammy" of wealthy donors and trade unions cutting their donations and grassroots members quitting the party.

Labour's membership has dropped from 405,000 to 280,000 since 1997 and a report to the NEC identifies policy differences with the Government as the main reason for members quitting. Officials fear a rush of resignations if Mr Blair supports military action by the United States against Iraq.

Party sources confirmed that Labour's total debts add up to about £13m, including a £5m mortgage on its new London offices. But a Labour spokesman dismissed as "nonsense" speculation that the party could not afford to run proper campaigns for next May's elections to the Scottish Parliament and Welsh Assembly.

Labour had hoped to make a £1m surplus this year to pay off some of its overdraft with the Co-operative Bank. But at a private meeting with Mr Blair last Thursday, trade union leaders were told the party is losing £1.6m a year.

The NEC is expected to agree a sharp increase in subscriptions for party members. Fees for the unemployed and pensioners are set to rise from £7 to £12 a year, and for others from £18.50 to £24 a year.

The financial crisis has added to the pressure on Mr Blair to introduce state funding for political parties. He is keen but has failed to win the Tories' support for the move and fears a public backlash.

A spate of "cash for favours" allegations this year has all but ended big donations from business leaders. At the same time, unions have cut their contributions to Labour by £3m over five years as relations with the Government fell to their lowest point since Mr Blair came to power.

Last week's meeting between Mr Blair and union chiefs had been called to discuss the party's cash crisis but was overshadowed by the surprise election of Derek Simpson as joint general secretary of the Amicus union. He beat Sir Ken Jackson, Mr Blair's closest union ally, who accepted defeat at the weekend.

Mr Simpson accused Labour of becoming "divorced from its roots" but insisted he would not urge Amicus members to cut the union's donations to Labour.

David Triesman, Labour's general secretary, told the party's rural conference in Shropshire yesterday: "We have had to reassess our priorities ... and make some difficult choices about the areas of work we would like to undertake."