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The Review of the 



Funding of 

Political 

Parties 



An Interim Assessment 
October 2006 



The Review of the 
Funding of Political Parties 



An Interim Assessment 



£18.00 



Contents 



Part 1 Page 

Summary of the Main Issues 3 

Existing Arrangements 9 

The Funding of Political Parties: A Survey of the Main Choices Involved 13 

Questions for Discussion 23 

Part 2 -Annexes 

Introduction to Part 2 27 

A - Objectives of the Review 29 

B - Process of the Review 3 1 

C - Recent Views on Party Funding 33 

D - Political Party Income and Expenditure for the Last Four Years 37 

E - Existing Public Funding 39 

F - Regulating Campaign Expenditure 4 1 

G - Financial Effects of a Cap on Donations 45 

H - Trade Unions 49 

I - Third Party Campaigning 55 

J - Ways an Incentive Scheme Could Work 59 

References 63 



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Parti 



Summary of the Main Issues 

Earlier this year I was asked by the Prime Minister to review our system of party political 
funding and to try to reach as much agreement as possible between the parties on a way forward. 
I have been asked to report by the end of this year. 

This interim assessment sets out the main issues as they appear to me, and the choices which face 
the public and the political parties. 

The purpose of publishing this assessment now is to stimulate and inform public debate, so that I 
can hear public and party reaction to the issues outlined here, and take this into account as I enter 
final discussions with the political parties. 

The role of parties 

For many people party politics is a turn-off. Party membership has substantially declined. There 
is widespread disenchantment with politicians. Yet everyone knows that parties are essential to 
democracy and there is no mature democracy anywhere in the world in which political parties do 
not play a vital role. People also know that party politics, and the abilities of those who choose to 
enter it, are of central importance to the quality of leadership, and the prosperity and the 
reputation of our country. We elect a Government through a Parliamentary democracy which is 
not about voting on single issues but about a wide range of important choices and priorities. 
Party politics is a competition to serve the public interest: that is its purpose. 

There is widespread disenchantment with party politics, not only in the UK but in many other 
democracies. Turnout at elections has fallen. So has membership of political parties. In the 1950s 
one in 1 1 people belonged to a party: now it is one in 88. When it came to power in 1997 the 
Labour Party had around 400,000 members. Now it has around 200,000. The situation is similar 
for the Conservative Party as well, which has seen a long-term decline in its number of members. 

Trust in politicians at a national level and trust in political parties are both low, and have been 
subject to a long-term decline. Polling research indicates that people feel distant from parties, and 
they feel that parties are only interested in them at election times. According to research 
undertaken by Ipsos MORI for the Committee on Standards in Public Life, trust in "your local 
MP" is relatively high at 48%, especially where the MP is seen as being active in the 
constituency, while trust in "MPs in general" is at 29%. 

While membership of political parties has fallen, membership of single-issue groups has risen. 
This voluntary activity is of course welcome, but it cannot be a substitute for party politics. 
Parties have to balance out competing claims upon government. That is why no modern 
democracy has been able to do without political parties. A healthy democracy needs healthy 
political parties. 

Tackling party funding alone will not resolve the problem of cynicism about party politics. The 
central challenge is for the politicians themselves across a much wider front. However, any 
changed system of party funding should try to bolster public confidence and help recapture the 
true mission of party politics as serving the public. 



The Review of the Funding of Political Parties 



The funding of parties and regulation 

Some views put to us in the course of the Review so far reflect a belief that political parties are 
or should be on the whole unregulated bodies, like social or sports clubs. But that position has 
gradually been eroded. The leader of the main opposition party has been paid out of public funds 
for 70 years; candidates in elections get free mailshots; parties receive free broadcast time at 
election time; and parties have received money from public funds for representational activity for 
many years. Those parties represented in Westminster now receive grants for policy development 
as well. Parties were recognised in statute and regulated in law by the Registration of Political 
Parties Act 1998 and the Political Parties, Elections and Referendums Act 2000. It is somewhat 
misleading, therefore, to continue to speak of parties as if they were entirely unregulated bodies. 
There is a public interest in the political parties. Healthy opposition is as essential to democracy 
as government. 

The number and nature of political parties have also changed. We have devolved administrations 
functioning in Scotland and Wales, and a latent devolved administration in Northern Ireland, as 
well as a plethora of different voting systems. The funding system needs to reflect the reality of 
this changed political situation and the needs of smaller parties, and enable entry to the political 
arena. 

In recent elections we have seen the growth of smaller parties. In the 2005 general election parties 
and candidates other than the three main parties won more than 10% of the vote. In comparison, 
in 1979, the share of the vote was less than 6%, and in 1955 less than 2%. 

Despite the existing contributions from public funds, the finances of most parties are fragile. The 
Labour Party remains dependent on trade union affiliation fees (though not as much as 20 years 
ago), and the three main parties have had to rely increasingly on donations or loans from a small 
number of very rich individuals. After the recent controversies about these, that source may well 
dry up, possibly of its own accord, even without any new step to cap the amount individuals or 
organisations can give. 

Nonetheless, in spite of these problems there is a case to be made for making little change to the 
present system. The simplest argument for this is that the parties have got into trouble by 
themselves and they should sort themselves out. But this may miss the underlying challenge to 
party financing. It certainly misses out the public interest in financially healthy political parties, 
and what parties can do in the public interest. 

A more sophisticated argument for avoiding major change now is that some of the problems 
which have arisen may be the result of the new regulatory regime of transparency: donations, and 
now loans, have to be disclosed; there is a limit to what parties can spend to campaign at 
elections; and some public funding is available for defined purposes. Change should be avoided, 
so the argument goes, as the problems that have arisen so far show in fact that the system is 
working. 

This minimalist approach would leave people free to give what they want to parties, and it could 
involve some changes to the role of the regulator - the Committee on Standards in Public Life is 
looking into that - to help increase its effectiveness. But the problem about doing little or nothing 
is that it does not address the underlying fragility of party finances nor does it do anything about 
public confidence in parties. 



Summary of the Main Issues 



Limit spending 



At general elections, there is an existing limit on what parties can spend on campaigning based 
on an allowance of £30,000 per constituency contested. This results in a ceiling of almost £19 
million for the three main parties, depending on the number of seats contested (the three main 
parties tend not to contest all the seats in Northern Ireland). In the 2005 general election their 
respective expenditure was £17.85 million for the Conservative Party, £17.94 million for the 
Labour Party, and £4.32 million for the Liberal Democrats. 

Reducing the ceiling further may help close the gap between income and expenditure. It might 
also encourage more local campaigning and greater engagement of voters in the communities in 
which they live. It would respond to the perception that parties spend far too much on 
campaigning and could force parties to spend with a clearer eye to value for money in what they 
do to persuade the voter. 

However, it has been put to me that lowering the ceiling further implies that "campaigning" is 
somehow a bad thing, ignoring the part it plays in informing the electorate. Running a 
professional campaign which meets modern communications expectations and complies with the 
rules is expensive. 

If the expenditure limits are decreased there are two consequential decisions. First we need to 
agree the new ceiling - some have suggested £15 million, others £10 million or £12 million. 

Second, a view needs to be taken on the period over which campaigning expenditure needs to be 
capped. There are many more elections than ten years ago. The campaigning cycle extends well 
beyond the annual period currently set for a general election. Considerable sums are spent in 
marginal seats outside the controlled period. The logic of this pattern might be to cap national 
and local campaign expenditure all the time. The question is whether this is proportionate and 
whether parties, especially locally, can manage the practical demands of greater accountability; 
and whether the cost of compliance on small parties is too great. 



Limit donations 



One of the most common responses to the charge that large donations to political parties buy 
influence is to say that the law should limit the amount any individual or organisation can give. 
Other countries, for example the USA and Canada, have such limits. On the face of it this would 
be a direct response to recent criticism and concern. Indeed it can be argued that if the limit is set 
relatively low (what that may be is a pretty subjective judgement) then it would have the further 
benefit of obliging parties to search for more small donations and therefore engage more people. 

Before anyone ticks this box in an automatic way four things must be thought through. 

The first is where this would leave the main parties financially. If you assume that existing 
donation patterns and sources continue, and that Trade Union affiliation fees are caught by any 
cap, the arithmetical consequence is a shortfall for the main parties in the following range: 



Limit/Cap 
£100,000 - £5,000 


Conservative Party 


£3.1 -7.2m 


Labour Party 


£6.9 -12.6m 


Liberal Democrats 


£0.6 -1.3m 



The Review of the Funding of Political Parties 



Of course, these precise levels are not likely to occur because parties and donors will change 
their behaviour, but in ways that are difficult to predict. (A detailed analysis of the possible range 
of shortfalls is in Annex G.) 

The second is the risk of evasion or avoidance, such as channelling donations through others, for 
example, giving amounts up to the cap to friends to donate; or alternatively through funding other 
organisations which campaign in the interests of a particular party without giving it the funds 
directly Of course some of this risk can be dealt with by closing off obvious loopholes in law, 
although this adds to the complexity and bureaucratic weight of regulation. 

The third is the consequence for the constitution of the Labour Party in which historically some 
trade unions and socialist societies are, by virtue of affiliation fees, "corporate" members. It has 
been put to me with some force that a change in funding arrangements should not be constructed 
so that it forces a change in the way in which a political party chooses to organise itself. Others 
argue, with equal force, that a major political party should have both the resilience and flexibility 
to sustain the constitution it wants despite new financing requirements. 

The fourth is that it may not be sustainable to set a limit on donations without some increase in 
public funding if the financial health of parties, and not just the large ones, is to remain stable. 



Public funding 



Adding to the amount of public funding which parties receive is not popular, but there are clear 
arguments in favour of it as well as against it. Simply put it would help ensure financial stability 
and underline the real public interest in healthy political debate. If allocated according to votes 
cast at one or more previous general elections, and in relation to elections for the devolved 
administrations, it would, depending on the threshold set, assist smaller parties and not just the 
big battalions. It could also encourage voter turnout in safe seats. A significant amount of public 
funding is a settled component in the Westminster-style democracies of Canada, Australia and 
New Zealand; and also in many continental European countries. 

Resistance to more public funding comes in a number of forms. Some oppose this as a matter of 
principle, although the principle has been breached in practice for some time. Others argue that 
they do not want "their" money going to a party with whose views they disagree; others that it 
would actually lead parties to engage with voters less, especially if it led to greater centralisation 
and less local activity. It is possible to point to examples from abroad where significant public 
funding of parties has not removed the risk of abuse or perceived abuse. 

It is quite clear that public funding should not be dismissed out of hand, but serious consideration 
given to both the merits as well as the drawbacks. Some commentators and some reports and 
research have suggested two ways in which more public funding might flow to parties other than 
as a general subsidy. 

One way would be to reward membership, and encourage parties to attract more members or 
more small donations, by some scheme of matched funding. It is argued this would provide an 
incentive for parties to engage more directly and regularly with voters, particularly if funds were 
to flow to local parties as well as to the centre. However, it would be important to take account of 
the cost of administering and regulating a system which might cover thousands of small 
donations or small sums of matched membership fees. 

Another suggestion would be to provide more public funds for defined activities which are in the 
long-term interest of developing a better informed relationship between parties and voters. The 
existing public funds are designed to assist parties to discharge their Parliamentary duties such as 
representing constituents, and formulating policy. Any increase in public funds might further 



Summary of the Main Issues 



support these activities and others which are clearly in the public interest. Any such increase 
could cover research, training and educational activity, for example, leaving the parties to find 
other sources for general administration and campaigning. 



Conclusion 



I have tried in this introduction to bring out the central issues although beneath them lies much 
technical complexity. Much of that detail can be found in the rest of this assessment. 

Finding a consensus on a new way forward for party funding will not be easy. The reform of 
party funding is not an end in itself, but a means to achieve the wider benefit of improving the 
quality of democracy. From the reaction the Review has received so far, I believe that the 
achievement of a good measure of cross-party agreement would be welcomed by the public. For 
that reason alone the process of the Review must be openly explained and not perceived as a 
private agreement only in the interests of the established political parties. Achieving agreement 
will require not just facilitation but an act of political will, including a readiness to accept that no 
one party will necessarily be able to achieve all of its objectives. 

I have been asked to report to the Prime Minister by the end of December. I now want to take 
public reaction to the issues set out in this interim assessment into my discussions with the 
political parties. 




?u 




October 2006 



The Structure of the Interim Assessment 

The interim assessment consists of two parts, the first part setting out what the key issues 
are and where choices may need to be made, and the second part providing more of the 
factual detail and analysis in a series of Annexes. 

In the first part, the above summary set out the key issues, without going into particular 
detail on any of the options. The next section gives an overview of what the current 
arrangements are for political parties, in terms of the regulations that exist regarding their 
income and expenditure. 

Following that overview is a section setting out a number of possible scenarios or packages 
of measures which can be envisaged for a changed system of party political funding. 

The Annexes can be split into three main sections. The first section provides information 
about the Review, including its processes and objectives; the second section provides 
background information on the current system of party funding in the UK; and the third 
section provides more detailed analysis of some of the issues discussed in the scenarios. 



Existing Arrangements 



Historically, political parties were private organisations, largely unregulated as far as their 
finances and organisation were concerned. It is only with the changes introduced in the Political 
Parties, Elections and Referendums Act 2000, following the Fifth Report of the Committee on 
Standards in Public Life (the Neill Committee), that their financial activities became substantially 
regulated. Parties now have to register with the Electoral Commission if they wish to put forward 
candidates for an election. Parties also have to submit annual accounts to the Electoral 
Commission, which publishes them on its website. 

Parties are primarily funded by donations and membership fees. They also receive some public 
funding, including support in kind. There are strict rules about what parties and candidates can 
spend at elections. 

Income and expenditure 

The average income of the Conservative Party over the last five years has been in the region of 
£20 million per year, while the average expenditure has been £27 million. For the Labour Party 
these figures are respectively £28 million and £32 million, and for the Liberal Democrats both 
are in the region of £5 million. 

The amount of funding a party receives fluctuates and is linked to popular support, with more 
donations being received when the party's popularity is greater, and also in the build up to a 
general election. Overall expenditure is also obviously higher for the year in which a general 
election takes place. 

In 2005, according to the annual statement of accounts, the total expenditure, including campaign 
expenditure, for the three main parties was as follows, with campaign expenditure then shown 
separately. As different criteria are used for the annual statement of accounts compared to the 
campaign expenditure return these figures differ slightly from those quoted earlier. 





Total expenditure 


Campaign expenditure 


Conservative Party 


£39.2 million 


£15.7 million 


Labour Party 


£49.8 million 


£15.2 million 


Liberal Democrats 


£ 8.8 million 


£ 4.9 million 



The average annual expenditure for the Conservative and Labour parties, excluding campaign 
expenditure, is in the region of £20 million. This includes costs such as accommodation, IT, 
servicing their membership, as well as activities such as developing policy. 

According to the annual statement of accounts, as of 3 1 December 2005, the Conservative Party 
had total net liabilities of £18.0 million, and the Labour Party £27.2 million. The Liberal 
Democrats had total net assets of £298,000. 



Donations 



The majority of the three main parties' income, somewhere between 50-80%, comes in the form 
of donations. There are currently no limits on the amount that political parties can receive from 
any one individual or corporation. This has led to some disquiet about large donations and loans 
accepted from high net-worth individuals. 



The Review of the Funding of Political Parties 



Donations are subject to regulation to make the system fair and transparent. The rules cover the 
reporting of donations and the identity of donors. This applies across the whole of England, 
Scotland and Wales, but Northern Ireland is currently exempt from some aspects of the donation 
reporting requirements due to the particular situation that exists there. It is due to come into line 
with the rest of the UK over the course of the next few years. 

Any donation to a political party of over £200 must come from a "permissible donor". This is 
anyone on the UK electoral register, companies or organisations registered and carrying on 
business in the UK, trade unions, and unincorporated associations. 

If a public listed company wants to give money to a political party the company has to ask its 
shareholders for their approval. Other companies are free to donate according to their own 
internal rules, as long as the companies are active and registered in the UK. 

Trade unions have to ballot their members every 10 years on whether the union should have a 
political fund. If the membership votes in favour of a political fund, each member pays a certain 
amount into that fund. The union may then decide to affiliate to the Labour Party, and would then 
pay the affiliation fee, currently £3 per member per year. Twenty-nine unions currently have 
political funds, of which 1 7 affiliate to the Labour Party. 

Any donation of over £5,000 made to the main political party offices must be reported to the 
Electoral Commission, as must donations of over £1,000 to constituency or local party offices. 
Parties must report any such donations to the Electoral Commission every three months or, in a 
general election campaign period, every week. The Electoral Commission then publishes this 
information on its website. 

Loans now come under the same rules as donations, and have to be reported in the same manner. 



Expenditure 



There are limits set on the amount parties and candidates can spend at certain elections on items 
and activities directly related to getting candidates elected. Limits on what candidates can spend 
on campaigning at elections, introduced in 1883, were intended to stop election results being 
bought. Limits on what a party could spend on campaigning nationally at an election, introduced 
in 2001 following a recommendation by the Neill Committee, were also intended to stop 
excessive spending at elections. For a general election the candidate limit comes into effect five 
to six weeks before an election, while the national party limit comes into effect 365 days before 
an election. Both limits cover only money spent on campaigning and not routine expenditure. 

The national campaigning limits for a party apply at general elections, European Parliamentary 
elections, Scottish Parliamentary elections, National Assembly for Wales elections, and Northern 
Ireland Assembly elections. Limits do not apply to parties at local elections. 

At a general election a party can spend £30,000 multiplied by the number of seats the party 
contests. So for a party contesting the elections nationwide the limit is in the region of £19 million. 

Generally, money spent on campaigning nationally, such as billboard campaigns, and aimed at 
promoting the party, counts as national expenditure, no matter where the activity takes place or 
where it is delivered. 

The limits on what candidates can spend are based in general on the number of electors in any 
constituency. These limits apply at all elections where electors can vote for individual candidates, 
but not to candidates on a party list. 



10 



Existing Arrangements 



A candidate at a general election can spend around £10,000 to £13,000, depending on the number 
of people who can vote in each constituency. This is separate from what parties can spend. Lower 
limits exist at local and devolved elections. 



Public funding 



In addition, there is already some public funding available to parties and candidates, both direct 
funding, in terms of grants, and indirect funding, in terms of benefits provided in kind. More 
detail is provided in Annex E. 

Eligible parties in the House of Commons receive direct funding in the form of grants to support 
their Parliamentary activities and to support their development of policy. A similar scheme exists 
in the House of Lords. 

Eligible parties represented in the devolved administrations also receive support for their 
representative activities, although they do not receive any money for policy development. 

Indirect funding mainly supports campaigning activities. For example, each candidate at a general 
election is entitled to free postage for one election mailing to each elector in the constituency. 

In addition, political parties do not have to pay for the airtime they obtain for party political 
broadcasts. In general, party political broadcasts are available to all parties that stand candidates 
in approximately one-sixth of the contested seats. 



Incumbency 



There are also benefits that a party or elected representative receives due to having been elected. 
Such incumbency benefits include special advisers for the government of the day, who are paid 
for out of public funds to provide political advice to cabinet ministers. 

Benefits that MPs receive include the Incidental Expenses Provision available to meet costs they 
incur in the course of their Parliamentary duties, but not on party political activities or 
campaigning. This might include, for example, reimbursement for part or all of the cost of 
sending a newsletter to constituents. 

There are further incumbency benefits for parties in local authorities in Great Britain, where the 
three largest party groups in each local authority are entitled to political assistants, paid for out of 
public funds. 



11 



The Funding of Political Parties: A Survey of 
the Main Choices Involved 

There are a number of possible scenarios or packages of measures which can be envisaged for a 
changed system of party political funding. Each of the measures has drawbacks or risks as well 
as advantages. Some hard choices have to be made and, if a good measure of consensus is to be 
achieved, the political parties will have to make some compromises about their own preferences. 
Questions are posed at the end of each scenario as I want to hear what the public thinks about 
each one and encourage discussion of these different choices. 

Four scenarios or packages of measures are presented on the following pages. These are not 
intended as discrete options from which a choice must be made but as ways of illustrating the 
nature of the choices and the arguments involved. These are presented in terms of increasing 
degrees of change over the present arrangements. 



Scenario 1: Minimal change 

The first consideration should be whether to keep things as they are now, and to start by 
evaluating the merits of the current system. 

Is there a case for change? 

When compared to other jurisdictions, the British political system, taken as a whole, has been 
remarkably free of abuse. Examples of abuse are the notable exception to the general rule. 1 

The Electoral Commission has some of the widest-ranging powers of any electoral regulator 
around the world available to it to investigate and enforce the law relating to political party 
finances. 2 Whether these powers are the right ones is an important regulatory issue. 

The current system for regulating party funding is relatively new. The scale of these changes 
should not be underestimated. Recent events may be the growing pains of the significant changes 
that have taken place as transparency has taken effect. For the first time, the public has been able 
to find out who donates what to political parties, and how much. 

It may be too early to assess the impact of these changes and therefore too soon to make any 
changes. Implementing changes to the system would cost the parties and the regulator both time 
and money. Any benefit from changing the system would need to outweigh these costs. 

The Electoral Administration Act 2006 now requires loans to be reported in the same way as 
donations. It could be argued that as one of the prime concerns over political party funding has 
now been addressed, no further changes are needed. 

The Committee on Standards in Public Life is currently reviewing the role of the Electoral 
Commission. Their recommendations, if accepted, might provide a basis for some further 
regulatory changes without changing the way parties are funded. Suggestions have also been 
made to the Review of areas where minor change may be needed, for example eligibility for 
policy development grants. Making these small adjustments coupled with any recommended 
changes to the Electoral Commission may be sufficient change. 

There are, however, three significant reasons for changing the system. Firstly, to respond to the 
suspicion and concern the public have. Public confidence in political parties and specifically their 



13 



The Review of the Funding of Political Parties 



financing arrangements continues to decrease. Public expectation and press comment suggest 
minimal change would be inadequate. 

Secondly, politics is changing. The pattern and rhythm of elections have changed rapidly. The 
long-term decline in participation in party politics is still continuing. This has had implications 
that the Neill Committee could not have foreseen back in 1998. Since then, the Electoral 
Commission, thinktanks such as the New Politics Network, the Hansard Society and the Institute 
of Public Policy Research (ippr), and others have argued that party funding needs to be 
addressed. 

Lastly the parties themselves are recommending changes, and there is an opportunity to work 
with them to create a consensus. There is no guarantee that this opportunity would present itself 
again at a later date. 



Do you think the current system (with a few minor changes) needs further time to 
bed in before thinking of more radical change? 



14 



The Funding of Political Parties: A Survey of the Main Choices Involved 



Scenario 2: Increased transparency and greater expenditure control 

Scenario 2 builds on existing transparency (section A) and existing expenditure control 
(section B). By enhancing these measures it may be possible to improve public confidence in 
party funding and ensure that political parties compete on the basis of policy and competence 
rather than their funding. 

2A Donations controlled through increased transparency and public scrutiny, 
with no caps on donations 

The existing system for the funding of political parties introduced in 200 1 seeks to regulate 
donations through transparency Transparency provides the public with the information on the 
finances of political parties and lets them draw their own conclusions. 

Possible areas where transparency could be increased include: 

• For donations over a certain amount, further information about the donor could be made 
publicly available listing the donor's financial, commercial or other interests. This could be 
similar in its coverage to the information required in the House of Commons Register of 
Members' Interests. 

• Corporate donors or individual donors holding senior positions in companies could be 
required to declare any government contracts the company has or is seeking. 

• The frequency of reporting could be increased to allow "real time" scrutiny by the public. 

• The transparency of trade union political funds could be increased. In addition to the 
information they are required by law to publish and distribute to members on the balance of 
the political fund, they could also be required to publish a breakdown of how the political fund 
was spent. 

• Donations from unincorporated associations (i.e. organisations not registered as companies) 
could be made more transparent. They might be required to disclose their sources of income 
and the identity of their directors. 

• All companies, whether public or private, could be required to reveal any donations or loans 
made to political parties in their annual accounts. 



Advantages 



Increased transparency would help public scrutiny become more effective. The requirement for 
further information about donors giving large sums may make giving sizeable donations less 
attractive. It concentrates on the root cause of concern over party funding, that is the perception 
that donors are trying to buy influence. Rather than relying on the media to investigate possible 
conflicts of interest, more information would be available for all to come to their own 
conclusions. 

Transparency as opposed to a cap on donations would still allow individuals to spend their money 
as they choose. It avoids using a financial mechanism to change the behaviour of political parties 
and is more in keeping with the voluntary tradition of political parties. 

Greater transparency would be easier to enforce than a cap on donations (this is discussed further 
under scenario 3). Transparency may be seen as a way the public impose their own views on what 
is acceptable. It may therefore be more flexible to specific circumstances. 



15 



The Review of the Funding of Political Parties 



Disadvantages 

The main disadvantage is that increased transparency alone may not be sufficient to increase 
public confidence in how political parties are funded. Following the recent public concern about 
the unacceptability of large donations and loans, specific measures such as a cap on donations 
may be needed. 

Evidence from other jurisdictions suggests that greater transparency can result in public 
confidence decreasing; greater disclosure may prompt more stories in the media alleging 
impropriety. 3 While deterring wrongdoing and uncovering it when it does occur are the major 
benefits of greater transparency, there is a danger that there may be unrealistic expectations that 
allegations of abuse will be removed. Further rules could suggest there is something 
fundamentally wrong with our system when this is not actually the case. 

Some feel that donors should have a right to privacy, particularly as publicity around a donor may 
be out of proportion with the amount they have given. Requiring companies to declare they are 
bidding for a contract could affect them commercially. As a result, transparency may discourage 
some people or organisations from donating to political parties. 

It would be difficult to enforce a register of donors' interests or companies involved in 
government contracts, as the information in it would be difficult to verify independently. Setting 
a timeframe in which donors had to declare this additional information would be difficult, as 
allegations may relate to donations made years before any alleged benefits gained. 

2B Reduce the amount parties can spend on campaigning at elections 

With the benefit of five years' experience of operating national limits on election campaign 
spending, it can be argued that national limits do seem to have worked in practice. While some 
specific operational concerns have been raised around definitions of national and candidate 
expenditure and the definition of an election period for candidate expenditure, no one seems to 
be arguing for the removal of the expenditure limit. 

There are still, however, areas of concern about campaigning at elections. Public confidence 
remains low, with research suggesting that campaigning through mass marketing does not engage 
the public. 4 The public felt that parties spent some of their money frivolously while campaigning 
at the 2005 election. Therefore, it is important to look at whether the current limit is the 
right one. 

A strong case has been made to the Review that regulation of party expenditure should try to 
redress the shift away from local campaigning. Research suggests that the public have higher 
levels of trust for politicians they know, but low levels of trust for politicians in general. 5 Local 
campaigning activities are more likely to encourage people to participate in politics. 6 The 
relationships at a local level between political parties and the public seem to be important for 
democratic engagement. Along with reducing the national limit, the candidate limit could be 
increased. 

Annex F has a more detailed discussion of concerns about how the existing national and 
candidate limits operate in practice. 



Advantages 



As expenditure limits were first introduced to help relieve the pressure on political parties to 
raise substantial amounts of money, an argument can be made that, as this pressure still exists, 
the limits should be further reduced. Transparency has not yet had the desired impact on how 
parties raise their income. 



16 



The Funding of Political Parties: A Survey of the Main Choices Involved 



Some would also argue that political parties have other functions to carry out as well as 
campaigning, such as research, policy development, developing leadership skills, education and 
local civic action. 7 Over the last 20 years, parties have been concentrating more of their resources, 
which due to the fall in party membership are mainly financial resources, into campaigning at the 
expense of these other functions of public benefit. 

This may be partly because the number of elections has increased. Elections for the devolved 
administrations and the London Assembly in addition to local, general and European Parliament 
elections mean that since the late 1 990s in some parts of the country barely a year has gone by 
without an election being fought. Reducing the amount parties can spend to campaign at 
elections could encourage them to refocus their resources towards other activities, with possible 
benefit for local democratic engagement. 

There is also a large difference in what the parties are able to spend to campaign in elections. At 
the 2005 general election, the Conservative Party and Labour Party each spent about six times 
the total of the Liberal Democrats. Lowering the national expenditure limit for campaigning may 
help small and new parties to compete with the two principal established parties. 

Disadvantages 

While reducing the amount parties can spend on campaigning at elections may encourage them 
to spend more on other activities, this may imply that somehow election campaigning is a bad 
thing. Campaigning brings many benefits: it informs the public and encourages them to make 
decisions about their political priorities. An argument can be made that increasing, or at least 
keeping, the current limits on national party campaign expenditure is positive for democracy. 

Parties are under pressure to be professional. Competing for attention with consumer advertising 
and the mass media has made polished presentation increasingly important. This all requires 
parties to spend more. Lowering the national campaign spending limit may not reduce the 
pressure if it does not address the reasons for current spending levels. 

While introducing a national limit on campaign spending does not seem to have decreased the 
central role of political parties in elections, there is a risk that a further reduction might do so, 
with a detrimental effect on the quality of debate during election campaigns. 

Some would argue that concerns over how much parties spend and what they spend it on are for 
parties to deal with. For as long as parties remain in essence voluntary organisations receiving the 
majority of their money from private sources, some would argue an expenditure cap is an act of 
overregulation. 

The national expenditure limit has not been adjusted for inflation since it was introduced, so has 
already been decreasing in real terms. As the national limit is calculated according to the number 
of constituencies a party has candidates standing in, recent reductions in the number of 
constituencies have had the effect of reducing the national limit. 



Do you favour the specific ideas described in scenario 2 for increasing transparency? 

What do you think of the idea of decreasing the amount parties can spend nationally 
on campaigning? 

Do you think the amount that can be spent on local campaigning should be 
increased? 



17 



The Review of the Funding of Political Parties 



Scenario 3: Cap on donations in addition to: 

greater transparency; and 
greater expenditure control 

This scenario adds in a cap on donations to greater expenditure control and greater transparency. 
This directly responds to public concern that donors who give large sums gain undue influence. It 
would increase equity for parties who do not receive large donations but may not be perceived as 
fair by some parties where particular income streams would be affected. 

The purely financial implications for political parties of setting a cap at particular levels are 
discussed in Annex G. If a cap were applied to organisations as well as individuals then this 
would have a substantial effect on Labour Party income, and some argue, on the way the Labour 
Party is constituted. This is discussed in more detail in Annex H. 

A Cap on donations, limiting the amount individuals and organisations can donate 
to political parties 

Advantages 

The main reasons for introducing a cap would be to remove both the perception and possibility 
that influence can be bought through donations to political parties. It would stop political parties 
relying on a small number of high net-worth individuals and have the additional effect of making 
smaller donations more important to parties. People may be encouraged to donate to political 
parties if they feel their donation is more likely to be valued. Parties will also have a need to seek 
donations from a wider range of people and this process will encourage them to engage more 
actively with voters. 

Disadvantages 

It would be possible to avoid a cap by making donations through a number of sources that are 
difficult to trace back to one individual. However, if it were illegal for a party to accept donations 
knowing that they originated from one individual it is difficult to see how the donor could gain 
significant influence. Measures could be taken to limit avoidance, such as applying the cap to in- 
kind donations and loans, although capping in-kind donations is harder as the value cannot be 
precisely determined. 

A cap may give rise to an increase in campaigning by third parties, that is, organisations distinct 
from political parties who campaign on political issues. Individuals may decide to donate to these 
organisations if they are restricted in what they can donate to parties. This has been found in 
some jurisdictions with a cap, such as the USA. However, there are a number of differences 
between the UK and USA that mean similar effects are not very likely to be found. This is 
discussed in more detail in Annex I. 

It is not immediately obvious where to set a cap. A cap at any given level is open to the charge 
that it is arbitrary and that it disadvantages one party more than others. 

Annex G looks at the impact different levels of cap will have based on current patterns of 
donations. A cap is likely to change the behaviour of donors and the way parties raise funds and 
so Annex G also gives examples of how changes in behaviour might affect income for political 
parties. It is difficult to predict exactly what wider changes would take place should a cap on 
donations be introduced. But a cap on donations may simply result in parties having insufficient 
income to function to the extent that a representative democracy requires. 



What do you think of the proposal that donations should be capped? 



18 



The Funding of Political Parties: A Survey of the Main Choices Involved 



Scenario 4: Greater levels of public funding through a general 
subsidy, a targeted subsidy, or publicly funded incentives to donate 
in addition to: 

a cap on donations; 

increased transparency; and 

greater expenditure control. 

The Review has found in its engagement work with the public that the issue of public funding 
seems to have generated the most debate and revealed polarised views. This scenario concentrates 
on setting out the arguments for and against increasing public funding. 

There are already a number of ways political parties are given support from public funds. These 
are described in Annex E. 

A general subsidy is a cash grant from public funds allocated in accordance with party 
popularity. There are various ways it could be implemented, which each have their own 
advantages and disadvantages. There are other ways of providing support to political parties from 
public funds, such as providing cash grants for specific functions or giving support in kind, or 
providing some incentive-based funding scheme. The latter two approaches do not necessarily 
have to be linked to a scenario which includes a cap on donations. 

4A A general subsidy allocated according to voters' preferences 

Advantages 

A case for a general subsidy can be made on three grounds. 

Firstly, it may be required financially to compensate parties for the loss of income through a cap 
on donations if without it political parties would be unable to fulfil the functions a representative 
democracy requires of them. 

Secondly, some argue as a point of principle that, as parties carry out many activities that are for 
the public good, it is appropriate for the state to support these public benefit activities. 8 It could 
help redress the balance which for some political parties has shifted towards centralised 
campaigning activities and away from engaging with local communities, education, training 
future leaders and policy development. 

Thirdly, it could help reduce the pressure on parties to raise money and run the risk of 
compromising themselves in doing so. Any suggestion that political parties reward donors in 
inappropriate ways or that any donors have undue influence as a result of their donations should 
be reduced. 

Public funding could bring both long-term and short-term financial benefits. A general subsidy 
could provide political parties with support in the short term and prevent them from facing a 
sudden, unpredictable drop in income as a result of a cap on donations. Such a drop in income 
could result in further centralisation and concentration on specific election campaigning activities 
focused in marginal constituencies at the expense of other activities. 

An argument could be made for a general subsidy being phased out over time to oblige political 
parties to adapt their behaviour and increase the amount of donations they receive. However, 
some would argue that parties in modern democracies cannot be reasonably expected to raise all 
the money it is necessary for them to spend." 



19 



The Review of the Funding of Political Parties 



An additional benefit of a cash grant is that it could be distributed in a way that encourages 
further democratic engagement. For example, allocating a grant to parties on the basis of share of 
the vote at elections could encourage supporters to turn out to vote in safe seats even if they felt 
the fate of their favoured party was certain. 

While the criteria used to allocate existing public funding varies, it is based on giving different 
proportions to parties according to how popular they are. However, other jurisdictions have also 
taken fair political competition into account when developing eligibility criteria to ensure a level 
playing field and market entry for new parties. This often results in quite complex formulae that 
balance these two principles. 10 

There is a balance to be struck with any public funding between helping small and new parties 
but ensuring parties are not set up solely to obtain public funding. Criteria that required a certain 
level of popular support before becoming eligible for public funding, whether in terms of seats, 
votes or members, may help achieve this balance. 

Disadvantages 

Political parties have had an important function as a link with the electorate which could be lost 
if they become too reliant on public funds. It is argued that if a general subsidy provided a 
significant share of parties' income, the nature of political parties in the United Kingdom could 
fundamentally change. 

Increased public funding may make political parties less accountable to their members and more 
accountable to the state, as political parties would have less incentive to represent the views of 
their members and may be less reliant on them." 

There would need to be a careful balance struck between providing financial stability to parties, 
allowing parties to budget, and reflecting up-to-date public support. If public funding was 
distributed on the basis of share of the vote taking into account devolved administration, 
European Parliament and general elections the amount parties receive could change so frequently 
that parties would find it difficult to plan ahead. 

A sudden stop in public funding, for example following a heavy electoral defeat, could force a 
party to cut activities which are for the public benefit. More time to prepare for a cut in public 
funding could allow the party to restructure its finances more appropriately. 

Some people feel that public funding should not be given to parties that hold certain values, such 
as views considered discriminatory, inflammatory or extreme. Some are concerned it may prevent 
the UK from meeting certain international obligations, such as preventing racial discrimination. 
The New Local Government Network and the New Politics Network have proposed an additional 
criterion which would require parties to meet certain democratic standards in order to be eligible 
for public funding. It would be very difficult to determine what would be acceptable and what 
would not be acceptable and who should decide. Some parties may stop expressing their views 
overtly in order to obtain public funding. Some believe that popularity is the best test of what 
views are acceptable. This is a very tricky issue, but one which any additional public funding 
would need to address. 

Given all the criteria that could be taken into account when determining how to allocate public 
funding, it could become difficult for people to understand how public funds are distributed and 
reduce the effectiveness of public accountability. The public's connection with parties could be 
significantly reduced and the amount of bureaucracy would increase. 



20 



The Funding of Political Parties: A Survey of the Main Choices Involved 



4B A targeted subsidy 

Additional public funds could be directed towards supporting particular activities, along the lines 
of the existing policy development grant, to support political parties in carrying out public 
benefit activities. This could be in the form of direct cash grants and/or indirect funding. 



Advantages 



This approach would not be designed simply to fill an emerging financial shortfall, but to 
encourage parties to be more active in areas which are clearly in the public interest. This could 
cover research, training and educational activities and some forms of community and civic 
engagement. It builds on existing arrangements which we know have worked in practice and have 
been in accepted in principle. 

Disadvantages 

The purposes for which such a grant could be spent might create difficulties in definition and 
policing; and also arguments about the nature of the threshold that needed to be passed to receive 
it. Unlike a general subsidy parties would have to account precisely for what the grant had been 
spent on, adding to their accountability workloads. 

4C Introduce a voter-led incentive scheme 

Parties might be helped to increase the number of people they get to donate smaller amounts by 
offering them a financial incentive. The main aim would be to provide an incentive for people to 
participate in the democratic process and for parties to encourage them to do so. 

Different ways such schemes could be designed are evaluated in Annex J. 



Advantages 



Were these incentives to have the intended effect, they would have many advantages both in 
terms of how political parties are funded but also in terms of increasing people's participation in 
party politics. They could help widen the funding base and help compensate parties for the loss 
of income through a cap on donations. The wider benefits are that more people may become 
involved in parties through donating money and it may encourage parties to seek out small 
donations, particularly in areas where there is little incentive for party activity because the seat is 
safe for one political party. 

It has the advantage over a general subsidy in that each member of the public decides which 
party, if any, they wish to support, and it is used only to support the political party they agree 
with. 



Disadvantages 



An incentive scheme may have a minimal effect on participation. The reasons behind the low 
levels of participation in parties and voter turnout are many and complex and getting more people 
to donate to parties may not result in those people getting involved in party politics. 

Incentive schemes are likely to increase the administration costs for parties and not bring 
significant financial gains. The scheme could contribute to the continuing centralisation of 
political parties if the refunds went to the party headquarters rather than the local party. 



21 



The Review of the Funding of Political Parties 



All the options for incentivisation schemes have the potential for abuse and some could 
encourage channelling of donations to optimise public funds, although appropriate regulation and 
enforcement will reduce this and the extent of avoidance may not in practice be that great. 

Each of the possible incentive schemes present practical issues for implementation (see Annex J). 
Most would remove the current anonymity for donors who give less than £200, although their 
identity would be unlikely to be known beyond the party and the body administering the scheme. 
While the risk of the information being disclosed may be small, it may discourage people from 
giving money to parties where they are particularly concerned about the impact disclosure would 
have for them. 



Do you support the principle that additional public funds should go to political 
parties? 

If so, do you support the idea of a general cash subsidy or a more targeted grant or 
the idea of financial incentives to encourage small donations? 



22 



Questions for Discussion 



Below is a list of the questions that appear at the end of each of the scenarios in the previous section. 
Scenario 1 

• Do you think the current system (with a few minor changes) needs further time to bed in 
before thinking of more radical change? 

Scenario 2 

• Do you favour the specific ideas described in scenario 2 for increasing transparency? 

• What do you think of the idea of decreasing the amount parties can spend nationally on 
campaigning? 

• Do you think the amount that can be spent on local campaigning should be increased? 

Scenario 3 

• What do you think of the proposal that donations should be capped? 

Scenario 4 

• Do you support the principle that additional public funds should go to political parties? 

• If so, do you support the idea of a general cash subsidy or a more targeted grant or the idea of 
financial incentives to encourage small donations? 

General 

• Which elements of the above scenarios do you think are most important? 

• Are there any issues which you think are important that we have not covered? 

To help us take your views into account during discussion with the political parties, please let us 
know what you think as soon as possible. The Prime Minister has asked that we report by the end 
of the year. In order to meet this deadline, we would appreciate all comments by 20 November 
2006. 

To send us your views, please reply via our website: www.partyfundingreview.gov.uk 

or alternatively: 

Email: review@partyfundingreview.gsi.gov.uk 

Write to: The Review of the Funding of Political Parties 
5th Floor, Steel House 
1 1 Tothill Street 
London 
SW1H9LJ 



23 



Part 2 



Annexes 



Introduction to Part 2 



The Annexes to the interim assessment fall into three categories. 

The first section contains more information about the Review. This explains how the Review is 
going about its work and what it hopes to achieve. The Objectives of the Review discusses what 
the Review is trying to achieve. The Process of the Review includes details of the political parties 
that have been contacted and ways the public has been involved so far. 

The second section provides background information on the current system of party funding in 
the UK. It puts the work of the Review in a wider context. Recent Views on Party Funding sets 
out the views that committees, other reviews and think tanks have put forward in the last few 
years. Political Party Income and Expenditure for the Last Four Years shows how much money 
the political parties with representation in the devolved assemblies, European Parliament and 
Westminster have received and spent in the last four years. Existing Public Funding explains why 
each area of public funding was developed and the different criteria used to allocate it. 

The last section provides a more detailed analysis of some of the issues discussed more briefly in 
the different scenarios. There are no Annexes related to scenario 1. 



Scenario 2 



Regulating Campaign Expenditure considers some of the concerns that the current system has 
enabled money to be targeted at marginal seats despite the limits and whether a different 
approach to the detail of regulating campaign spending is needed. 



Scenario 3 



Financial Effects of a Cap on Donations uses the data available on donations to help weigh up 
the effects a cap on donations may have and contribute to the debate on public funding. 

Trade Unions looks at the existing laws that regulate the political activities of trade unions and 
makes them different from other organisations. 

Third Party Campaigning assesses the impact that people who campaign for or against a political 
party, but are not part of that party have, the existing controls on this type of campaigning and 
whether changes such as a cap on donations would diminish the central role of political parties in 
campaigning to win elections. 



Scenario 4 



Ways an Incentive Scheme Could Work identifies some of the options for operating an incentive 
scheme to provide examples of how such a scheme could work and whether it would be practical. 



27 



Annex A 



Objectives of the Review 



When the Review began there was a general feeling, shared by experts, the public and the parties 
alike, that, rightly or wrongly, there was a lack of public confidence in how political parties were 
funded. This concern seemed to coalesce around three public policy issues: the perception of 
buying influence; the amount of money that is spent at elections; and the need for more 
democratic engagement. This general feeling forms part of the background against which the 
objectives of the Review were originally formulated. 

Published objectives 

The following objectives were published on our website in July: 
I started off by making three assumptions. These were: 

• The financial health of political parties is fundamental to our parliamentary democracy; 

• How parties are funded should be fully transparent; and 

• A future system should encourage democratic engagement and be as fair as is possible 
between parties. 

Working from these assumptions I adopted the following objectives for the Review: 

• To improve public confidence in party funding; 

• To try to ensure that parties compete on the basis of policies and competence, not money; 

• To contribute to greater democratic engagement; and 

• To be as fair as is possible to all political parties and candidates. 

Objective 1. To improve public confidence in party funding 

The public needs to be reassured that the system of party funding is transparent, open and well- 
regulated. Most people are probably unaware in any detail how parties are funded including, for 
example, that there is already some public funding for parties. Any system of party funding, 
especially if the public's money is involved, must be fully accountable. The Electoral Commission 
currently regulates the system on the public's behalf, except on the issues where Parliament 
regulates the use of the money it provides to parties and MPs that is intended to support their 
Parliamentary activities. The role of the Electoral Commission is being reviewed by the 
Committee on Standards in Public Life. I want to ensure that the work we each do is well 
coordinated and that our conclusions, if possible, are complementary. 

Objective 2. To try to ensure that parties compete on the basis of policies and competence, 
not money 

In 1998 the Neill Committee recommended a cap on the amount that political parties can spend 
at elections and this was introduced; there have for many years been caps on what candidates can 
spend. It is now suggested, by the Electoral Commission among others, that the expenditure 
allowed in an election year should be further reduced, and some think there should be a ceiling 
on expenditure in every year. My objective is to avoid an "arms race" on campaign expenditure, 
while still allowing parties to campaign effectively and fully inform the public of the issues 
at stake. 



29 



The Review of the Funding of Political Parties 



Objective 3. To contribute to greater democratic engagement 

Greater engagement with the democratic system is a widely shared objective; that is, increasing 
the number of members of the public that are involved in politics and with political parties, and 
using politics as a means for people to be empowered and take control of their lives. As we live 
in a Parliamentary democracy this should mean engaging with political parties. Although the 
Review is about funding, rather than democratic engagement, encouraging more engagement in 
the party political process should be a factor taken into consideration when weighing up different 
options for the party funding system. 

Objective 4. To be as fair as is possible to all political parties and candidates 

My review should try to avoid giving advantage to parties on the basis of any of the following: 

• Whether a party is new or established; 

• The size of the party; 

• Whether the party is contesting seats in all of the UK or only part of it; 

• Whether the party is in government or not; and 

• The wealth and influence of the party's supporters. 



Tests 



The tests against which I will assess both the various proposals put to me and my final 
recommendations lead on from the objectives. They are that: 

• Political parties have sufficient money to fulfil their function; 

• There is sufficient transparency so that sources of funding are clear; and that 

• The proposals can be properly policed in a cost-effective way. 

These tests are common ground. They reflect other publicly available statements of principle, 
such as those published by the Electoral Commission, the Hansard Society, and the Council of 
Europe, as well as the statements made by the political parties. 



30 



Annex B 



Process of the Review 

Terms of reference 

The terms of reference are as follows: 

"To conduct a review of the funding of political parties. 
In particular: 

• To examine the case for state funding of political parties including whether it should 
be enhanced in return for a cap on the size of donations; 

• To consider the transparency of political parties' funding; 

• And; to report to the Government by the end of December 2006 with 
recommendations for any changes in the current arrangements. 

Sir Hayden Phillips will work closely with stakeholders including, especially, the political 
parties and the Electoral Commission. He has been asked to aim to produce 
recommendations which are as much as possible agreed between the political parties with 
a view to legislation as soon as Parliamentary time allows." 

Process of the Review 

The way I have chosen to undertake the Review is through three broad, interwoven strands of 
work. These are: 

• Analysis of the issues; 

• Public engagement; and 

• Engagement with the political parties. 

Analysis of the issues 

The analysis strand is looking at the current situation, both in terms of the law and practice, and 
how any future system could work. It includes statistical modelling of the various options around 
a possible cap on donations. 

I have been very fortunate in that I have been able to build on the work already done, especially 
the Fifth Report of the Committee on Standards in Public Life, the Neill Committee report, 
entitled "The Funding of Political Parties in the United Kingdom" (1998). 12 In addition, many 
people have been very generous with their time - politicians, academics and expert practitioners, 
not forgetting ordinary members of the public who have been willing to share their views with 
me and in some cases enter into discussion with me and members of my team to discuss further 
the issues and ideas raised. 

I have been ably assisted by a number of academics who attended a seminar that was hosted for 
us by Professor Robert Hazell, at the Constitution Unit of the University College London. In 
addition some of them have generously allowed me to meet them and discuss the relevant issues. 
Professor Justin Fisher of Brunei University, and Professor Tim Besley of the London School of 
Economics, have kindly agreed to advise us. 



31 



The Review of the Funding of Political Parties 



In addition, I have had regular meetings with Sam Younger, Chairman of the Electoral 
Commission, in his role as regulator of the system, and with Sir Alistair Graham, Chair of the 
Committee on Standards in Public Life, and I am grateful for the assistance that they and their 
staff have given to me. 

During the Electoral Commission's international conference on the regulation of political party 
financing in September I was able to discuss the key issues with some of the leading practitioners 
from around the world, including Jean-Pierre Kingsley, Chief Electoral Officer, Elections 
Canada; Nicole Gordon, former Executive Director of the New York City Campaign Finance 
Board; Ellen Weintraub, Commissioner of the US Federal Electoral Commission; and Paul Dacey 
and Kevin Bodel, respectively Deputy Electoral Commissioner and Director of Funding and 
Disclosure of the Australian Electoral Commission. 

Public engagement 

The public engagement strand began when we launched our website, 

www.partyfundingreview.gov.uk, providing information and inviting public comment. On 25 July 
we launched our online forum, hosted by the Hansard Society, allowing members of the public to 
debate the issues with each other and with us. 

We have entered into a dialogue with the public, responding to the emails and letters we have 
been sent, asking people further questions, listening to what they have to say, and feeding their 
views into our analytical work and my discussions with the political parties. 

To date I have received over 1,100 letters, more than 200 emails, over 200 posts to our online 
forum, and more than 3,500 visits to our website. Almost 3,000 copies of our information booklet 
have been distributed. 

In addition, the Electoral Commission and Social Market Foundation ran a seminar in May with 
politicians and journalists discussing the various issues involved; the Joseph Rowntree Reform 
Trust asked questions on party funding in an opinion poll; the New Politics Network has 
conducted a survey among local party activists, run a website, and has held fringe events at the 
party conferences; and the Electoral Commission has undertaken quantitative research, that is, 
opinion polling, and qualitative research, through deliberative forums, into public attitudes. I 
understand that the Commission will continue to undertake this research, looking among other 
things at the public's views on the scenarios contained in this assessment. I am very grateful for 
all these organisations, and others, for sharing their research and their results with me. 

I hope that the publication of this interim assessment will stimulate a further round of public 
discussion of the issues. 

Engagement with the political parties 

At the start of the review I invited all parties represented in the UK Parliament, the European 
Parliament, the Scottish Parliament, the National Assembly for Wales, and the parties based in 
Northern Ireland to meet me. I am pleased to say that I have met or have arranged to meet all 
those that requested a meeting, a number of them on more than one occasion. This has included 
travelling to Northern Ireland, Scotland and Wales to meet parties represented there. It has been 
invaluable for me to see the issues through the eyes of the people directly involved in the running 
of parties, and I thank the parties for their contribution and openness. 



32 



Annex C 



Recent Views on Party Funding 

The funding of political parties is under heavier scrutiny than at any other time in recent history 
We currently have a funding system with a large degree of transparency, and yet trust in how 
parties are funded has not increased, even though more information than ever before is in the 
public domain. The issue that gave birth to this Review was the controversy about loans to 
political parties, the reporting of which has been resolved due to the provisions put into the 
Electoral Administration Act 2006. 

The Review offers a chance to look at how political parties are funded in the round, looking at 
both income and expenditure, and also how much of that income comes from the state either 
directly, in terms of grants, or indirectly, for example in terms of freepost at elections. 

Fifth Report of the Committee on Standards in Public Life ("the Neill Committee ") - 1998 n 

The Neill Committee's recommendations concentrated on creating a more open and transparent 
system, so that the public would know where the money was coming from in terms of the 
reporting of donations, and where it was being spent, in terms of the reporting of national party 
campaign expenditure. The Committee also recommended creating an Electoral Commission, 
which would have as one of its core functions monitoring and regulating the party funding 
system. 

The Government accepted the vast majority of the Neill Committee recommendations, and these 
became law with the passing of the Political Parties, Elections and Referendums Act 2000. The 
key principles underlying the Neill Committee recommendations, openness and transparency, are 
now an accepted public expectation. 

The Neill Committee also recommended a slight increase in public funding through the creation 
of a Policy Development Grant that would allow parties represented in the House of Commons to 
formulate their policies more effectively. It also recommended that tax relief for donations be 
introduced, which was a recommendation not accepted by the Government. However, overall the 
Neill Committee felt that the time had not come "if it ever will" for substantially increased levels 
of state funding. 

It should be noted, though, that the background against which the Committee made its report was 
significantly different from the current situation. Since 1998, when the Committee reported, there 
has been a large drop in turnout at general elections, down 12 percentage points between 1997 
and 2001; the membership of the main parties has decreased substantially, especially affecting the 
number of activists at a local level; parties have found themselves in significant debt; there is a 
police investigation into allegations of abuse of the honours system; and there has been a massive 
growth in the use of new technology, especially mobile phones and the internet, with the different 
opportunities for campaigning and organising that these allow. These changes perhaps help to 
explain why the issue of party funding has not gone away in the intervening years. 

Institute for Public Policy Research (ippr) report "Keeping it Clean " - 2002' 4 

The ippr report of 2002 identified two key problems: declining membership; and the so-called 
campaign "arms race". It was argued that both these factors compel parties to seek large 
donations even though the donations are then made public, and are often subject to a great deal of 
negative publicity. 

The ippr report recommended a donation cap of £5,000, arguing that this was a level where the 
public could see that donations could not buy influence or be perceived as buying influence. The 



33 



The Review of the Funding of Political Parties 



report argued that the fall in income due to a cap could be alleviated by lessening the amount 
parties could spend at an election, and possibly by controlling the amount that parties could 
spend annually The authors recommended incentives at the local level for parties to recruit and 
retain members and small donors, such as a system of "Tax Relief Plus" to incentivise the donor 
and reward the party For example, a maximum donation of £50 might attract £50 from the state 
while a £100 donation might gain an £80 top-up. 

New Politics Network "Strong Parties, Clean Politics " - March 2003 15 

The New Politics Network published a report featuring articles from MPs from the three main 
political parties, arguing for further reform of the party funding system. In his introduction, Peter 
Facey, the Director of the New Politics Network, argued that further reform of the party funding 
system could end the perception of sleaze. He said that: 

"we wish also to illustrate the immense opportunities such reform could bring if approached 
with these additional objectives borne in mind. We have a rare opportunity to look at the 
general health of our parties, to stabilise political party membership, remove the concern that 
parties are beholden to a few rich backers, and to create a framework under which parties seek 
new and effective opportunities to engage with the electorate." 

In addition, the New Politics Network published a report in 2004 entitled "Life Support for Local 
Parties", looking at the parlous state of many local constituency parties in terms of the number of 
members they have, and arguing that this could be strengthened through reform of the party 
funding system. 

Electoral Commission "The Funding of Political Parties" - December 2004' 6 

Over the course of 18 months the Electoral Commission conducted a comprehensive review, 
including hearing from the experts in the field and conducting in-depth assessments of public 
opinion. The report recognised the funding challenge facing parties, and that there was no public 
appetite for large-scale state funding. It argued that political parties should concentrate their 
efforts at the local level, and recommended tax relief for small donations, and an equivalent 
scheme for non-taxpayers. In the view of the Electoral Commission, this would have the desirable 
consequences of delivering broader streams of income, and of encouraging more effective 
engagement with the electorate. 

The Electoral Commission did not recommend a cap on donations, but it did say that if a cap 
were to be introduced it should be set at a low level, and the figure the report mentioned was 
£10,000. 

The report also recommended lowering the amount parties could spend at national elections and 
raising the amounts that candidates could spend. This would be aimed at stimulating more local 
campaigning by parties. In addition, the report recommended extending the Policy Development 
Grant scheme, recommended by the Neill Committee, from solely parties represented in 
Westminster to include parties represented in devolved administrations and the European 
Parliament. 

POWER Inquiry - March 2006" 

The POWER Inquiry conducted a wide-ranging investigation into the causes of the recent decline 
in involvement in politics in the UK, and came out with a series of recommendations. Those 
directly related to party funding are that: 

• Donations from individuals to parties should be capped at £10,000, and organisational 

donations should be capped at £100 per member and subject to full democratic scrutiny within 
the donor organisation. 

34 



Annex C 



• State funding to support local activity by political parties and independent candidates to be 
introduced based on allocation of individual voter vouchers. This would mean that at a general 
election a voter would be able to tick a box allocating a £3 donation per year from public 
funds to a party of his or her choice to be used by that party for local activity. It would be 
open to the voter to make the donation to a party other than the one for which they have just 
voted. 

Views since the Review began 

Over the course of the last few months there have been various contributions from thinktanks and 
from MPs to the public debate, and some of them are discussed below. 

In March, Andrew Tyrie MP published a paper "Clean Politics", 18 arguing for a cap on donations 
at £50,000; lowering the cap on national party campaign expenditure for a general election from 
approximately £20 million to £15 million; tax relief for donations; and a general public subsidy 
to eligible parties based on the number of votes gained. 

Alan Whitehead MP produced a pamphlet, "Anti-Politics and Political Parties", 19 in April, making 
the case for increasing public funding on the basis that it provides "the guarantee that the civil 
life of the state functions well, and it restores the proper role of politics to the civil life of 
citizens." Public funding would combat the rise of what he terms "anti-politics", the widespread 
disinterest and in some cases hostility to politics. 

The Leader of the House of Commons, the Rt Hon Jack Straw MP, gave a lecture 20 to the Fabian 
Society in June in which he argued that reducing election expenditure should be the priority, 
rather than a cap on donations. He saw a real risk in any moves that would push the funding of 
political parties down the same route as in the US, that is, of massive campaign spending and 
large amounts of unregulated expenditure, which he saw as highly undesirable. 

The New Local Government Network published a paper, 21 also in June, making the case for 
political parties to be funded by a "civic aid" scheme, whereby parties would be able to claim 
£25 for every registered supporter or donor giving £50 or more in any one financial year. The 
aim would be to stimulate local democratic engagement by encouraging the parties to strengthen 
local activism so that they could get more people to give donations. Only parties that had signed 
up to a "Charter of Democratic Practice", renouncing violence and discrimination, would be 
eligible for this funding. 

In September, Demos published "Serving a Cause, Serving a Community", 22 a paper by the 
Secretary of State for Transport and Secretary of State for Scotland, the Rt Hon Douglas 
Alexander MP and Dr Stella Creasy arguing the case for a renewal of parties, and for 
strengthening and reforming local party activism. The authors argue that parties must re-evaluate 
how they relate to the communities that they serve, and that they should open themselves up to 
engage with social activists. They mention the role that the funding of political parties could 
serve in enabling this. 

The Young Foundation has recently published a paper 23 by Fiona Mactaggart MP, Geoff Mulgan 
and Rushanara Ali arguing that some activities of parties, such as the formulation of policy, the 
development of leaders, and the maintenance of links with the community could be classified as 
being in the public benefit. They argue that these activities should be legally separate from their 
other activities such as campaigning, and that only these public benefit activities should receive 
public funding, through matched funding of donations. 



35 



The Review of the Funding of Political Parties 



As has been shown, the last few years have produced a wealth of argument and discussion as to 
how political parties are funded. While there has not been any agreement, it is noticeable that the 
same themes continue to emerge, such as the importance of transparency, a reduction in 
expenditure limits for parties, and some form of public funding, which may indicate a growing 
consensus. 



36 



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37 



Annex E 



Existing Public Funding 



Political parties in the United Kingdom receive public funding at present, and have done so for 
many years. The same is true of parties in many liberal democracies. This section describes the 
key elements of the existing public funding arrangements for political parties. 



Short Money 

This is provided to opposition parties in the House of Commons to help them discharge their 
Parliamentary duties. Recipients must be represented in the House of Commons by two or more 
sitting MPs (that is, MPs who have taken the Oath of Allegiance to HM The Queen), or one 
sitting MP and more than 150,000 votes at the previous general election. 

It was introduced in 1975 on the suggestion of Edward Short, the then Labour Leader of the 
House of Commons, and has three components: 

• Funding to assist an opposition party in carrying out its Parliamentary business; 

• Funding for the opposition parties' travel and associated expenses; and 

• Funding for the running costs of the Leader of the Opposition's office. 

It is not available to the government of the day, which can draw on the resources of the state, 
including the Civil Service, to meet its obligation to Parliament. 

In the financial year 2005-2006, the Conservative Party received over £4 million in Short Money. 
The Liberal Democrats received around £1.5 million; they do not receive any money in relation 
to the running of the office of their leader. Other eligible parties with representation at 
Westminster received lesser amounts, dependent on votes cast and seats won. 

Sinn Fein is not eligible for Short Money as its MPs do not take the Oath. But it does receive 
funding analogous to Short Money to help its MPs undertake their representative business. 

Short Money is administered by the House of Commons authorities. 

Equivalent funding schemes exist for parties represented in the Scottish Parliament, the National 
Assembly for Wales and the Northern Ireland Assembly. 

Cranborne Money 

A similar scheme for opposition groups exists in the House of Lords. Cranborne Money, named 
after the then Leader of the House of Lords, was introduced in 1996. It is to help opposition 
parties and crossbenchers to conduct Parliamentary business. 

In 2005-2006 the Conservative Group received around £435,000 in Cranborne Money, the 
Liberal Democrats Group £210,000, and the Convenor of the Crossbencher Peers £38,000. 

Cranborne Money is administered by the House of Lords authorities. 

Policy Development Grants 

Policy Development Grants are specifically provided to enable parties to prepare policies for 
inclusion in their manifestos. They have been provided since 2002. 



39 



The Review of the Funding of Political Parties 



A £2 million fund is distributed annually among political parties with two or more sitting MPs. It 
is divided according to a complex formula which seeks to benefit all eligible parties. It is divided 
equally among parties contesting the same geographical area. In Great Britain the Conservatives, 
Labour and Liberal Democrats receive the same amount of money, approximately £458,000. In 
Northern Ireland the eligible parties there, the DUP and the SDLP, receive the same amount of 
money, approximately £155,000. The Scottish National Party receive approximately £162,000 and 
Plaid Cymru approximately £151,000. 

The Policy Development Grant is administered by the Electoral Commission. 

Indirect public funding 

When parties and candidates put themselves forward for election they become eligible for 
support in kind. The principal methods are set out below. 

Party political broadcasts 

Political parties do not have to pay for the air time they obtain for party political broadcasts. As a 
general rule, party political broadcasts are available to all parties that put candidates forward in at 
least one-sixth of the contested seats across the UK or one of its constituent countries. 

The terrestrial commercial broadcasters are under a statutory obligation to carry party political 
broadcasts, while the BBC has a formal obligation to carry them under its Charter Agreement. 

It has been estimated that if the parties had to buy equivalent advertising time at commercial 
rates, their value would be in the region of £68 million for an election year, and £16 million in a 
non-election year. 24 

Freepost at elections and use of meeting rooms 

Candidates are entitled to free postage for one election mailing to each elector in the 
constituency. This applies to elections to devolved bodies and the European Parliament as well as 
general elections. It is not available for local government elections in Great Britain although it is 
provided for local elections in Northern Ireland. For general elections the total cost of freepost is 
over £20 million. 

Candidates are also entitled to the free use of public meeting rooms, e.g. schools, town halls, for 
all elections in Great Britain. There is no such provision in Northern Ireland. 



40 



Annex F 



Regulating Campaign Expenditure 

Specific concerns with the current system 

The Review is aware of concern that some parties are using material that counts towards the 
national expenditure limit in a targeted way in marginal constituencies to enable them to spend 
more there than the candidate limit alone would allow. Examples include letters addressed to 
individual voters from a party leader and leaflets put through letter boxes in marginal 
constituencies which only mention the name of the party. Some feel this goes against the spirit of 
the current rules which intended national campaigning to cover only those activities with truly 
national coverage of voters. 

A further specific problem is caused by candidate campaign expenditure limits coming into effect 
only five to six weeks before an election. This means large amounts of money can be spent in 
constituencies close to the date of election which are not regulated or reported. The Electoral 
Commission register of donors shows that some donors gave donations to multiple constituency 
parties, many of which were well over the limit of what candidates can spend on campaigning in 
the regulated period for a general election. 

The Electoral Commission proposed increasing the limit for the regulated period for candidates 
to four months but this was rejected by Parliament during the passage of the Electoral 
Administration Act 2006 because of practical concerns over finding election agents for the 
four-month period and uncertainty as to when the four-month period would start. 

The Electoral Commission has held a series of consultative meetings with political parties around 
the UK to seek their views on these specific issues and will be reporting in due course. However, 
a new approach to regulating expenditure could help overcome these difficulties. 

Changes to the way campaign expenditure is regulated 

The Review is also aware of issues around the present regime for regulating election campaign 
expenditure that go beyond discussion of whether the current limits are the right ones. The 
system for regulating candidate spending at general elections devised in 1883 still underpins the 
current regulation of election spending. Many of the principles remain the same, but changes in 
society, the electoral system and party campaigning all point to problems with the approach. A 
different century faced different problems. It may be that the time has now come to change the 
whole approach to regulating campaign expenditure rather than modifying a nineteenth-century 
model. 

Current expenditure limits are based on a specific definition of campaigning in relation to 
election periods. However, political parties are always seeking to persuade people on a range of 
issues that their ideas and approach are better than other political parties. This is the primary 
purpose of political parties and is positive for democracy. People are being encouraged to get 
involved to establish a progressive momentum towards an election. The specific activities a party 
decides to carry out at a certain point in time will be influenced by the electoral cycles, but 
persuading voters is a continuing, positive activity. 

Regulation faces an additional challenge when the defined periods for election campaign 
spending overlap, as happened with the European Parliament election of 2004 and general 
election of 2005. 

This problem could be avoided if, rather than trying to define the period in which election 
campaigning takes place, there were continuous limits on party campaign expenditure. Parties 



41 



The Review of the Funding of Political Parties 



could be given an expenditure limit for the whole year. These could apply to parties separately at 
a national and local level to take into account the different ways political parties are organised. 
The limits might be further adjusted to take account of the number and type of elections 
occurring in a year. 

Continuous regulation of expenditure could be applied to local parties to ensure that the money 
spent locally is recorded and included in expenditure limits. This would be a significant addition 
to the workload for local parties, although regulation could be made proportionate; only basic 
information might be required from local parties with low levels of expenditure. The regulation 
of charities could provide a possible model as it is flexible and recognises some charities are 
large, professional organisations while others are small and run by volunteers. Charities are 
required to present expenditure in particular formats and financial thresholds determine how 
much information charities have to provide. 

Some would argue that it is important that candidates can spend to campaign in elections without 
the money being controlled directly by the party. A specific limit could remain for candidates to 
use in the period five to six weeks before the election, but with all their expenditure outside of 
this period being local party expenditure. This would, however, introduce a third category of 
expenditure for political parties to manage, adding further complexity. 

Advantages 

A more continuous process of regulation would better reflect the current climate of continuous 
campaigning. It would also avoid specific concerns that large amounts are spent in marginal 
constituencies promoting candidates before the candidate limit comes into force five to six weeks 
before the election. This spending is currently not reported anywhere as it does not come under 
the definition of national party spending, and it is incurred before the candidate spending limit 
takes effect. Even if the regulated election period is lengthened, there is likely to be a tendency 
for those parties with sufficient money to spend large amounts just before any election period 
starts. There are a number of permutations for how continuous regulation of expenditure could 
help solve these problems, but broadly speaking by doing away with election periods it would 
prevent parties or candidates from frontloading expenditure to avoid them. 

Disadvantages 

Parties rely on volunteers at local level and many are already struggling to find people to take 
posts such as election agent or local treasurer as a result of falling membership and the increased 
responsibilities regulation has placed on these office holders. At the moment election agents are 
legally liable for ensuring their candidates do not exceed the election campaign expenditure limit. 
While some are prepared to take the responsibility for a five to six week period, there are already 
difficulties finding people willing to do this. It would be more difficult to find someone willing 
to take legal liability for reporting all local party expenditure and making sure the expenditure 
limit is adhered to year in, year out. 

Not all elections are fought on the basis of parliamentary constituencies, which tend to form the 
basis for the organisation of local party units. This would make year-round regulation of local 
expenditure difficult where elections were being fought across different boundaries. It would also 
cause difficulties where campaigning is taking place for parties using a list system of 
proportional representation. 

Parties have a certain amount of expenditure that is not directly connected with a particular 
election campaign. It is difficult to draw the line between core expenditure and campaigning. 
Examples are member relations, accountancy, building, office expenses and staff. For example, 
staff may be campaigning and a mailing may be used to encourage members to campaign. 



42 



Annex F 



Buildings may be located in prominent places to increase the local presence of a party and office 
expenses may include stationery and postage used for campaign mailings. Expenditure may also 
not be evenly distributed, for example new computer software to help all campaigning activities 
may artificially increase spending in one year but provide benefits over a number of years. 



43 



Annex G 



Financial Effects of a Cap on Donations 

To understand the possible effects of any cap on donations, the amount that parties currently 
receive and the amount that they spend need to be analysed. The following information has been 
taken from the three main parties' annual Statement of Accounts, which are sent to the Electoral 
Commission and made publicly available. All figures are in millions of pounds. 

Conservative Party 





Donations, including 
membership fees 


Total Income 
(including donations) 


Expenditure 


2002 1 


Approx 


11.0 


Approx 


15.8 


Approx 16.7 


2003 


8.5 




13.6 




16.0 


2004 


14.7 




20.0 




26.2 


2005 


14.4 




24.2 




39.2 


Annual Average 


12.5 




19.3 




27.1 



Total net liabilities as of 31 December 2005 = £ 18.0m 

1 Due to the reporting year for the Conservative Party being the financial year rather than the calendar year in 2002 
those figures have been disregarded in calculating the average. 

Labour Party 





Donations, including 
membership and 
affiliation fees 


Total Income 
(including donations) 


Expenditure 


2002 


14.1 


21.2 


22.1 


2003 


19.3 


26.9 


24.3 


2004 


20.0 


29.3 


32.1 


2005 


25.6 


35.3 


49.8 


Annual Average 


19.8 


28.2 


32.1 



Total net liabilities as of 31 December 2005 = £27.2m 
Liberal Democrats 





Donations, including 
membership fees 


Total Income 
(including donations) 


Expenditure 


2002 


1.7 


3.7 


3.4 


2003 


2.1 


4.1 


4.0 


2004 


2.8 


5.1 


4.6 


2005 


6.2 


8.6 


8.8 


Annual Average 


3.2 


5.4 


5.2 



Total net assets as of 31 December 2005 = £298,000 

This shows that, for the three main parties, the proportion of donations as part of the total income 
ranges from approximately 50% to approximately 80% depending on the party and the particular 
year. The amount of donations increases in the year prior to a general election. 



45 



The Review of the Funding of Political Parties 



Donations of over £5,000 to a central party, or over £1,000 to an accounting unit, have to be 
declared to the Electoral Commission. We used this publicly available data to calculate what the 
effects of any cap would be in terms of the reduction of party income. We have cleaned the data 
as much as possible, seeking accurately to record the amount each donor gave in any one 
particular year. If a donor gives quarterly it currently appears on the Electoral Commission 
register as four separate donations. We assumed that any cap would apply to the total amount a 
donor gives on an annual basis, and so adjusted the data accordingly. 

It should be noted that as donations of under £5,000 to a central party, or £1,000 to an accounting 
unit, do not have to be recorded or reported to the Electoral Commission, the figures we have 
used only deal with reported donations, and therefore do not tell the whole story of the number of 
donations received. However, we believe any margin of error to be minimal, and any impact on 
the results to be negligible. 

In addition, due to the very nature of the fact that we are dealing with donations to political 
parties, it is difficult to predict with certainty future trends, so the analysis can only be based on 
past behaviour, and on an assumption that future trends of donations would be similar. In general, 
the trend is that donations follow the perceived success of a party. 

Shortfalls 

We calculated the average yearly amount that parties would receive if a cap were set at various 
levels between £100,000 and £5,000. The range of the shortfalls that the parties would face is as 
follows: 



Cap 

£100,000 - £5,000 


Conservative Party 


£3.1 -7.2m 


Labour Party 


£6.9 -12.6m 


Liberal Democrats 


£0.6- 1.3m 



We then made certain assumptions about the change in behaviour that may be expected as the 
result of a cap. These were that: 

• Parties would seek to encourage more donations; 

• Donors would seek to avoid the cap by channelling donations through family members and 
other sources; and 

• Parties would actually spend less, possibly in conjunction with a reduction of the amount the 
national party can spend at a general election. 

Different scenarios could be modelled by altering the percentage effect of the above changes, 
which may be driven by a publicly funded incentive scheme for members or small donations, a 
cap on election expenditure, and other factors. Obviously behavioural changes are notoriously 
difficult to predict, so again this adds an element of approximation into the modelling. 

Adjusted shortfall 

Assuming variations of 10% in each of the three variables, that is, a 10% increase in parties 
seeking donations and in large donations being split and channelled through other sources, and a 
10% decrease in the amount of donations required due to decreased spending, the following 



46 



Annex G 



adjusted figures show the range of the shortfalls that the parties would face, again with a cap set 
between £100,000 and £5,000. 



Cap 

£100,000 - £5,000 


Conservative Party 


£0.8 -5.1m 


Labour Party 


£4.3 - 10.4m 


Liberal Democrats 


£0.1 -0.9m 



With an increase of 20% in the amount of donations due to parties seeking more donors, while 
the other variables remain at 10%, the following range of shortfalls result (a plus sign signifies a 
surplus rather than a shortfall): 



Cap 

£100,000 - £5,000 


Conservative Party 


£0.2 - 4.9m 


Labour Party 


£3.5 -10.1m 


Liberal Democrats 


£+0.1 -0.8m 



With an increase of 30% in the amount of donations due to parties seeking more donors, while 
the other variables remain at 10%, the following range of shortfalls result: 



Cap 
£100,000 - £5,000 


Conservative Party 








£+0.5 - 


4.7m 




Labour Party 








£2.7- 


9.9m 




Liberal Democrats 








£+0.6 - 


0.7m 




Reported donations a\ 


'erage 
















Cap of 
£100,000 


Cap of 
£50,000 


Cap of 
£10,000 




Cap of 
£5,000 


Conservatives 




£6. 5m 


£5. 7m 


£3. 5m 




£2.4m 


Labour 




£8.1m 


£6. 2m 


£3. 4m 




£2.5m 


Liberal Democrats 




£1.6m 


£1.4m 


£1.0m 




£0.8m 


Shortfall 






Cap of 
£100,000 


Cap of 
£50,000 


Cap of 
£10,000 




Cap of 
£5,000 


Conservatives 




£3.1m 


£3. 9m 


£6.1m 




£7.2m 


Labour 




£6.9m 


£8. 8m 


£11.6m 




£12.6m 


Liberal Democrats 




£0.6m 


£0.8m 


£1.2m 




£1.3m 



47 



The Review of the Funding of Political Parties 



Adjusted shortfall with 10% change in variable factors 






Cap of 
£100,000 


Cap of 
£50,000 


Cap of 
£10,000 


Cap of 
£5,000 


Conservatives 


£0.8m 


£1.7m 


£4.0m 


£5.1m 


Labour 


£4.3m 


£6.4m 


£9.4m 


£10.4m 


Liberal Democrats 


£0.1m 


£0.3m 


£0.7m 


£0.9m 



48 



Annex H 



Trade Unions 



Different issues arise in relation to the funding of political parties for trade unions compared to 
other organisations because their political activities are regulated differently. The Trade Union 
and Labour Relations (Consolidation) Act 1992 includes restrictions on the political activities 
trade unions can carry out, such as donating to a political party. An independent person, the 
Certification Officer, has the main responsibility for enforcing the law. 

The regulation of trade union political activities and their financial relationship with political 
parties is often misunderstood. The first section of this Annex explains the current regulations 
relating to the political activities of trade unions. The second section looks at the implications for 
the different scenarios. 

Current regulations relating to the political activities of trade unions 

Political funds 

A trade union can only carry out political activities if its members have agreed that the union can 
pursue political objectives. All activity in support of the political objectives must be paid for from 
a special fund set up for this purpose, known as the political fund. A trade union must ballot its 
members initially on whether to pursue political objectives and set up a political fund. It holds a 
ballot every 10 years thereafter. If the members do not agree to the union having political 
objectives and setting up a political fund, the trade union will not be able to carry out any of the 
activities specified in law as being a political object. 

The political fund is financed by contributions from trade union members. This is a separate 
contribution paid on top of the membership subscription fees and this can only be used for the 
political fund. It is sometimes referred to as the 'political levy'. The general membership 
contributions cannot be used for political activities. 

Under law, trade union members in Great Britain have the right to opt out of paying contributions 
to the political fund. In the past, changes have been made to the law to require trade union 
members to opt in to paying contributions to the political fund. The issue of whether the 
assumption should be that trade union members pay, or do not pay, has been controversial. The 
latest figures for Great Britain show that approximately 1 0% of trade union members opted out 
of paying a contribution to the political fund in 2006. For the affiliated trade unions, the figure is 
very slightly higher. 25 In Northern Ireland, trade union members opt in to paying these 
contributions. 

The political funds of trade unions are overseen by the Certification Officer and he can 
investigate complaints by union members into the handling of contributions to the political funds 
and requests to opt out. 

There are 201 trade unions. 26 Of these, 29 have political funds. The latest figures show the 
combined balance of all political funds on 31 December 2004 was £13.4 million. 

Political funds in affiliated trade unions 

Of the 29 trade unions with political funds, 17 trade unions are affiliated to the Labour Party. 
UNISON has two political funds, an affiliated political fund known as Labour Link and a general 
political fund which is not affiliated to any political party. 



49 



The Review of the Funding of Political Parties 



Trade unions affiliate to many organisations, not just political parties. For example, many 
affiliate to the Trades Union Congress and international labour organisations. 

Affiliation is a description of a category of membership open to an organisation rather than an 
individual. It does not necessarily mean that each member of a trade union would wish to join 
that organisation, but that the trade union as a whole wishes to. 

The organisation being affiliated to will decide how much it wishes to charge other organisations 
to affiliate to it in the same way that it would decide how much it wishes to charge individuals 
who wish to join it. This will often be based on the size of the organisation that wishes to affiliate 
and in the case of trade unions the number of members is often used as a measure of size. 
However, the trade union may have discretion over how it wishes to define the number of 
members it has. For example, it may have the freedom to exclude certain categories of 
membership, particularly those who do not pay subscriptions to the union, such as honorary, 
retired or unemployed members. The Review is aware of anecdotal evidence that affiliations to 
other organisations may use a particular definition of "member" for financial reasons if the trade 
union cannot afford to pay an affiliation fee based on its total membership or to increase its 
voting power within the organisation it is affiliating to. 

Affiliation to the Labour Party follows a similar pattern to affiliation to other organisations. The 
process is illustrated in the figure following. At present, the Labour Party asks affiliated trade 
unions to pay £3 per member affiliated. Trade unions can also affiliate at a regional level to the 
regional Labour Party and at a branch level to a Constituency Labour Party. Affiliation to the 
Constituency Labour Party costs £6 per 100 members. 

The view that trade union affiliation is organisational membership is not agreed by everyone. 
Some people say that trade union affiliation should be seen as a collection of individual 
membership subscriptions. They point to the link between individual contributions to the political 
fund and the amount paid in affiliation fees; to individual trade union members voting on 
whether the trade union should affiliate; and to individual union members voting in elections for 
Leader and Deputy Leader of the Labour Party. 

As with individual membership subscription fees paid to political parties, affiliation fees are 
treated as donations to a political party and are reported to the Electoral Commission in the same 
way. Payments over £1,000 at a local level and £5,000 at a national level have to be reported and 
can be viewed on the Electoral Commission's online register of donations. 

Trade unions are not the only organisations to affiliate to the Labour Party. There are also 14 
socialist societies which pay an affiliation fee based on the number of members they have and are 
entitled to representation and votes within the party structures, in a similar way to trade unions. 

As affiliation fees are payment for organisational membership, they entitle trade unions to certain 
rights within the Labour Party in a similar way to individual members. Affiliated organisations 
are entitled to send representatives to regional conferences; vote at the Party Conference; vote in 
the Electoral College to elect the Party Leader and Deputy Leader; and have places on the 
National Policy Forum and National Executive Committee. 

Affiliated trade unions may also give money to the Labour Party in addition to paying affiliation 
fees. They use their political funds for a range of political activities, which may include 
campaigning at an election as a registered third party (see Annex I). 



50 



Annex H 



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51 



The Review of the Funding of Political Parties 



Non-ajfiliated trade unions 

Non-affiliated trade unions can still use their political funds to support particular political parties. 
For example, the RMT has made donations to the Scottish Socialist Party. They also use their 
political funds for a range of other political activities, which may include campaigning at an 
election as a registered third party. 

Trade unions and the scenarios for changing the way political parties are funded 

The Committee on Standards in Public Life considered how existing trade unions regulation was 
working and concluded, "We have received no evidence to suggest that the legislation is not 
working satisfactorily, and no case has been made out for any reform. We do not propose any 
change in the law in this respect." 27 Since 2000, the Certification Officer has received three 
complaints regarding political funds. Two of these were withdrawn and one was not upheld. 

Increasing transparency 

Scenario 2 outlines the advantages and disadvantages of increasing transparency and identifies 
areas where transparency could be increased in relation to trade unions. 

Implications of a cap on donations 

If a cap on donations were introduced, as discussed in scenario 3, and the existing definition of a 
"donation" was used, then the Labour Party would have to change the basis for calculating 
affiliation fees where the affiliation fee worked out at more than the cap. Trade unions would not 
be able to pay an affiliation fee that was more than the cap in donations regardless of the number 
of members the trade union had. 

A number of different arguments have been made on this issue. Some believe that a cap on 
donations should apply to trade unions for the same reasons that a cap on donations should apply 
to individuals and companies; that is, the perception that large amounts of money given to 
political parties buy influence. Others believe that trade union affiliation fees should not be 
restricted by a cap on donations for some of the following reasons: 



• 



• 



Affiliated trade unions are an integral part of the Labour Party, a different relationship to the 
one private sector corporate donors have with political parties 

It may require the Labour Party to change how it calculates the fees it charges trade unions to 
affiliate 



• Requiring a change in how trade unions affiliate to the Labour Party may alter the constitution 
of the Labour Party. It is argued that no other political party would be affected in the same 
way and it is inappropriate for the state to interfere in the internal organisation of a political 
party. It could be seen as impinging on freedom of association. 

The alternative view of affiliations, that they are a collection of individual donations, would mean 
that a cap on donations would prevent some trade union members from being able to affiliate. 
Once the collective payment had reached the level of the cap, no more members would be able to 
pay the affiliation fee. With this understanding, it would be open to argument whether the 
affiliation fee per member should be considered as the donation rather than the collective 
payment. The low level of the affiliation fee per member would not be affected by a cap on 
donations. 



52 



Annex H 



Would a cap on donations in itself cause the constitution of the Labour Party to be 
changed? 

Trade unionists have set out a number of reasons why they feel a cap on donations would 
challenge the existing structures of the Labour Party, with Professor Keith Ewing, writing in a 
Trade Union and Labour Party Liaison Organisation paper, stating that, "The constitution of the 
Labour Party would be fatally undermined". 28 They stress that trade unions are members of the 
Labour Party and have rights according to their size. Professor Ewing says in relation to the 
effect of a cap on donations, "it would be absurd if a large union like UNISON could affiliate 
only on the same basis as a very small union". This in turn would affect the basis of 
representation at the Labour Party Conference, the National Policy Forum, the internal party 
structures, the selection of candidates and the election of Leader and Deputy Leader. They 
conclude that this would impinge on the principle of freedom of association as political parties 
must be allowed to determine their own structures. 

However, there is an alternative view that recognises that affiliated trade union involvement with 
the Labour Party goes beyond a financial relationship but that the wider relationship can continue 
even if regulatory measures such as a cap on donations mean the financial relationship changes. 
A cap on donations does not affect political funds. It also does not stop the Labour Party 
charging affiliation fees to trade unions, although it may alter the basis on which they set their 
affiliation fees. The trade union may end up paying less in affiliation fees, but could either 
redirect the political fund towards other political activities or reduce the amount they charge 
union members in contributions to the political fund. The Labour Party could still determine the 
trade union's influence according to the number of members contributing to the political fund. 
Trade union representation could still be determined on the same basis as at present. The only 
difference would be the amount the trade unions pay in affiliation fees. 

An argument can still be made that it would not be appropriate for the state to determine how 
political parties set their membership fees, including affiliation, but this can be seen as separate 
from the argument about whether a cap would change the structure and organisation of a party. 
Theoretically, a cap on donations would constrain all parties in terms of the level they set their 
membership fees although it is unlikely a cap would be set lower than any of the individual 
membership fees political parties currently charge. Alternatively, it could be argued that 
membership fees should be treated differently from donations, although steps would need to be 
taken to make sure membership fees were not used as a way of avoiding a cap. For example, 
trade union affiliation fees are not classified as donations in some existing legislation, but the 
Political Parties, Elections and Referendums Act 2000 does include affiliation fees and 
membership fees within its definition of a donation. 

Other effects of a cap on donations 

The concern over the impact of a cap on donations on the way political parties are organised is 
not limited just to trade unions affiliated to the Labour Party. A cap on all donations could affect 
socialist societies' affiliation to the Labour Party. It could also affect the way the Co-operative 
Party is organised because over 90% of its subscription income comes from co-operative 
societies: trading organisations that include co-operative supermarkets. The Co-operative Party 
also makes donations to the Labour Party rather than incurring expenditure in election 
campaigning itself, as, under a 1927 electoral agreement, candidates stand on joint Labour and 
Co-operative Party tickets. There are currently 29 Labour/Co-operative MPs. 



53 



Annex I 



Third Party Campaigning 



In the context of an election campaign, third parties are people or organisations which are not 
themselves candidates or parties. Third parties campaign in favour of or against a candidate or 
political party. They have not been authorised to campaign on behalf of a candidate or party. 
Some people or organisations may campaign more widely on political and election issues but are 
only considered to be third parties under the present definition if they support or oppose a 
particular candidate or party. 

Present controls on third party funding 

The present controls on third parties focus on campaigning during election periods. National 
regulation of third party expenditure during election periods was introduced in 2000. However, 
restrictions on what third parties could spend in favour of candidates have been around much 
longer. This is now set at £500. 

The present system introduced by the Political Parties, Elections and Referendums Act 2000 
requires third parties campaigning nationally during an election period and who spend over 
£10,000 (or £5,000 in one region) to: 

• Register with the Electoral Commission; 

• Be subject to the same rules for receiving donations, declaring donations and providing 
accounts as political parties; and 

• Not spend over the prescribed amount. 



Election 


Regulated 
period 


Controlled Expenditure Limit 




(ends with the 
date of the poll) 


England 


Scotland 


Wales 


Northern 
Ireland 


Westminster 


365 days 


£793,500 


£108,000 


£60,000 


£27,000 


Scottish Parliament 


4 months 


N/A 


£75,800 


N/A 


N/A 


National Assembly for Wales 


4 months 


N/A 


N/A 


£30,000 


N/A 


Northern Ireland Assembly 


4 months 


N/A 


N/A 


N/A 


£15,300 


European Parliament 


4 months 


£159,750 


£18,000 


£11,259 


£6,750 



Source: Electoral Commission 

How much third party campaigning is there at present? 

At the 2005 general election there were 26 registered third parties who spent £1.7 million 
between them (including one who registered but did not spend anything). 29 The two highest 
spenders were the Conservative Rural Action Group who spent £550,370 and UNISON, the 
public sector union, who spent £534,916. The remainder spent less than £58,000 each. Only 
10 third parties registered at the 2001 general election. 



55 



The Review of the Funding of Political Parties 



Possible impact of change on third parties 

Lowering the amount that parties can spend on campaigning 

If election campaign expenditure limits were lowered further, this may increase the influence of 
third parties. However, if the limits on third party spending were altered proportionately and 
mirrored any changes in approach for regulating party and candidate expenditure, then the effect 
of third party spending is unlikely to change. 

A cap on donations 

If a cap on donations were to be introduced, it may be that some donors continue to give to 
political parties up to the level of the cap. However, they may then spend more of their money 
that previously would have been donated to a political party on campaigning as a third party. This 
could be to campaign on a particular issue or for or against a particular party. This need not be 
because they are trying to find a way around the cap but simply because they wish their money to 
be used for political purposes. 

It would be quite possible for someone who at present donates money to be used, for example, in 
billboard advertising, to fund billboard advertising as a third party. On the face of it, there could 
be little difference between a billboard funded by a party and one funded by a third party. 

Evidence and experience from other jurisdictions 

The US is often cited as an example of why the UK needs to ensure excessive amounts are not 
spent on campaigning by third parties and third parties do not become dominant in elections. 
However, the situation in the US has resulted from some specific circumstances that are not 
found in the UK. 

The US Supreme Court ruled that there should be no restrictions on what people can spend on 
campaigning as long as it is not in conjunction with the candidate. In their view, the expenditure 
of money was protected under the freedom of speech provisions of the constitution. 30 Unlike the 
UK, the US has no limits on spending by third parties in elections and there is much more money 
in politics in the US than in the UK. In particular, third parties in the US can buy television 
advertising, an expensive form of campaigning but one that guarantees wide coverage. 

While the US Supreme Court ruled that limits on third party spending would impinge freedom of 
speech, the Supreme Court in Canada upheld limits of third party campaign expenditure saying 
that, "the spending limit system would lose all its effectiveness if the independent spending were 
not also limited". 31 

In New Zealand, campaigning by third parties is prohibited unless it is authorised by a party or 
candidate. As a result it comes within the expenditure limits for the party or candidate. However, 
advertising promoting particular issues rather than political parties is not regulated. And so 
campaigning for or against a particular policy associated with a particular party is not controlled. 

Conclusion 

Some have voiced the concern that changes to the current way political parties are funded could 
result in a dramatic increase in the spending and influence of third parties. This may mean that 
the effectiveness of lowering the campaign expenditure limit or introducing a cap on donations is 
reduced. 

However, some make the case that as the UK has a long tradition of controlling third party 
spending and does not permit third parties to buy broadcast advertising time it is unlikely that 



56 



Annex I 



third party spending would become problematic. The culture of politics in the UK is very 
different from that found in the US and comparisons should be made with caution. When repeat 
proposals for change, careful thought should still be given to the effects on third party spending. 
Where appropriate, the existing rules may need to be tightened to reflect other changes made. It 
is unlikely that third party spending is a sufficient reason in itself for ruling out lower campaign 
expenditure limits or caps on donations. 



57 



Annex J 



Ways an Incentive Scheme Could Work 

Current situation 

At present donations to political parties do not qualify for income or corporation tax relief, 
although they are exempt from inheritance tax and capital gains tax. However, in practice, these 
current exemptions are rarely used. 

The Neill Committee recommended that a system of tax relief should be introduced, limited to 
the basic rate of tax, on donations of up to £500 a year to eligible, registered political parties. 
This is the only substantive recommendation of the Neill Committee that was not accepted by the 
Government. The Government said this was because the administration and cost of tax relief to 
Her Majesty's Revenue and Customs (HMRC) and political parties would potentially be too 
burdensome relative to any prospective take-up. 

The Neill Committee considered examples of tax relief systems in the US and Canada. In the US, 
taxpayers decide whether to contribute $3 of their income tax to presidential campaigns, but have 
no say over which political party should benefit. This type of system would not meet the aims of 
the incentive scheme outlined in scenario 4, in as far as it would not incentivise either the 
political party to engage individuals, nor individuals to be engaged with parties. Canada has 
introduced a new system of party funding since the Neill Committee report but retained its 
system of tax credits. Refunds are given on income tax to individuals who donate to political 
parties - there is no direct benefit to the party. The system operates on a sliding scale according 
to the amount donated, with a 75% refund on donations of Can$400. 

The common criteria for judging mechanisms for incentive schemes are that they should be 
cost-effective for both parties and the Government to administer, straightforward for the public, 
donors and parties to understand, yet also prevent abuse or fraud. In addition, the system should 
support the wider aims of an incentive scheme outlined in scenario 4. 

Possible incentive scheme mechanisms 

Tax relief to party 

"The essential difference between direct [public] funding and funding by tax concessions is that, 
in the latter case, the funding results from the decisions taken by taxpayers to support the 
political parties and involves a contribution by the taxpayers out of taxed income." 32 

There are just over 29 million income taxpayers in the UK, while the population of the UK is just 
over 60 million, although not all these people will be "permissible donors". Only a minority of 
taxpayers complete annual tax returns. This would make any scheme that relied on opting in 
through the tax return difficult to administer. 

Two systems provide a model for how tax relief could work administratively: the Gift Aid scheme 
for charitable donations and the Mortgage Interest Relief At Source payment system (MIRAS) 
that operated until April 2000. These are models of how a system for funding political parties 
could work, leaving aside any arguments about whether political parties should become eligible 
for charitable status. 

Charities can claim back from HMRC the income tax at basic rate that a donor has paid. The 
charity has to show an audit trail back to a specific donor and a Gift Aid declaration. There is no 
minimum amount that Gift Aid can be claimed on, although charities may choose not to if the 
costs in administration will be greater than the amount they will gain. There is no maximum 
amount as long as the individual has paid income tax greater than the amount being reclaimed. 



59 



The Review of the Funding of Political Parties 



There are detailed rules explaining exactly what is eligible and for how much. Gift Aid claims are 
subject to risk-based or randomly selected audit and HMRC recovers wrongly submitted claims. 

The legislation that established Gift Aid uses a different meaning of a donation to that defined in 
the Political Parties, Elections and Referendums Act 2000, requiring donations to be made 
through freewill and not through paying for a benefit. For example, the admission fee to attend 
an event over and above the actual cost of putting on the event would be a donation if arranged 
by a political party under the Political Parties, Elections and Referendums Act 2000, but would 
not be eligible for Gift Aid if put on by a charity. 

For the MIRAS scheme, the borrower paid interest to the lender minus the tax. HMRC refunded 
the tax to the lender directly. If the borrower was not a taxpayer, they would also pay interest 
minus the tax, but the lender would be refunded from the then Department for Environment and 
the refund was treated as public expenditure rather than income tax recovery. A tax relief scheme 
for political donations need not prevent non-taxpayers from participating. 

If it was so desired, a limit could be placed on the amount of tax that could be reclaimed for a 
donor with this mechanism. 

The advantages of such systems are that they put parties on a comparable footing to charities, 
and this may encourage people to see donations to political parties as contributing to 
organisations that serve the public good. The rationale for the amount the state would give is 
clear, and the idea that it is an individual's tax that is being refunded to the party, rather than 
public funding coming from general state funds, may alleviate the concerns some have that 
parties which they do not support are being funded through their tax contributions. 

The disadvantages are the costs both to the parties and HMRC in processing claims. Only 29 
million people in the UK pay income tax. It would therefore be necessary for a similar 
arrangement to be made for non-taxpayers. The Gift Aid rules show how complex a system could 
end up being. 



Match funding 



The main differences between a tax relief scheme and a match funding scheme are the way it is 
administered and the amount of the incentive. As mentioned above, a tax relief scheme could 
have an equivalent scheme for non-taxpayers running alongside it. 

In this context, match funding should not necessarily be interpreted as meaning matching 
donations like for like: for instance, the proportion of match funding could change depending on 
the amount of the donation. Such flexibility would enable a match funding scheme to be more or 
less generous than a tax relief scheme. It could be as simple as matching each donor who gives 
over £50 in a year with £25 of state funding, as suggested by the New Local Government 
Network. Alternatively, it could be more sophisticated such as the ippr suggestion that a £50 
donation might attract £50 from the state while a £100 donation might gain an £80 top-up. 

In terms of administration, the scheme could work in a similar way to tax relief. It is unlikely that 
an individual donor submitting details of their donation to the Government to claim match 
funding is going to be a cost-effective way of administering the system for either Government or 
political parties. Therefore it would require the political party to make the claim. 

A potential disadvantage of this scheme is that it could be seen to be more open to fraud, unless a 
system of checks were to be built in to the system. This would need to be done without 
compromising the attractive simplicity of the scheme, and avoiding making the scheme 
unnecessarily burdensome for political parties and the state to administer. 



60 



Annex J 



Both tax relief and match funding schemes aim to encourage more people to give small donations 
to political parties and parties to engage more with potential donors of small amounts. It would 
be possible to design the system so that smaller donations receive proportionally more public 
funding than larger donations. With a tax relief scheme, this could only be done through putting a 
limit on the amount that could be claimed. An example of this would be the Neill Committee 
recommendation of limiting tax relief to donations of up to £500 a year. Donations over this 
amount would still receive tax relief, but only on the first £500. With a match funding scheme, a 
more sophisticated means of weighting donations could be used. 



Illustrations of how tax relief and match funding could work 





Donation 


With public funding 


Proportion of public 
funding to donation 


Tax relief with £500 cap 


£50 


£64.10 


28% 




£100 


£128.21 


28% 




£500 


£641.03 


28% 




£1,000 


£1,141.03 


14% 


Match funding weighted to 


£50 


£100 


100% 


favour small donations 


£100 


£150 


50% 


(scale shown in the right 


£500 


£750 


50% 


hand column) 


£1,000 


£1,250 


25% 



Voucher scheme 



The POWER Inquiry, drawing on a Council of Europe suggestion" recommended that voters be 
given a voucher for a certain amount of public funding in a polling station at a general election. 
They could indicate which party should receive their voucher and need not necessarily allocate 
their voucher to the party they voted for, for example in the case of a person who voted tactically. 
The POWER Inquiry recommended that the voucher should be worth £3 and it should go to the 
local unit of the party and not the central party. 

By distributing a voucher at a polling station it could involve more people and does not rely on 
people being proactive to claim the incentive. It would be easier to administer, as those attending 
would already have identified themselves and confirmed that they are on the electoral register. It 
may help increase turnout as there is value in attending a polling station even in a safe seat and 
encourage parties to campaign in a safe seat, even if it is for people to allocate their vouchers to 
that party rather than vote for them. 

There are disadvantages, however, as it confuses two different relationships: that of voting and 
that of allocating public funds. The voter may expect or wish the recipient of the voucher to 
remain secret, as their vote was secret. Yet, if no identification of who gave the voucher is 
provided to the party, it prevents them from engaging with supporters. 

General elections are infrequent ways of engaging the public. Voters would not often have the 
opportunity to express their opinion on who should receive their allocation of public funds and 
parties would only have an incentive to engage with voters when they already have an incentive 
to do so, that is during general election campaigns. There is a real danger that the public may 
become more cynical and feel that political parties are only contacting them to get money from 
them. It is doubtful whether this mechanism can meet the principle aim of an incentive scheme, 
that of increasing democratic engagement, because it does little to make voters feel closer to 
parties or make parties seem less remote. It may be more helpful to view this mechanism as a 
way a general subsidy from public funds could be distributed, as discussed in scenario 4. 



61 



The Review of the Funding of Political Parties 



There are also practical problems that would need to be overcome. It may be confusing for the 
voter if the parties the candidates on the ballot paper belong to does not match the parties they 
can allocate their voucher to - which may well be the case if independents are standing or if 
emerging parties are unable to field candidates in all seats. In some areas, there may be so few 
members of a local party that the resources cannot be put to effective use or are open to abuse. 
By receiving public funds, there may be an expectation of more accountability, which local 
parties with few members may struggle to meet or find resource-intensive. Some parties may 
receive such a small amount that the administration and accountability required is 
disproportionate. 

Grant per party member 

Rather than distributing an incentive for each donation given, parties could be rewarded with 
public funding for each member they have. Donating money does not require people to get 
involved with a political party and many members of political parties will be more engaged than 
donors. It could be argued that this more accurately incentivises the type of behaviour that 
indicates high democratic engagement. While party members who pay subscriptions would be 
caught by tax relief and match funding incentive schemes, this scheme captures membership 
from people who do not pay subscriptions because they have a low income or no income. The 
money supporters of political parties have is no longer so important. 

Many parties, and not just the largest political parties, have centralised membership systems 
which would allow straightforward administration of the scheme. However, the public funds are 
likely to be used centrally by the party which may increase the centralisation of political parties. 

The drawbacks are that a consistent definition of a member would need to be imposed on 
political parties, who at the moment determine their own structures. Even then, it relies on parties 
keeping accurate membership records and it would be relatively easy for parties to over-inflate 
membership figures, even if unintentional where people do not explicitly tell the party they wish 
their membership to cease. If the figures were audited externally to control this, it would remove 
the current confidentiality over who belongs to a party. 

Tax relief to individual 

Under this mechanism, the party would receive no additional financial benefit. The donor would 
receive the financial incentive to give directly through receiving a refund on the income tax they 
had paid on any money donated. 

This would be very difficult to administer in the UK where most taxpayers do not complete tax 
returns and it would be difficult to justify any equivalent for non-taxpayers, as effectively the 
state would be paying them to give to political parties. It would also require people to disclose to 
the state the amount of donation they had given. This may act as a disincentive to some donors as 
at present donations below £200 do not have to be recorded and they may be concerned about 
providing information on their donations. 



62 



References 



The Funding of Political Parties: A Survey of the Main Choices Involved 

1. Ghaleigh, N.S. (2006) The UK's Political Parties, Elections and Referendums Act 2000. Chapter 
in Ewing, K.D. and Issacharoff, S. (2006) Party Funding and Campaign Financing in 
International Perspective. Oxford: Hart. p. 40. 

2. Biezen, I. (2003) Financing Political Parties and Election Campaigns - Guidelines. Strasbourg: 
Council of Europe Publishing, p.66. 

3. Ibid. 

4. Research by MORI reported in Electoral Commission (2004) The Funding of Political Parties: 
Report and Recommendations, pp. 59-60. 

5. Ipsos MORI (2006) Survey of Public Attitudes Towards Conduct in Public Life 2006. London: 
Committee on Standards in Public Life. 

6. Electoral Commission (2004) The Funding of Political Parties: Report and Recommendations. 
London: Electoral Commission. Runswick, A. (2004) Life Support for Local Parties. London: 
New Politics Network. 

7. MacTaggart, E, Mulgan, G. & Ali, R. (2006) Parties for the Public Good: Reforming the 
Channels that make Democracy Work. London: Young Foundation. 

8. See, for example, Runswick, A. (2006) Policy Briefing: Funding of Political Parties. London: 
New Politics Network. Leslie, C. (2006) Who Pays for the Party? An Opportunity to Rejuvenate 
Grassroots Politics. London: New Local Government Network. MacTaggart, E, Mulgan G. & 
Ali, R. (2006) Parties for the Public Good. London: Young Foundation. 

9. Biezen, I. (2003). Financing Political Parties and Election Campaigns - Guidelines. Strasbourg: 
Council of Europe Publishing, p. 35. 

10. Ibid. 

11. Biezen, I. (2004) Political Parties as Public Utilities. Party Politics Vol. 10 No. 6 pp.70 1-722. 

Annex B - Process of the Review 

12. Committee on Standards in Public Life (1998) The Funding of Political Parties in the United 
Kingdom. London: The Stationery Office. 

Annex C - Recent Views on Party Funding 

13. Committee on Standards in Public Life (1998) The Funding of Political Parties in the United 
Kingdom. London: The Stationery Office. 

14. Cain, M. and Taylor, M. (2002) Keeping it Clean: The Way Forward for State Funding of Political 
Parties. London: Institute for Public Policy Research. 

15. New Politics Network (2003) Strong Parties, Clean Politics: The Case for Party Funding Reform. 
London: New Politics Network. 

16. Electoral Commission (2004) The Funding of Political Parties: Report and Recommendations. 
London: Electoral Commission. 

17. POWER Inquiry (2006) Power to the People. London: POWER Inquiry. 



63 



The Review of the Funding of Political Parties 



18. Tyrie, A. (2006) Clean Politics available from: 
http://www.conservatives.com/pdf/cleaninguppolitics.pdf 

19. Whitehead, A. (2006) Anti-politics and Political Parties: The Case for State Funding. New 
Politics Issue 3. 

20. Straw, J. (2006) speech to the Fabian Society available from: http://www.fabian- 
society.org.uk/press_office/news_latest_all. asp ?pressid=558 

21. Leslie, C. (2006) Who Pays for the Party? An Opportunity to Rejuvenate Grassroots Politics. 
London: New Local Government Network. 

22. Alexander, D. and Creasy, S. (2006) Serving a Cause, Serving a Community. London: Demos. 

23. MacTaggart, R, Mulgan, G. and Ali, R. (2006) Parties for the Public Good. Reforming the 
Channels that make Democracy Work. London: Young Foundation. 

Annex E - Existing Public Funding 

24. Andrew Tyrie, quoted in Electoral Commission Background Paper, The Funding of Political 
Parties, May 2003. 

Annex H - Trade Unions 

25. This is based on the total of those paying contributions and those who opted out and excludes 
categories of union membership who do not pay contributions such as honorary, retired or 
unemployed. From Certification Officer's Annual Report, 2005-2006. 

26. Certification Officer's Annual Report, 2005-2006, including listed and non-listed trade unions. 
As no employee associations have political funds, these have been excluded from this 
discusssion. 

27. Committee on Standards in Public Life (1998) The Funding of Political Parties in the United 
Kingdom. London: The Stationery Office, p. 83. 

28. Ewing, K. (2006) The Funding of Political Parties — The Trade Union Case for Reform. London: 
TULO. p. 12. 

Annex I - Third Party Campaigning 

29. Electoral Commission (2006). Election 2005: Campaign Spending. 

30. Buckley v. Valeo. Supreme Court of USA (1976). 

31. Libman v. Quebec (AG). Supreme Court of Canada (1992). 

Annex J - Ways an Incentive Scheme Could Work 

32. Committee on Standards in Public Life (1998) The Funding of Political Parties in the United 
Kingdom. London: The Stationery Office, p. 94. 

33. Schmitter, PC. and Trechsel, A.H. (1994). The Future of Democracy in Europe: Trends, Analyses 
and Reforms. Strasbourg: Council of Europe. 



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