Party funding in Britain is a problem that will not go away. Despite the biggest overhaul for over a century just a few years ago, events in 2006 have led the prime minister to order a further review, which is being carried out by Hayden Phillips, a former senior civil servant, who will report in December. The review is charged with evaluating the case for further reform, and brokering a consensus between the political parties.
How did it come to this? After all, the reforms introduced by the Political Parties, Elections and Referendums Act 2000 (PPERA)—see the short history at the bottom of the page—have worked: party funding is far more transparent than it was, and the danger of an election spending "arms race" has been averted. When asked about "cash for peerages," it may be inappropriate for Labour politicians to claim, as they do, that it was they who passed the legislation that made party funding more open, but it is true. Reform was extensive and, critically, was achieved through consensus. Unlike the 1980s Conservative reforms to union funding of the Labour party, PPERA was not seen as partisan and the new electoral commission established by the act devoted much effort to working with all parties to ensure that the reforms worked.
But funding remains on the agenda. Why? First, the new transparency rules have encouraged more stories about party finance and therefore more public, or media, unease. Although the reporting of donations is quite legitimate and desirable, the tone has not always been reasonable. Large individual donations are not new—they began to surface in the mid-1990s. But the new transparency means that there is usually a story about a large donor each time donations are declared by the electoral commission. Days before the 2001 election, for example, the Tory party received a £5m gift from Paul Getty. Equally, Labour has received three £2m-plus contributions from Lord Sainsbury since 2002, totalling £6.5m. All three big parties have received a number of large contributions (£500,000-plus) since transparency began in 2001.
Second, the national spending limits on elections introduced by PPERA have not reduced the parties' demand for money. Parties now campaign in even more elections, partly as a result of devolution. At the same time, membership decline (a trend all over Europe) and a fall in corporate donations, caused principally by changes in corporate structure and the growth of the public affairs industry, mean that parties struggle to maintain their organisations. The result is that individual private donations have become a far more significant component of party income, which inevitably raises questions about whether such donors enjoy any leverage within the party. The evidence for this is very thin. But that is not the point: if these concerns persist, they could undermine public confidence in the political system.
The consequence of these two developments was to keep party funding under review, even after PPERA became law in February 2001. So in 2003, the electoral commission announced that it would be reviewing party funding, specifically looking at caps on contributions from individuals and institutions and the case for further state funding. It reported in 2004 and decided that the time for change had not yet come.
But events soon put party funding in the spotlight again. In the build-up to the 2005 campaign, the Conservatives and the Liberal Democrats appeared to challenge the spirit of the 2001 legislation. It emerged that the Conservatives had received a number of loans, rather than donations, over £1m. In some ways this was nothing new—the party had for some years relied on loans both from individuals and wealthy constituency associations. However, with loans, no declaration was required, provided they were made at commercial rates, thus challenging the principle of transparency established by PPERA. Moreover, some of those who made loans to the Tories could not legally have made donations because they were not eligible to vote in a British general election. The Liberal Democrats, meanwhile, received donations in the region of £2.4m from 5th Avenue Partners Ltd, a company whose registered address was in London and from which no accounts had at the time been filed. No breach of the law had occurred, yet the benefactor was actually resident in Majorca, thus again challenging a principle laid down in PPERA—the ban on overseas donations.
Then came the events of this spring. It emerged that Labour had also sought loans rather than donations, and that a number of those making them had subsequently been nominated for political honours. In fact, all the nominations were rejected by the House of Lords appointments committee, but a "loans for peerages" crisis ensued, one that has seen the arrest—but not yet the charging—of Lord Levy, a Labour fundraiser, and Christopher Evans, who had loaned money to Labour, under the terms of the Honours (Prevention of Abuses) Act of 1925. This was passed in response to Lloyd George's indiscriminate selling of honours for party funds—a custom begun in the late 19th century. Under the act, which until now has only resulted in one conviction (a Lloyd George aide, Maundy Gregory), anyone who accepts or contributes a gift with a view to enabling an honour to be bestowed may be convicted. The Metropolitan police will decide shortly whether to take their investigations further. But it will be a surprise if there are any convictions: the crown prosecution service needs a more than 50 per cent chance of success before pursuing a case and it is unlikely that evidence of the offer of a peerage for cash would be anything more than the "nod and wink" kind. Still, the police involvement is a novel departure and the political fallout will be significant, whatever the legal outcome.
The government acted swiftly to close the loans loophole by tagging a transparency provision on to the electoral administration bill, which came into force this autumn. But the loans scandal brought the whole issue of party funding back into focus—especially with David Cameron's Conservatives performing a volte face and championing the idea not only of a £50,000 cap on individual contributions, which the Tories had previously dismissed as an infringement of liberty, but also of more comprehensive state funding. The result is that the Phillips review is now considering three main areas for reform: caps on contributions, caps on spending and enhanced state funding for political parties.
Caps on Contributions
Those in favour of caps cite three principal reasons for their introduction. First, there is evidence that large contributions cause public disquiet, which undermines confidence in the political system. Introducing caps would not cure this, but it would help. Second, it is both undesirable and impracticable for parties to rely on large contributions: undesirable because contributors might enjoy leverage in the party, impracticable because the withdrawal of a contribution could cause a party significant financial problems. Caps, it is argued, would encourage parties to widen their base of financial supporters. Third, with Britain now increasingly a multi-party system, parties that do not receive large corporate or trade union contributions are disadvantaged.
Others, however, consider caps an infringement of liberty. Public disquiet is not a reason in itself to impose extra rules on top of the transparency requirement, and there is scant evidence that contributors of large sums enjoy any leverage. Perhaps the most politically potent opposition comes from some within the Labour party who are anxious that caps could affect the relationship between the party and trade unions. They argue that the party's structure, with both associations and individuals being members, means that a contribution cap would threaten the position of affiliated organisations.
The case for contribution caps is not clear-cut, yet politically a "do nothing" or "do little" approach may be hard to sustain. If caps are introduced, parties will still need money, so other reforms will almost certainly accompany caps, either to reduce the parties' need or to compensate for the likely loss of income.
Caps on Spending
A second suggested reform has been a lowering of the cap on national spending introduced by PPERA. Currently, the amount a party can spend campaigning at national, rather than constituency, level is a function of the number of seats it contests. Parties may spend £30,000 per seat, meaning that the three largest parties could theoretically spend £18.84m if they contested all 628 seats in Great Britain. At the 2005 election, the Conservatives spent £17.85m, Labour £17.94m and the Liberal Democrats £4.32m. At constituency level, the Conservatives spent a further £4.63m, Labour £4.18m and the Liberal Democrats £2.5m. Recent Conservative proposals have included reducing the national cap to £15m—a seemingly arbitrary figure, but one that sounds sufficiently lower than the often-misquoted maximum of £20m. Here, there does appear to be some consensus between the parties—albeit a misguided one. The parties are queuing up to say "curb our extravagant behaviour." Yet the sums involved are already relatively modest, owing, in part, to the ban on political advertising through broadcast media which keeps spending on British elections at a far lower level than in many other countries. (The graph below shows where parties spent their money in the 2005 campaign.)
The logic of a spending cap reduction is that it will reduce demand for income, thereby compensating for any contribution cap and reducing the need for parties to raise so much money. The common perception is that parties have too much, and that money spent on election campaigns is wasted (billboards are often singled out for no good reason). But the idea that parties only raise money to fight general elections is wrong. Political parties are permanent organisations, with recurring costs such as salaries and rent that account, on average, for about 80 per cent of expenditure. And devolution means that parties are fighting major elections almost every year—Europe, Scotland, Wales, London, as well as staggered local government elections.
The logic also betrays an ignorance of what actually drives contributions. Party income patterns are a function of the general election cycle. Income is largely driven by elections and any greater limit on election spending would probably be a disincentive to contribute—donors respond to what they see as genuine and necessary pleas for election money, not to pleas about the day-to-day business of running a party. Also, reductions in spending limits may well have repercussions for electoral engagement. Elections are, among other things, a form of political education. They force citizens to make choices: to vote or abstain; to vote for one party or another. Political engagement is enhanced by the "event" of the elections. However, it is also clear that parties target their resources on key seats. This is perfectly rational behaviour—the parties' first priority is to win elections; increasing turnout is a secondary concern. Yet a key complaint of those who abstain or who are disengaged is that the election feels as though it only takes place in target seats. Further restrictions on spending will exacerbate this, since fewer resources will lead to even greater targeting.
Finally, parties are not the only ones who campaign in elections. Pressure groups and, of course, the media are key players too. PPERA restricted the sums that individual "third parties" could spend at elections, thus ensuring the primacy of parties in electoral contests, as long as the third-party campaigns were reasonably symmetrical, supporting or opposing political parties in equal number. Third parties that register with the electoral commission can spend up to 5 per cent of a party's maximum national spend—around £940,000; unregistered third parties can spend up to £25,000. But PPERA does not cover campaigns in the mass media. As all parties know, media coverage of elections is rarely even-handed—many newspapers pursued an anti-Labour line during election campaigns in the 1980s and early 1990s, and the Tories have suffered similarly more recently. Thus any attempt to reduce party spending limits would benefit "third parties" (pressure groups and the media) over political parties. Political parties may be many things, but they are at least accountable through the ballot box—third parties are not. In sum, there is a good case to be made that the national campaign limits established by PPERA were set at a sensible level, and the case for their reduction is at best not compelling, at worst potentially damaging.
State Funding
Parties, as we understand them, cannot survive on the basis of membership subscriptions alone—that is why they solicit donations. Yet if income is restricted through caps, it needs to come from somewhere else, and one potential source is the state. Opponents argue fervently that they do not wish their taxes to be spent on parties whom they oppose, and that market forces should apply—if parties cannot raise sufficient income voluntarily, they should scale down their activities. And, we're told, the public would never support it.
Supporters point out that we already have some state funding, both in monetary terms for parties in parliament, and "in kind" for parties fielding candidates at elections, such as a free mailout and use of local authority facilities for public meetings. In addition, the three main parties receive four party election broadcasts, while all parties that field more than 50 candidates are entitled to at least one, with broadcasters contributing the airtime. So the principle of paying for parties was established long ago. Moreover, if parties die through lack of money, what will take their place? The most likely candidates are single-issue organisations funded by rich benefactors, not collections of like-minded individuals or plucky independents. Advocates of the free-market principle should ask themselves if the Referendum party represents a good model for the future. There is also a case to be made that we all benefit from parties, regardless of whether we support individual ones. Parties offer policy alternatives, stimulate debate and ensure that democracy is not the preserve of only those who can afford it. We all benefit, as we do from other public goods, yet there is a "collective action" problem at present since only a few of us are willing to fund parties. Thus there is a case to be made that the state should support the parties that benefit us all. Democracy costs money, and it is surely preferable that we all contribute to its wellbeing rather than leave it to the whims of wealthy benefactors. As for public opinion on state funding, it is in fact remarkably uneven, with polls suggesting contradictory responses depending upon the context of the survey.
For all that, state funding is not a panacea. It does not prevent corruption—scandals have continued to occur in France and Germany, where state funding is extensive. Nor should parties be funded entirely by the state—some fundraising is necessary to ensure that parties remain responsive. But if parties are to be financially enfeebled by contribution caps, something has to plug the hole. One solution is to accept clandestine funding, as has occurred in many other democracies. A second, surely preferable option is to provide extra money from the public purse, conditional on some regular measure of popular support. If neither option is acceptable then we will see the decline of representative politics through political parties, with all the uncertainties that would bring. Reforms are never cost-free, and none of those currently proposed should be considered in isolation.
The Phillips review must propose a workable way forward and do so with the broad support of the political parties. Phillips and his team are consulting widely—not just with parties, but with academics and the general public as well. Yet for all that, one option is to do nothing—the current legislation is only a few years old and spending limits have already been eroded a little by inflation. But this review is not taking place in a vacuum. With the involvement of the police and with public dissatisfaction apparently rising, changing nothing may be the most appropriate solution, but the least politically credible.
A short history of party financing
Until the early 1980s, there was a flawed consensus between the parties on party funding. The Conservatives generated the bulk of their funding from companies, Labour from trade unions. And since the Liberals were such a tiny electoral force, no one cared about their funding. Formally, there were almost no rules, save for restrictions on spending at local level and a requirement for companies to declare any donations in their annual report. This consensus was broken by Thatcher's government. As part of the Conservative trade union reforms, members now had to be balloted every ten years to determine whether their union should continue to maintain a political fund, from which payments to the Labour party were made. This move was considered by many to be an attack on Labour's finances and, in effect, guaranteed that Labour would consider further reforms when it returned to power. Calls for reform grew louder in the 1990s, when the issue of sleaze became a problem for the Major government and the Conservatives were receiving donations, particularly foreign ones, that were not illegal but that caused unease. Labour, too, had its own "influence buying" problem with Bernie Ecclestone's donation in 1997.
After it returned to power in 1997, Labour asked the Neill committee on standards in public life to consider the issue of party funding reform. The committee reported the following year and most of its recommendations were included in the Political Parties, Elections and Referendums Act 2000 (PPERA).
PPERA represented the most radical overhaul of British party finance since 1883. It introduced transparency for donations, banned foreign donations, set campaign expenditure limits at national level (a maximum of around £18.84m, depending on the number of constituencies contested) and established an electoral commission to oversee the whole process. Although a radical overhaul, it also represented a rather British response to the problem. In many European countries, the response to party financing difficulties has been to introduce state funding. Although PPERA did introduce a modest extension of state support, the response in Britain was to reaffirm the tradition of funding parties through voluntary means: donations were now subject to declaration but no limits were imposed on the size of any one donation. Beyond the restrictions on foreign donations, parties could continue to receive as much money as they could get from whoever they liked.
