House of Commons - Constitutional Affairs

Select Committee on Constitutional Affairs First Report

2 The Funding of Political Parties in the UK

The Regulatory Framework: The Political Parties, Elections and Referendums Act (PPERA) 2000

14. A "nonsensical, loophole ridden patchwork", is how Navraj Singh Ghaleigh, Lecturer in Public Law, Edinburgh Law School, described the system of party funding in the UK before the Political Parties, Elections and Referendums Act (PPERA) was passed in 2000.[22] During the late 1990s, this was illustrated by allegations of "sleaze"[23] and by claims from the parties themselves that they operated under "such constraints of debt and uncertainty of income as scarcely to be able to perform their constitutional functions".[24] PPERA was intended to address this and established a regulatory framework for party finance at national level for the first time in the UK.[25] Rt Hon Jack Straw MP, Leader of the House of Commons, who gave evidence to us as the Minister responsible for overseeing party funding issues, and also on behalf of the Labour party, hailed PPERA as "the most significant improvement in the regime of party funding" since the Second World War, but he conceded that "it has left some quite big gaps".[26]

15. The Act required registered political parties to submit an annual statement of accounts to the Electoral Commission, by a particular date and in a specified format. Furthermore, under PPERA donations to parties in excess of £5000 nationally or £1000 locally must be publicly declared with the details of the donor and the amount. This included 'in kind' as well as cash donations. Contributions may only be from permissible donors; foreign donations were banned and anonymous gifts in excess of £200 were also prohibited.[27] Under PPERA, party spending at the national level in general elections was capped. A new agency, the Electoral Commission was established to oversee the working of the Act and ensure compliance with the new rules.[28]

Party Income

16. Despite the requirement under PPERA 2000 that all political parties must submit annual accounts to the Electoral Commission, it has remained difficult to obtain a precise picture of the total income and expenditure of political parties. The Electoral Commission does not at present provide significant analysis of the statistics it collects. This is required, because partly the internal structures of all the main political parties incorporate a degree of local autonomy in both fundraising and spending and for the distribution of funds at the local and national level.[29] While PPERA bought a degree of regulation, transparency and conformity to the way party accounts are laid and scrutinized, it did not alter the different historical pattern of how the main parties in the British political system have raised funds. Indeed, any proposals for further reform to the system of party funding in the UK will eventually meet the obstacle of the plethora of historical traditions and relationships in the funding of political parties in the UK.

17. In the period 2001-2005 the Electoral Commission reported that the main parties income figures were as indicated in the table below.[30] This income is made up of several sources.

2001 2002 2003 2004 2005

Labour £35.5m £21.2 £26.9m £29.3m £35.3m[31]

Conservative £23.3m £ 9.9m £13.6m £20.0m £24.2m[32]

Liberal Democrats £ 5.0m £ 3.7m £ 4.1m. £ 5.1m £8.6m[33]

MEMBERSHIP FEES

18. Membership fees have historically been a key component of the income of all major political parties. However, for various reasons (not least that the parties did not necessarily keep central membership lists) it is unclear how reliable figures given for membership of political parties actually were. Both the Conservative and Labour parties affiliated on estimated local numbers - the Conservatives based on local figures with no central records, and Labour on the basis of a minimum of one thousand members per constituency affiliation. In the UK, it is estimated that party membership as a proportion of the voting-age population declined from reported figures of 10% in 1960-64, to 5.9% in 1975-79 and 2.6% in 1985-89, a particularly stark decline compared to other western democracies.[34] However, political parties were not alone in having experienced a decline in membership. The Hansard Society's Report Neglecting Democracy, re-published in March 2006, noted that:

19. The Power Inquiry agreed with this, but added that in the realm of political campaigning outside formal electoral or parliamentary politics, involvement was still healthy. They explained that:

20. The evidence suggested that while there may never have been a 'golden age' in party membership, there is no doubt that membership has declined, and that this has had an impact on political parties. One impact, as illustrated by a recent study, was that from the 1970s onwards the balance between income from membership fees and income from donations has changed. It is estimated that the share of membership fees in the central income of both major parties in the UK decreased from 49% in 1975-9 to 25% in 1993-7, while the proportion of donations grew from 49% in 1975-9 to 63.7% in 1993-7.[37] By 2005, membership fees accounted for only 10% of Labour party income and only 3.5% of Conservative party income.[38] The New Policy Network concluded that "the systems that have kept political parties running over the past century are breaking down. As membership has fallen, political parties have become increasingly dependent on large donations from individuals to fund their election campaigns".[39]

21. Another traditional source of funding for parties was provided by locally organized events and social activities, but this income stream has been affected by the decline in membership. Parties also organise larger scale fundraising events at national level; some of these are in part a vehicle for donations and corporate sponsorship, while others have given rise to issues about and restrictions on the use of Downing Street and parliamentary facilities.

22. Furthermore, a decline in party membership has altered the campaigning profile as well as the income profile of the main political parties, as both campaigning and fundraising have become increasingly centralised. The New Policy Network argued that in marginal constituencies in particular, parties often compensated for a lack of activists by using direct mail or national advertising, which may possibly be an effective campaigning mechanism but does not provide personal contact between the public and their representatives. They further warned that if over successive election campaigns a person has never been canvassed personally and has not met either the candidate or a representative of the party, then the likelihood of their having a positive view of politics and politicians and consequently of turning out to vote tends to drop significantly. A study by Denver, Hands, Fisher and MacAllister found that at best (i.e. in marginal target seats) only 50% of the electorate was canvassed in the 2001 General Election campaign.[40] In non-target seats, this figure fell to 18% for the Labour and Conservative parties and 8% for the Liberal Democrats.[41] However, it is widely accepted that the contact between elected Members of Parliament and their constituents has increased significantly over recent years.[42]

23. Decline in party membership has altered the income profile of the main political parties. However, more significantly, it has altered campaigning strategies, led to a reduction in the number of local activists and subsequently reduced the direct contact that parties have with members of the public.

Trade Union Funding

24. In their written evidence, the National Trade Union and Labour Party Liaison Committee (TULO) outlined the origins of the Labour party. The Party was founded by the trade unions on the 27^th of February 1900, in order to reverse a judgement of the House of Lords and secure "better representation of working people in parliament".[43] While the Labour Representation Committee changed its name to the Labour party in 1906, the Party maintained the structure of an organisation of affiliated trade unions and societies; it was not possible for an individual to become a member of the Labour party as such. Labour party membership was only opened to individuals as well as organisations in 1918.[44]

25. In addition to the regulation under PPERA 2000, the relationship between the trade unions and the Labour party is subject to additional legal regulation under the Trade Union and Labour Relations (Consolidation) Act 1992. The rules were summarised by TULO as follows:

26. In 2001 there were 4,419,165 levy payers in 35 trade unions, and 643,000 trade union members who had opted out. According to the 2005 British Election Study, 45.7 % of current trade union members voted Labour in the 2005 General Election, 22.1 % Liberal Democrat and 19 % Conservative.[46] The law relating to trade union political expenditure was comprehensively examined by the Committee on Standards in Public Life in 1998. The Committee recommended that that there should be no change to the existing position on the grounds that the existing law appeared to be working well.[47]

DONATION INCOME

27. In reviewing the income profiles of the three major political parties in the UK in 2005, based on analysis of Electoral Commission registers of donations, Ewing and Ghaleigh found that a total of £148.2m was donated to the political parties between the 5^th April 2001 and the 5^th May 2005.[48] A further source of donation income was local donations. However, this was difficult to quantify, in part because donations to local party structures were more likely to fall beneath the threshold and in part due to specific local arrangements which relied on voluntary disclosure by local volunteers.[49]

28. The Labour party was the largest single beneficiary of donation income, which totalled £65,980,846 during this period: 64% of this donation income was provided by trade unions. Ewing and Ghaleigh found that 37 donors provided a further 25% of the Labour party's total donation income.[50] Given the constitutional position of the trade unions within the Labour party there is a question as to whether trade union funding should be categorized as donation or as a membership/affiliation fee. However, regardless of its classification, there has been a decline in trade union income as a proportion of the Labour party's overall income. The Lord Chancellor and Secretary of State for Constitutional Affairs, told us that donations from the trade unions currently provided 25-26% of the Labour party's total income, compared with 92% thirty years ago.[51] However, other estimates suggested that trade union income to the Labour party still accounted for over 64% of its total donation income.[52]

29. Historically, the Conservative party has relied on local constituency associations, individual and corporate donations for much of its income. Again, between April 2001 and May 2005, the Conservative party received a larger average of individual donations than the other parties, with high value donations (over £100,000 including aggregated donations) accounting for 43% of its donation income. A further 29% of its income came from state funding in the form of Short money and Policy Development Grants.[53]

30. The Liberal Democrats have never received funding on the scale of the Labour and Conservative parties, but in recent years the party has received significant and regular funding from a few sources, notably the Rowntree Reform Trust. Ewing and Ghaleigh stated that until just before the 2005 General Election these sources accounted for 38% of Liberal Democrat funds, but a series of large donations from one source radically altered their income profile[54] and, in 2005, 25% of the Liberal Democrats donation income came from these sources. Three companies accounted for more than 30% of all donation income and a further 44% of all donation income came from private sources.[55]

31. As the figures above illustrate, a significant proportion of these donations were large donations. It was pointed out to us in private session that all organisations, whether charities, political parties or others which are engaged in fundraising, find it much more efficient and cost effective to target a few large donors, rather than to pursue a wide range of donors of small sums. This situation makes it inevitable that large donations be targeted, unless specific steps were taken to discourage this.[56]

32. Several parties have made increasing use of donations from elected representatives and local councillors, who in some cases are asked to give a suggested percentage of the allowance they receive as councillors to support the running of the party groups on the local council, the production of literature in order to communicate with voters and for local campaigns. These are payments to councillors who are free to treat them as income. Their support constitutes donations and is currently legal. Questions have been raised about whether it is proper to make a commitment to payments a condition of selection or re-selection as a council candidate and, in at least one case, about the use of council payroll systems for these payments. Some parties have made individual arrangements for their MEPs, MSPs and AMs to make regular contributions.

PUBLIC FUNDING

33. Short money was first introduced in 1975 in order assist parties with representation in Westminster with the costs of parliamentary business.[57] The current scheme is administered under a Resolution of the House of 26 May 1999. Short money is paid to opposition parties in the House of Commons, based on a formula on number of seats won and number of votes gained. The opposition parties receive additional payments for travel by front bench spokesmen, and the largest opposition party receives additional assistance for its Leader and Chief Whip's Offices.[58] The allocations in 2005-6 were as indicated in the table below.[59]

Short Money Cranborne Money

Conservatives £4,206, 058 £426,351

Liberal Democrats £1,536,221 £212,873

34. Cranborne money was introduced on 27 November 1996 to fund opposition parties in the House of Lords. In 2005-06 the Conservative received £426,351, and the Liberal Democrats £212,873.[60]

35. Under PPERA 2000 an additional sum of £2 million per annum was to be paid to all eligible parties via the Electoral Commission in the form of Policy Development Grants, "to assist the parties with the development of policies for inclusion in any manifesto",[61] for all parties with two or more sitting MPs.[62] The money was shared between the parties, based on a formula (which takes into account the different nature of party politics in England, Wales, Scotland and Northern Ireland and the size of the electorate) and then the results adjusted at the UK level.[63] Plaid Cymru described these grants as having a "major beneficial impact".[64]

36. The following table sets out the exact allocations of the Policy Development Grants for 2006-2007 to those parties that were eligible to receive the funding.[65]

Party Total allocation 2006-7 Actual allocation 2005-6 Net gain 2005-2007

Labour Party £457,997 £440,394 £17,603

Conservative and Unionist Party £457,997 £440,394 £17,603

Liberal Democrats £457,997 £440,394 £17,603

Scottish National Party £162,542 £145,828 £16,714

Plaid Cymru £151,894 £134,393 £17,501

Ulster Unionist Party £0 £132,866 n/a

Social Democratic and Labour Party £155,786 £132,866 £22,920

Democratic Unionist Party £155,786 £132,866 £22,920

Total** £1,999,999 £2,000,000 £132,864

** Discrepancies in totals are due to rounding of figures.

37. Furthermore, political parties along with independent candidates retain state assistance in kind in elections: for example, candidates' entitlement to free postage for one election communication, free use of local authority-owned meeting rooms and an entitlement to party election broadcasts if fielding candidates in more than one-sixth of the seats at an election.[66] Parties also have an entitlement to broadcasts outside election periods, and to broadcasts following ministerial broadcasts and the budget broadcast. Their entitlements are limited to air time and studio facilities, and do not extend to the cost of filming. Further assistance in kind is extended by the Electoral Commission who provide some support for party staff and officials.[67]

38. The Westminster Foundation for Democracy, an independent political foundation sponsored by the Foreign and Commonwealth Office (FCO), also provided funding to the political parties for the promotion of democracy overseas. In 2005-06, the foundation received £4.1 million from the FCO, half of which was distributed between the three major UK parties, and to smaller UK parties on a proportional basis, for activity designed to "support the development of 'sister' parties in emerging democracies".[68]

39. Political parties receive income from a variety of different sources. Despite the introduction of a duty to produce accounts under PPERA, a lack of common accounting practices makes it difficult to compile a comprehensive account of the income profiles of the political parties. The Government should ensure that the Electoral Commission produce more digestible, thorough and transparent figures of both the private and public sources of party income.

Party Expenditure

40. In the period 2001-2005 the three main parties represented at Westminster declared expenditure figures as follows:[69]

2001 2002 2003 2004 2005

Labour £44.5m £22.1m £24.3m £32.1m £49.8m

Conservative £25.0m £ 10.5m £16.0m £26.2m £39.2m

Liberal
Democrats
£ 5.2m £ 3.4m £ 4.0m £ 4.6m £8.8

41. In 2004, running costs were the largest expenditure item for the three main parties; £16.2 million for the Conservatives, £22.5 million for Labour and £2.3 million for the Liberal Democrats.[70] In 2005, a general election year, running costs remained the largest single expenditure item for both the Labour and Conservative parties.[71] A survey of the accounts revealed that, over a five year period, 80% of the costs incurred by political parties were for routine expenditure.[72] While much of the debate has focused on the escalation of costs in the context of campaign spending, the significant majority of party expenditure is spent on the day to day running of the parties.[73] This includes membership administration, handling inquiries, candidate selection and training, internal democracy and governance, fundraising, financial management, legal advice and the increasingly significant compliance costs arising from regulation and transparency.

Campaign Spending

42. Under PPERA 2000, campaign spending was capped at the 2001 General Election. It was set at £24,000 per contested constituency, or a total of £15.8 million in the year before the poll. In 2001 the Electoral Commission reported the following spending in the UK: Conservatives £12.8 million; Labour £11 million and the Liberal Democrats £1.4 million.[74] These limits were significantly increased to £30,000 per constituency or a total of £19.4 million in the year leading up to the 2005 General Election. The Electoral Commission reported that during this period the Conservatives spent £17.85 million; Labour £17.94 million and the Liberal Democrats £4.32 million.[75]

43. In the run up to the 2005 General Election, all political parties and campaign groups spent a total of £42.3m (Labour and Conservative party expenditure accounted for £84.6% of this total), an increase of over 50% when compared with expenditure in the 2001 General Election. However, this reflected an extension in the regulated period from 111 days in 2001 to 365 days in 2005.

THE ARMS RACE: THE COST OF CAMPAIGNING

44. The Labour party's national campaign expenditure increased by more than five times in real terms between 1983 and 1997 and the Conservative party's by more than three times, giving rise to the argument that there was an 'arms race' between the parties, each under pressure not to be outspent by the other.[76] Again, this problem was not unique to the UK. Peter Kelly, former treasurer of the Democrat National Committee in the United States, told us that in 1978 the annual budget of the party was $3 million. By 2004, however, the parties had spent $3 billion on federal elections alone. He argued that there was "no limit to the hunger of the political system for money".[77] Jack Straw told the Committee that despite the fact that caps on campaign spending had been introduced, one of the biggest gaps in the PPERA legislation was that "the controls on spending are inadequate".[78] The New Policy Network agreed, and argued that while the spending cap introduced had lessened the 'arms race' of increasing spending during the 1990s, "substantial sums of money continue to be spent on election campaigns".[79] Jack Straw concluded: "my principal concern…was to see the total amount of money spent by political parties reduced, because it is essential that we end the arms race".[80]

Conclusion: So What's the Problem?

45. The increased cost of campaigning has had a significant dual impact on the political parties. First, the Electoral Commission review of the impact of the PPERA legislation on party funding in the UK identified that "it is clear from these accounts that the main parties are having difficulties meeting their day-to-day costs, let alone campaigning costs, with some relying heavily on borrowing to fund their operations".[81] This was graphically illustrated by the party accounts. In 2004, the Labour Party ran a deficit of £2.8 million in 2004, the Conservatives a deficit of £6.2 million and the Liberal Democrats a surplus of £0.445 million.[82] In 2005, a general election year, the Labour party ran a deficit of £14.5 million, the Conservatives of £14.9 million and the Liberal Democrats £0.207 million.[83] While PPERA introduced a cap on election spending, the legislation did nothing to address the financial burden that the political parties face between elections; that of maintaining and operating large organisations which deliver public goods.

46. Second, Ghaleigh claimed that this "unseemly dash for cash followed by the regular campaigning binges", which characterised the increase cost in campaign spending, "created the impression (however inaccurate) of parties and governments being in hock to their wealthy benefactors (whether trade unions or off-shore potentates)".[84] The requirement under the Political Parties, Elections and Referendums Act 2000 (PPERA) to publish all significant donations seeks to prevent corruption by requiring transparency. Furthermore, the amendment to the law in the Electoral Administration Act 2006, which brought the requirement to declare loans into line with the requirement to declare gifts, significantly strengthens the protection afforded by the law.[85] However, this legislation has not dispelled the public's perception of "sleaze" or restored faith in the political system.[86] Furthermore, the financial position of political parties is still very far from transparent. It is still impossible accurately to gauge party income or the level of support in cash or other benefits given to political parties from particular sources. This can only contribute to public dissatisfaction with the current system of the funding of political parties.[87]

47. The current situation has a considerable negative impact on public opinion with regard to politicians and political parties more broadly. In seeking to tackle the issue, the Lord Chancellor acknowledged that party funding was only one issue that had an impact on public confidence and public confidence would not be wholly restored "just by sorting out party funding".[88] However, he told the Committee "one of the critical issues is what is the best source of funding for political parties in a way which most enhances public confidence".[89] Sir Hayden Phillips concurred and stated that "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".[90]

48. The current system of party financing in the UK is unstable and, unless key issues are addressed, it is likely that these problems will increase further. Not addressing the financial predicament of the parties at this stage could lead to increased dependency on large donations, ever increasing amounts of money being spent between elections and the subsequent further erosion of public confidence due to the increasing appearance of money buying power and influence.

49. We believe that there are problems, both actual and perceived, with the current arrangements for party funding in the UK. While parties struggle with escalating costs and a reduction in the traditional financial support base, public confidence is damaged by the fear that donors may be able to buy political influence. While the PPERA 2000 introduced closer regulation and some improved transparency, it has not finally resolved problems with the system; if anything, increased transparency, by revealing the extent of and dependency on donations from a few rich individuals, corporations and trade unions, has increased the negative impact on public confidence.

50. We agree with the Lord Chancellor that party funding is only one issue that has an impact on public confidence and resolving this issue alone will not fully restore this confidence. However, if handled well, the process could contribute to the restoration of public confidence. If handled poorly, regardless of the merits of any proposals for reform, public confidence and engagement will be further undermined.

22 Navraj Singh Ghaleigh 'Expenditure, Donations and Public Funding under the United Kingdom's Political Parties, Elections and Referendums Act 2000' pp. 35-56 in KD Ewing and S Issacharoff (eds.) (2006) Party Funding and Campaign Financing in International Perspective (Hart, Oxford), p.36 Back

23 For further detail see Ghaleigh 'Expenditure, Donations and Public Funding under the United Kingdom's Political Parties, Elections and Referendums Act 2000' pp. 35-56 in KD Ewing and S Issacharoff (eds.) (2006) Party Funding and Campaign Financing in International Perspective (Hart, Oxford), p.36 Back

24 Paul Webb, (2000), The Modern British Party System, (Thousand Oaks, Sage), p. 238-9 Back

25 Alan Grant, (2005), 'The Reform of Party Funding in Britain', in The Political Quarterly, pp. 381-392, p. 381 Back

26 Q 262 Back

27 Permissible donors under PPERA 2000 are listed at Ev 46 Back

28 Ev 46 Back

29 Q 232-234 Back

30 Electoral Commission (2004), The Funding of Political Parties: Report and Recommendations, pp. 27-33. However, these figures are those reported to the Electoral Commission and may not be accurate. See paragraph 39 Back

31 www.electoralcommission.org.uk/files/dms/LabourSOA31-12-2005_22475-16688__E__N__S__W__.PDF Back

32 www.electoralcommission.org.uk/files/dms/ConservativeSOA2005_22685-16891__E__N__S__W__.PDF Back

33 www.electoralcommission.org.uk/files/dms/TheLiberalDemocrats(TheFederalParty)SOA31-12-2005_22454-16670__E__N__S__W__.PDF Back