In an ideal democracy, political parties would be financed entirely by individual membership subscriptions. But no democracy achieves this ideal. Membership subscriptions are everywhere supplemented from one of three sources: large individual donations, institutional money—primarily from companies and trade unions—or public funding. Of these three alternatives, public funding is by far the least damaging.

In Britain, only a small proportion of party funds is raised from membership subscriptions. Traditionally, the two large parties were financed primarily by trade unions and companies. In the 1970s, trade union funding comprised 92 per cent of Labour’s central income, while the Conservatives drew at least 55 per cent of their central income from company donations. The funding arrangements of the parties replicated a long-gone class war.

Tony Blair wanted New Labour to be a party of the whole nation, not merely of the organised working class. In 1995, he declared, “Nobody believes in this day and age that the business of the Labour Party is to be the political arm of the trade union movement.” By 2005, he had reduced trade union funding to around 25 per cent of Labour’s central income.

But Labour, in consequence, came to rely, as have the Conservatives, on large individual donations. Between 2001 and 2010, over three-quarters of Labour’s donation income and over half of the Conservatives’ came from donations of more than £50,000.

However, after 2000, when the parties were required to make public all donations over £5,000, many donors were deterred from giving. Therefore Labour began to solicit loans, which at that time did not need to be declared. Of 12 individuals who gave such loans to Labour before the 2005 general election, seven were recommended for peerages by Labour. Four were rejected as unsuitable by the House of Lords Appointments Commission. In 2010, Michael Farmer, a recent Conservative appointee to the Lords, told the Committee on Standards in Public Life, “You cannot get away from the fact that the word ‘peerage’ is connected to large donations, so if you are giving a large donation there is a part of your mind somewhere that every now and then thinks about it.” A large donation, while it may not enable a man to enter the Kingdom of Heaven, may nevertheless help him enter the House of Lords.

Allegations of cash for honours made Labour more wary of large donors. But, in consequence, the party has again had to rely on funding from the trade unions which now provide around 70 per cent of its central income. However, Ed Miliband, although often accused of being a tool of the trade unions, has altered Labour’s constitution so that its electoral college, in which the unions played the leading part, has been replaced for leadership elections by one member one vote. It is anomalous, therefore, that the party is still so dependent on the trade unions for its funding.

The Conservatives now rely more on large donations than on money from companies. Some large donors may, as Farmer suggests, hope for a peerage. Others hope to influence policy or gain access to ministers. In January 2001, one wealthy businessman gave £5m to the Conservatives, a sum amounting to over one-third of the central party’s annual income at that time. But he said that his financial contributions were conditional upon it remaining eurosceptic—and keeping Kenneth Clarke out of the leadership. More recently, the Conservatives have held a “Black and White” fundraising ball, with ticket prices at up to £1,500 per head. A week-long trip for 24 people to an estate in Mallorca was auctioned for a staggering £220,000—more than eight times the average annual wage. But the most popular item auctioned was a shoe shopping trip—with a £500 voucher thrown in—with the Home Secretary. Such fundraising efforts demean our politics.

A further consequence of the reliance on large donors and on institutional funding is that the parties need not bother to widen their support by attracting new members. It is far easier to obtain one large donation from a rich person than myriad small subscriptions from supporters.

A recent report from the Electoral Reform Society declared that “Whenever party funding scandals hit the news, the public aren’t surprised—in fact, they have grown to expect it.” The report found that 75 per cent believed that large donors enjoyed excessive influence, 65 per cent believed that donors could buy honours, while 61 per cent believed that the system of party funding was corrupt and ought to be changed. It cannot be right for political parties to be dependent on handouts from millionaires, nor for there to be a suspicion that donors are in effect purchasing seats in the House of Lords. Too high a proportion of the money used to finance our political parties is tarnished. That, fundamentally, is the case for the public funding of political parties.

But many believe that public funding would breach a fundamental principle of democracy. Parties, they argue, are essentially voluntary organisations and taxpayers should not be required to support parties with which they disagree. This objection, however, ignores the fact that parties are essential to the working of democracy. No democracy operates without them. “Without parties,” as Benjamin Disraeli understood, “parliamentary government is impossible.” And taxpayers already subsidise parties with which they disagree.

Since 1937, the Leader of the Opposition and the Opposition Chief Whip have been paid a salary out of public funds. This was recognition that Her Majesty’s Opposition is just as important a part of our democratic machinery as Her Majesty’s Government. In 1975, public funding was made available to sustain opposition parties in the House of Commons—the so-called “Short money,” named after the then Leader of the House of Commons, Edward Short. The Conservative-voting taxpayer, therefore, contributes towards supporting the Labour opposition in parliament.

"Millionaires already have enough influence and should not be allowed to buy more through donations."

The state also subsidises political parties in other ways. Public meeting rooms are provided free to candidates at election time and their election addresses are delivered free by the Post Office. Gifts to political parties are exempt from inheritance tax and small bequests are exempt from capital transfer tax. In addition, the Electoral Commission provides a “policy development grant” to assist parties in developing policies for inclusion in their manifestos.

The argument of principle against public funding, therefore, must be that, while it may be justifiable to subsidise the activities of the parties inside parliament, it would not be justifiable to subsidise their activities outside parliament. But why is this so fundamental a principle? Is not the distinction between subsidising parties inside and outside parliament bogus? For money paid to a party inside parliament enables it to divert resources for activities outside parliament. Is the distinction not one without a difference? The issue of public funding does not mean the introduction of a wholly new principle into British politics, but rather the extension of a principle long accepted.

With public funding, the parties would no longer need to seek money from trade unions and companies or aid from the rich. Millionaires already have enough influence and should not be allowed to buy more through donations. Many object to the trade union political levy, which they see as a means of buying influence. There are equal objections to the rich man’s political levy. There should be a cap both on individual and institutional donations, and this cap should be set very low. In 2011, the Committee on Standards in Public Life recommended that the cap be set at £10,000.

Of course, the great danger of public funding is that it could provide an unconditional subsidy to out-of-touch party bureaucracies, so increasing public disengagement from party politics. What is needed, therefore, is a system which improves our democracy by linking public funding to an index of democratic participation such as party membership. I would like to see a system by which, for every £x a party raised in membership subscriptions to constituency parties, the state would pay £x to the central party organisation. Aid to the parties would need to be triggered by the decisions of individual citizens who wished to join political parties.

This would ensure that public funding did not simply strengthen the central party bureaucracies at the expense of constituency parties, and it would provide an incentive for constituency parties to seek out new members rather than relying, as so many do, upon a small handful of old faithfuls. Public funding, therefore, could help to revive constituency parties and increase interest in and participation in politics.

A properly designed system of public funding would get rid of so many of those allegations that poison our political life—the allegation that the rich can buy influence or a seat in the House of Lords, the allegation that trade unions enjoy excessive influence over the Labour Party, the allegation that the parties tailor their policies to meet the needs of their rich donors, and that parliamentary candidates are selected by small and unrepresentative constituency organisations. The public funding of parties could make a real and genuine improvement to the health of our democracy.

But party funding has pitfalls...

It won’t work—Gisela Stuart, Labour MP

It’s not that I’ve never seen an argument for public funding of political parties. Back in the 1990s I made a speech about it to the Labour Party conference. Then it was in the context of moving to “one member, one vote” and away from block funding, whether from big companies or large trade unions.

But this isn’t the problem we face now. The public is disengaging from party politics. Many of the traditional left-right divides have gone. Managerialism is on the increase; it may be efficient, but it hardly inspires.

The answer is for parties to return to become grassroots movements again. That’s where a significant chunk of their funding should come from. This has to go hand-in-hand with transparency and constituency, as well as national, caps on donations. People make a choice about whether to put a cross against Labour’s name on the ballot paper, deliver Labour leaflets, or give money. If we don’t make a decent case that we are relevant to their lives and will make a difference, they will turn to someone else.

There is a constitutional need for “Her Majesty’s Opposition” to exist. That’s why we have “Short money” to support the Opposition. Running the process of elections also rightly comes from the public purse.

But funding of the parties themselves must come from those who support the aims of the party, not the taxpayer. And if there are worries that some people end up in the House of Lords only because they gave large donations, then tighten the system of scrutiny and reduce opportunity for patronage, but don’t lumber the poor taxpayer with the bill for politicians not being able to police the systems they themselves have created.

Finally, how about pegging party membership fees at “how much do you think it’s worth?” Shouldn’t we try that first?

It creates new problems—Michael Pinto-Duschinsky, senior consultant at Policy Exchange

Money in politics is a very serious problem, increasingly so because of the emergence of economic oligarchs. The international trend has been to introduce an ever-growing series of state subsidies as well as legal restrictions. The aim has been to limit the scope for corrupt political payments and to encourage a fairer contest between rival parties and candidates. But these remedies have not provided cures and have often been unpopular.

Polling in 24 European countries carried out in 2010 by Paul Whiteley of the University of Essex showed that “heavy regulation of political parties is associated with low levels of trust in parties.” In a few countries, such as Canada and Italy, state subsidies have been abandoned. In others, high levels of subsidy have co-existed with serious corruption.

There are many reasons why the combination of state subsidy and regulation has proved inadequate. The idea that money from public coffers satisfies politicians’ appetites, thus reducing the incentive for corruption and undue influence, is an illusion. Moreover, finance does not flow into politics only through contributions to election campaigns and party organisations. The effect of controlling party and election campaign finance alone is to divert, but not to eliminate, the contributions of the super-rich.

In a revealing article in the New Yorker, the billionaire activist Haim Saban made clear that he sought to exercise influence not only through campaign contributions but also through think tanks and media. The crucial role of buying power via the media in Britain was vividly illustrated during the Leveson Inquiry. Considerations of free speech make it extremely difficult to restrict the press, yet some media organs function effectively as political advertising.

Legislation introduced by Tony Blair’s government in 2000 to regulate party funding has been followed by an increasing use of think tanks, which sometimes operate as the external wing of parties subject only to charities law. Donors to think tanks set up as charities not only enjoy tax relief, but also are not obliged to declare their gifts.

Although UK parties have only limited public funding, state aid has steadily seeped into British political life, arguably with damaging consequences. MPs, elected mayors, local councillors and members of the devolved parliaments employ ever-growing numbers of staff. These patronage appointees have tended to replace party agents previously employed by local party organisations. The financial incentive that existed to recruit party members has largely disappeared.

Another problem is the use of public resources for the dissemination of supposedly neutral information which may be political propaganda in disguise. At the international level, the misuse of such “administrative resource” for partisan purposes has been the subject of investigation by the Organisation for Security and Co-operation in Europe and by the Council of Europe. Closer to home, the Department of Communities and Local Government has recently invoked a new legislative power to question information circulated by the London Borough of Greenwich.

After the general election, it will be all too tempting for the parties, especially for Labour and the Liberal Democrats, to seek a quick legislative fix for the undeniable problems of party funding in the UK through extensive state aid and strict donation caps. Whatever the merits of such a package, it will not get to the root of the malaise. The only effective cure will be a new attitude on the part of political leaders: a determination to reach out beyond the Westminster bubble and the circle of large donors, unions and big business alike, to ordinary party supporters.

Who pays for our politics?

But party funding has pitfalls...