House of Commons - Constitutional Affairs

Select Committee on Constitutional Affairs First Report

1 Background

1. Political parties form the bedrock of the system of representative democracy in the UK. Even when scepticism is expressed about the current nature and configuration of political parties, there are calls for their regeneration and renewal.[1] Political parties mobilise voters to participate in elections at all levels and make possible the conduct of effective government at the national, devolved and local level. They recruit and select candidates who become leaders of our democratic institutions and fulfil a key role in making and implementing public policy.[2] Survey evidence suggests that public opinion recognises and values the role played by the political parties: 71% of respondents agreed that political parties give ordinary voters the chance to choose between different sets of policies and 64% agreed that the parties represent strands of public opinion, both in government and opposition.[3] The Electoral Commission concluded that "it is difficult to visualise a parliamentary democracy…without the role played by political parties".[4]

2. There is general agreement with the Electoral Commission's statement that political parties require sufficient funds to fulfil their democratic functions.[5] However, a paradox currently exists at the heart of party politics in the UK: while there is recognition that political parties are key in mobilising local political activity and a central vehicle in promoting civic engagement, membership of political parties, turnout in elections and trust and confidence in politicians are at an all time low.[6] This has major implications for the financial management of political parties. Modern, centralised campaigns have resulted in escalating campaign costs, while at the same time the financial impact of the decline in party membership has resulted in increasing reliance on large donations and loans to fund political parties: a situation which appears to have eroded public confidence still further.[7] The New Policy Network warned that without an accepted system of adequate funding for political parties "we risk the health of our democratic system".[8]

3. Problems with the funding of political parties are not exclusive to the UK. Our inquiry found that in Canada, Germany and the U.S steps had been taken and legislation passed, in order to stabilise funding arrangements for the political parties. The current system in the UK is unstable and likely to become more so unless key issues are addressed. Keeping the current system is therefore not an option. This report considers the potential route maps for reform of the party funding system. In considering the merit of any proposed reform two key questions were at the forefront of our mind a) what do the public want, and b) what can the political parties realistically achieve?

4. We decided to investigate this important area before the controversy relating to loans to political parties which emerged in March 2006. However these, and subsequent developments, made our inquiry even more necessary. The allegations relating to circumstances surrounding major loans to all of the major political parties, whether substantiated or not, were bound to have an effect on public confidence in the workings of one of the most important parts of our political system. We immediately took evidence from the Lord Chancellor, who had announced at the end of March 2006 in a letter to all political parties which were represented at Westminster that he was going to seek to amend the law by way of an amendment to the Electoral Administration Bill (which was then in the House of Lords) to make it compulsory for all political parties to disclose any loans they received.[9]

5. Soon after our decision to start an inquiry we were contacted by Deputy Assistant Commissioner John Yates, the senior police officer in charge of an investigation into allegations made under the Honours (Prevention of Abuses) Act 1925. We made clear to him that we would ensure that nothing that we did in the course of our inquiry would in any way obstruct the police investigation. We wish to emphasise that we have focused on the principles behind the broader issue of party funding rather than on any particular cases or allegations. Because we were examining party fundraising, it was necessary for us to take evidence from fundraisers from all three major parties, including persons who either had been or might be involved in the police inquiry. This evidence was taken in private.

6. The question of how the political parties are, and should be, funded is not new, and has been the subject of several reviews, for example the Home Affairs Committee Inquiry of 1993-94 and the Hansard Commission Report of 1982.[10] The most notable in recent years was the Fifth Report of the Committee on Standards in Public Life Report, The Funding of Political Parties in the United Kingdom (October 1998), which followed a Labour Party manifesto pledge in 1997 to require donations to be declared and to ban foreign donations.[11] The recommendations of the Neill Committee included: the public disclosure of donations over £5000, but no cap on the size of a permissible donation; a review of the Short and Cranborne monies and the introduction of tax relief for donations of up to £500 per annum.[12]

7. The Government welcomed all of these recommendations with the exception of tax relief for small donations. The majority were implemented through the Political Parties Elections and Referendums Act 2000 (PPERA) which came into force in February 2001.[13] The Act established the Electoral Commission, set down accounting requirements for political parties, introduced controls on donations and on campaign expenditure, and rules for the conduct of referendums.[14] However, only four years after its implementation, the Electoral Commission recommended a series of changes to the current party funding regime in the UK and called for a debate of the difficult and sensitive issues associated with the funding of political parties.[15] Subsequently, in its 2005 General Election manifesto, the Labour party made a commitment to work with the Electoral Commission to explore how best to support political parties in their democratic role.[16] In evidence to us the Department for Constitutional Affairs expressed the Government's recognition that "issues need to be looked at afresh".[17]

8. On 17 March 2006, it was announced that Sir Hayden Phillips would be carrying out an independent review of the party funding system. In oral evidence to us Sir Hayden indicated that he would work closely with stakeholders including the political parties and the Electoral Commission. He had been asked to aim to produce recommendations which are agreed between the political parties with a view to new legislation as soon as parliamentary time allowed.[18]

His terms of reference were as follows:

i. 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;

ii. To consider the transparency of political parties' funding.

9. An interim report was published on 19 October.[19] The interim assessment set out four different scenarios for the future of party funding in the UK. The first scenario was based on minimal change, and on the assumption that the impact of the change in regulation brought about by the Political Parties, Elections and Referendums Act (PPERA) 2000 required more time to bed in. The second scenario envisaged increased transparency and greater spending control, and the third proposed a cap on donations. Scenario four proposed greater levels of public funding in addition to the proposals outlined in scenarios two and three.[20] The Phillips review is due to present its recommendations for the future of party funding to the Prime Minister early in 2007.

10. We wished to contribute to the widening and important debate, not least because in some quarters there were concerns that the process would not be subject to democratic input or public debate: a "stitch-up" between the parties was seen as an undesirable outcome. We were able to put most of the evidence received by us on public record; the terms of reference for our inquiry were as follows:

i. To consider the current system of party funding and to establish how well it is working and what reforms are required;

ii. To consider whether any further safeguards are necessary to ensure transparency and propriety in party funding;

iii. To consider possible alternative funding methods.

11. During the course of out inquiry we received written evidence from the witnesses listed on page 63. We visited: Berlin; Ottawa; Hartford, Connecticut; Boston and Washington, DC. A list of the people we spoke to is appended to the report.

12. At the heart of our inquiry was the question of who should pay for party politics. This report provides an overview of the issues, potential problems and proposed solutions that are relevant in answering that question, whilst at the same time providing for the effective functioning of political parties as a crucial element in an efficient parliamentary democracy in the UK. It explores the purpose of political parties and the efficacy of current funding arrangements and considers what kind of reform is required to the system of party funding in order to help parties fulfil their role. In welcoming the Committee's inquiry, the Electoral Commission stated that there is "a clear need to examine the operation of the current system and to consider the desirability and practicability of any possible reforms".[21]

13. Party funding and the maintenance of a system of parties that compete fairly within the British polity is an issue of central political importance. It is imperative that the Government take a considered and measured view of any proposals for reform and that reforms command a wide consensus among political parties. Failure to undertake reform, or the promulgating of reforms which are seen to be of a partisan nature, will serve only to alienate the public and damage rather than revive political parties in the eyes of the electorate.

1 For example see Power to the People: The Report of Power: An Independent Inquiry into Britain's Democracy, (March 2006), page 19 and page 22, which called for "the regeneration of parties" Back

2 Electoral Commission (2004), The Funding of Political Parties: Report and Recommendations, p. 7 Back

3 Ev 63 and 64. ICM POLL State of the Nation 2004, for the Joseph Rowntree Reform Trust Back

4 Electoral Commission 2004, p. 7 Back

5 Electoral Commission 2004, p.7 Back

6 See the British Election Study at www.essex.ac.uk/bes/ Back

7 For example see media reports at http;//politics.guardian.co.uk/funding/0,,685279,00.html Back

8 Ev 57 Back

9 See also Ev 48 Back

10 Hansard Commission Report on the Financing of Political Parties 1982 Back

11 The Committee on Standards in Public Life, Fifth Report, The Funding of Political Parties in the United Kingdom, Cmnd 4057, October 1998 Back

12 Short money is named after Edward Short, Leader of the House in 1975, when it was introduced. The money which is to be used for parliamentary business, has been a source of dispute in recent years, particularly over the definition of "parliamentary business". Back