Politically bankrupt

Politically bankrupt - Labour and the Tories are heavily in debt. Who should bail them out? The cry of sleaze goes up when rich donors chip in, while proposals for state funding enrage the taxpayer - especially when the parties are so profligate at election time. Could business models help them sharpen up? Andrew Pierce reports.

by Andrew Pierce
Last Updated: 31 Aug 2010

Labour and the Tories are heavily in debt. Who should bail them out? The cry of sleaze goes up when rich donors chip in, while proposals for state funding enrage the taxpayer - especially when the parties are so profligate at election time. Could business models help them sharpen up? Andrew Pierce reports.

The finances of both our main political parties are in a chronic state. If they were publicly listed firms, their shareholders would be furious. There would be calls for sackings. The vultures would be circling - only there would be few buyers.

The situation is urgent. The general election is a couple of years away and yet both parties are millions of pounds in debt. This month, there's more expense to come as the annual autumn party conference season kicks off and the begging-bowls are passed round. Under the present ludicrous rules, the Tories and Labour can spend pounds 30,000 in each of the 641 constituencies they contest. It means they can each lavish up to pounds 19.23 million on a three- or four-week election campaign. Last time, more than pounds 10 million was spent by both parties in the most one-sided election since, er, 1997. It is the politics of the madhouse and the principal reason why the image of political fundraising has become so tarnished.

The resignation in June of the Tory Party treasurer Sir Stanley Kalms, under pressure from the leadership, underlines the scale of the difficulties facing Her Majesty's Opposition. The party reported a year-end deficit of pounds 1.64 million in 2002. George Magan, Kalms' successor, a persuasive dealmaker who mingles effortlessly with City plutocrats, has a daunting task ahead of him.

He was co-founder of the merchant banking boutique Hambro Magan, which earned him about pounds 15 million. He reputedly raised pounds 33 million for the Royal Opera House. There are few places where the rich congregate that he does not frequent. But he will require more than a Midas touch to make the Tories solvent again.

There is little incentive for rich donors to invest in the Tory party until there is a realistic chance of ejecting Tony Blair from Downing Street. That still seems a remote possibility - the Tories may have come out just ahead in the polls for the first time in years recently, but they are a long way off the kind of lead required to win a general election.

There is a growing fear in both main parties that they will not be able to raise the millions required for the coming general election campaign.

The Tories have an added concern. In the unlikely event of Blair turning the election campaign into a referendum on the euro, millions of pounds that would normally flow into Iain Duncan Smith's coffers would be diverted to the 'No' lobby.

It was all so different in the heady days of Thatcherism in the 1980s, when the mere hint of a knighthood, peerage, gong or intimate dinner with the Leaderene was enough to persuade overseas businessmen like John Latsis, shipping magnate and friend of the Royal Family, to write six-figure cheques.

In absolute secrecy, of course. But the relentless diet of sleaze and cash for honours (which has been around since Lloyd George's day) that so badly de-stabilised John Major's government has heralded a new era of transparency and accountability. Donations from overseas have been banned. All gifts of pounds 5,000 or more must be declared. It's possible now to discover the names of donors on the web.

In the past, the big brewers, for example, had an annual direct debit to the Tories, while the trade unions had an open chequebook for Labour. No more. Labour, with its membership in free fall because of disillusionment with Blairism and because of the Iraq war, is in the worse state. Membership now stands below 250,000, the level Blair inherited from John Smith in 1994. It has slumped from a peak of 405,000 in 1997.

Membership fees now account for only 14% of the party's income. Yet initially the Blair factor had reversed years of dwindling numbers from the high point of the late 1950s, when Labour had some 800,000 card-carrying supporters.

Forget the spin about the party's decision to move out of its purpose-built Millbank headquarters. The move to Old Queen Street was the result of frenzied cost-cutting by David Triesman, the general secretary, who is effectively Labour's party treasurer.

It has worked, to a point. Labour's accounts for 2002 show an operating deficit of pounds 924,000 compared to pounds 8.9 million in 2001. But it also has a pounds 5 million mortgage on its new Westminster headquarters, and when you add overdrafts and loans, this totals pounds 11.8 million. On a typical overdraft rate of 5.5% this could cost pounds 649,000 a year to service.

Both Blair and Duncan Smith are reluctantly beginning to accept that there will have to be a more realistic limit on the amount of money spent in the general election. An analysis of campaign budgets found that the Tories spent pounds 12,751,813 in the run-up to the June 2001 poll, almost pounds 2 million more than Labour's pounds 10,945,119. Yet Labour could have spent half the amount and still won the election by a landslide. The Tories could have spent pounds 100 million and William Hague would still have presided over the party's second-worse result for 150 years. If the Tories can permanently reduce the gap in the opinion polls, the temptation would increase for Blair and Duncan Smith to spend, spend, spend.

Charles Kennedy's Liberal Democrats spent a mere pounds 1,361,377 and yet still enjoyed their best result for decades. There is surely a lesson in that.

Once, Labour could rely on the unions. No longer. The union bosses, who long ago despaired of ever being invited into Number 10 again for beer and sandwiches, don't feel like bailing Blair out.

Sir Bill Morris, the outgoing general secretary of the Transport and General Workers Union, knighted by Blair for services to trade unions, has repaid the prime minister by challenging the historic link with the Labour party in a valedictory address. Sir Bill told senior colleagues he believes ordinary members 'don't get value for money' from the institutional ties, although he stopped short of advocating a split. His successor Tony Woodley has further increased the pressure on Labour by granting a review of the pounds 1 million-plus annual donation to the party after clashing with the Government over asylum, public services, employment rights, manufacturing and, more recently, foundation hospitals.

In June the GMB, one of Britain's biggest unions, voted to review its donations to individual MPs, including Peter Mandelson, unless they share the union's 'aims, values and priorities'. The GMB cut central donations to Labour by pounds 500,000 two years ago.

Yet after John Major's surprise general election victory in 1992, the unions accounted for 66% of Labour's income, down to 40% in 1997 and only 27% today.

The collapse in mass membership, and the deliberate fracturing by Downing Street of the historic links with the trade unions, paved the way for the phenomenal rise and rise of Lord Levy, Labour's unofficial fundraiser. A regular visitor to Chequers, Levy is one of the most trusted members of the Blair inner circle.

He is an extraordinary character: a leading member of Britain's Jewish community, a former pop music producer who has the dubious distinction of discovering Alvin Stardust, and, to the irritation of the Foreign Office, the PM's Middle East envoy.

The oleaginous, silken-tongued Levy is credited with raising tens of millions of pounds for Blair. He created the glamorous dinners where to dine in the same room as the prime minister with 500 other guests will cost you pounds 500. To be on the same table you should add a nought.

Levy has tempted into Labour's big tent the likes of Sir Ronald Cohen, the venture capitalist and one of Britain's wealthiest men, who has handed over pounds 550,000, and Charles Peel, co-founder of the stockbroker KPC Peel Hunt. He wrote a cheque for pounds 100,000 to help Labour out of its latest crisis. Cohen's close friendship with Gordon Brown was rewarded when in 1997 he was given charge of a government quango, the Social Investment Taskforce.

Levy rarely takes no for an answer. His handshake is a preposterously elaborate motion. He winds his arm back like a baseball pitcher before swooping down into your palm. Clasp, eye contact, tender squeeze, pause, lingering gaze, unclasp. While you don't exactly need to count your fingers afterwards, it is advisable to check your bank balance: this dapper little man could write the definitive degree course on how to make people part with their money.

Lord Sainsbury of Turville needed no such persuasion. He has given pounds 8.5 million to Labour since 1999, including pounds 2.5 million this year, the biggest gift in the party's history. Sainsbury's ministerial post at the DTI is not related to his largesse, of course.

Many Labour MPs and grassroots supporters worry that, like the Tories in the 1980s, the party is now too reliant on big donations from rich individuals, such as Cohen and Bernie Ecclestone, the Formula One chief, whose pounds 1 million donation in 1997, and pledge of a second million, was followed by the Government changing its policy on tobacco advertising in motor racing. Unrelated to the donation, of course.

Labour, which relentlessly pursued the Tories over sleaze, has now discovered that rich private donors are increasingly deterred by the media exposure that follows large donations. Ecclestone never came back with more. Greg Dyke's pounds 55,000 almost cost him the director-generalship of the BBC, which he had craved for years. Lakshmi Mittal must be hoping the Romanian steelworks he bought, after the prime minister intervened on his behalf, was worth the pounds 125,000 he gave to the Labour Party only weeks earlier.

The Tories are in trouble too. Their accounts for 2002 show a deficit of pounds 1.6 million, compared to a surplus of pounds 6.8 million in 2001. They receive a much greater proportion of their income - about 90% - from individual donors, which makes them far too dependent on the generosity of a dwindling number of ageing benefactors. The death of Sir Paul Getty, who gave pounds 5 million after the Tories had undergone their second calamitous defeat, has robbed them of another potential saviour. Central Office is eagerly awaiting the publication of Getty's will.

The Liberal Democrats, meanwhile, raise only a tiny amount of money from donors, although they are correspondingly more careful with their expenditure.

The central question about the funding of Britain's political parties is not so much whether there is a crisis as how it can be solved. The situation is made worse by the mounting cost of modern communications. Political life is becoming more expensive.

So what is the answer? Should it be state funding? Is it fair to demand the cash from taxpayers? In fact, the taxpayer is already providing financial support by a device known as Short Money.

The payment was negotiated in the '70s - when no-one had any money - to help oil the wheels of opposition. Blair agreed to a huge hike in the money paid to the Tories and Lib Dems after the '97 election - the Conservatives will receive pounds 3.5 million this year. It is intended to fund work in the Commons but, in reality, the Tories couldn't afford to turn the lights on at Central Office without it.

The political parties have relied on good luck for too long. Instead of asking business leaders for huge injections of cash, perhaps it's time to start asking them for advice on how to run a profitable enterprise.

The Tories tried that with Archie Norman, who had brought the moribund Asda supermarket chain back to life. But he was unable to work the same magic at Conservative Central Office when William Hague made him chief executive.

He was resisted at every turn by politicians, who bluntly told Norman that running a political party was not the same as selling beans. Norman retreated from the scene and now languishes on the backbenches, bemused by the entire political process at Westminster. Corporate cash has dried up ever since the law was changed requiring ballots of shareholders on political donations.

State funding is increasingly advocated by many Labour MPs. But there is little public appetite for it, even though the amounts would be a fraction of what the Government spends each year through the increasingly politicised Central Office of Information. Last year the figure was pounds 273 million, a rise of 146% since Labour came to power in 1997, and the equivalent of a small hospital.

There is also an official cost to spin. The amount spent on spin doctors has trebled to pounds 5.1 million a year since John Major came to power. Are spin doctors value for money? Can anyone seriously argue that Jo Moore, who famously suggested burying bad news on 11 September, was a good investment for the taxpayer?

So state funding of political parties has already arrived by the back door, but the answer is not necessarily to extend its scope. The fear in Downing Street and Central Office is that hostility to politicians would increase rather than reduce if people were aware that their taxes are being squandered on campaigns. Why should we taxpayers pay for the stupidity and vanity of politicians?

Taxpayers who are relaxed about paying for research into the merits of an Act of Parliament, which is the proper use of Short Money, might be offended if they found out their cash had been used to pay for a billboard ad for a party they loathed.

One option gathering support at Westminster is for tax relief for donations, and for these to be capped at pounds 10,000 - a form of subtle state funding.

It would mean that the current system, which is dependent on large donations by rich individuals, corporations and other groups such as trade unions, would be replaced by one that encourages parties to seek many more small donations.

It would diffuse the whiff of influence-peddling. The pot could be topped up with a small increase in funding from the taxpayer linked to the number of votes cast in general elections.

If trade unions were banned from funding Labour, the individual trade unionists would have to make a positive decision each year to 'opt in' to paying for Labour, or another party. It would create a level playing field between the two big parties.

One of the reasons why parties find it so hard to raise money is that donors believe, with reason, that a good deal of it is wasted. The poster campaigns in the last general election cost millions and probably did not change the result by a single percentage point.

The answer is for the Electoral Commission to reduce the general election spending limit of some pounds 19 million by at least half. Then the politicians would not have to go cap in hand to dubious donors who are angling for a peerage, a knighthood or a favour.

If the parties fail to adopt one of these alternatives voluntarily, a mechanism already exists to prevent them from governing in the interests of their donors. It is called voting. When Labour became too reliant on the unions in the '70s, and the Tories on foreign donations from dubious individuals, they were punished by the electorate. This control is far more effective than complicated financing laws, which can easily be circumvented.

Politicians are right to argue that properly financed parties are in the national interest. That, however, is true of a wide range of voluntary activities. It does not mean that the taxpayer should pick up the bill. Tony Blair made a pledge in 1997 to restore the integrity of British politics. Now is his chance to do it.

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LABOUR - Bernie Ecclestone pounds 1,000,000 (May '97): Ecclestone's donation had to be returned when it was alleged that his payment had bought F1 an exemption from the tobacco advertising ban.

LABOUR - Lakshmi Mittal pounds 125,000 (May '01): Caused problems when it was later claimed that Mittal's contribution had bought the Government's support for his purchase of a Romanian steel plant.

LABOUR - Dr Paul Drayson pounds 100,000 (July '01, Jan '02): Drayson's cash injection caused a huge row for the Government when his company, Powderject, later won a multi-million contract from the Department of Health to produce a smallpox vaccine for the UK.

LABOUR - Richard Desmond pounds 100,000 (Jan '01): The outcry over Labour accepting money from a pornographer intensified when a possible OFT inquiry into his Express purchase did not materialise.

TORY - Stuart Wheeler pounds 5,000,000 (Feb '01): The biggest single donation in British political history. Wheeler's eurosceptic views led to claims that Tory party policy was for sale.

TORY - Lord Ashcroft pounds 6,795, plus pounds 74,730 non-cash (since June '01): The former Tory party treasurer received adverse publicity about his business practices in Belize. The stories were never verified, but they damaged the Tories at the time.

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