House of Commons - Constitutional Affairs

Select Committee on Constitutional Affairs First Report

4 Potential Solutions: Sources of Funding

97. Jean-Pierre Kingsley, Director of Elections Canada, told us that in Canada the regulatory system had been devised in order to deal with escalation in spending. He argued that caps on spending alone were insufficient and he argued that in addition "contribution limits are essential". In their 2004 review of party funding, the Electoral Commission recommended that a cap on private donations was not appropriate at that time. However, they suggested that if at some time in the future a cap were to be proposed, it should be set at a low level; they recommended approximately £10,000.[157] However, public opinion is remarkably consistent in its dislike of private donations, primarily because of an objection to the possibility of buying influence. A MORI poll in 2003 found that 70% of respondents agreed that funding political parties by voluntary donations was unfair because of the risk that wealthy individuals, businesses and trade unions could buy influence over parties,[158] while 73% agreed with this statement in an ICM poll in 2004, with 74% further agreeing that there should be a limit on donations.[159] A Populus poll for the Times conducted in March 2006 found that 79% of respondents agreed that there should be a limit on the amount of money that can be donated to any political party to remove the risk of people trying to buy influence or favours.[160] The Joseph Rowntree Foundation identified that in April 2006 59% of respondents supported a donations cap, a majority of more than two-to-one over those who opposed it (24%).[161]

98. The New Policy Network argued that the most effective method of dealing with the claim that money buys influence was to introduce a cap on donations. However, this raised other questions: who would set the cap, and more crucially, at what level? Should the cap apply equally to individuals, companies and trade unions? They identified two potential options for the creation of a cap:

To cap all donations at the same level. The exact level of the cap would be set by the Electoral Commission.
To cap corporate or trade union donations at a different level from individual donations.[162]

INDIVIDUAL DONATIONS

99. In its report, the Power Inquiry concluded that "donations from individuals to parties should be capped at £10,000, and organisational donations capped at £100 per member, subject to full democratic scrutiny within the organisation".[163] All three main parties represented at Westminster agree in principle that a cap on individual donations should be considered. Both the Liberal Democrats and the Conservatives proposed a cap on individual donations in the region of £50,000.[164] However, the Conservative party added that should a £50,000 cap fail to allay public disquiet, the limit may need to be lowered still further.[165]

100. The Labour party told us that "there is a case to examine a limit on individual donations, which should be applied equally and not circumvented", however, they added that "the merits of such a limit will need to be examined carefully. If there is to be such a limit, it should be low enough to address any public concerns about individual donations… It is important that the regulatory framework enables the Electoral Commission to intervene when the Commission has legitimate grounds for investigating - not after the event. All loopholes need to be closed; we should not close some loopholes simply to open others".[166]

AFFILIATED ORGANIZATIONS AND CORPORATIONS

101. A further area to be considered in the context of a cap on donations are those received from trade unions and corporations. The relationship between the Labour party and the trade unions was outlined in paragraphs 24 and 25 of this report. The Labour party told the Committee that any review of party funding, or any proposed changes must "respect the membership and constitution of political parties". They explained that "all our affiliates, be they socialist societies, trade unions, constituency labour parties or the relationship we have with the Co-op party- must remain an integral part of the Labour party".[167] In their written evidence, the Labour party were also keen to draw a distinction between affiliated organisations and corporate bodies or businesses. They argued "an affiliated organisation is different: business may give money to any particular political party or parties, but they are not a component element of the party, as an affiliated organisation is".[168]

102. This distinction was rejected by the Conservative party. They told the us:

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103. The National Trade Union and Labour Party Liaison Committee argued that, in reality the affiliation fee is a collective membership fee.[170] However under PPERA, it is currently classified as a donation. The New Policy Network supported this position and said that they "would allow trade unions and membership organisations in general, to act as "facilitators" between individual members and the political party".[171] Furthermore, UNISON argued that "a donation cap introduced to include affiliations would effectively exclude working-class people".[172] They stated that "any system of donation caps which includes affiliation fees would prevent this membership relationship and would do huge damage to the most powerful and demonstrably successful way of ensuring wide and active participation in politics".[173]

104. However, the New Democratic Party (NDP) in Canada have re-evaluated their relationship with the trade unions. When legislation was passed prohibiting financial contributions from trade unions (see text box), the party sought other ways to preserve the links and relationships with the trade unions. The relationship is now based on membership and not money, so for example, the more NDP members that belong to a particular union, the more influence that union has on the party. Two of the twenty five seats on the party executive are reserved for the unions, who also retain a flexible number of seats on the party council. Unions are also awarded annual convention places on the basis of the number of party members they have.[174]

105. Although the NDP were initially concerned about the impact of a ban in trade union donations on their relationship with the unions, they were positive about its outcome. Not only had it removed any suggestion of trade unions buying political influence, but also served to reinvigorate the party base, as the trade unions became more pro-active in promoting party membership. By adapting their behaviour, the NDP did not lose out financially and at the same time succeeded in breathing new life into their own internal structures and broadening the party's support base. [175]

106. In Germany, we learnt that some large financial institutions donate money to several political parties. So long as corporate donations remain permitted, there is merit in business recognising that democracy as a whole can be better supported if they divide any political contributions they make amongst several parties. However, we see merit in seeking to encourage business to finance a democracy fund for the funding of citizenship education and promoting participation.

A Cap on Donations?: The Canadian example
The provisions for spending limits and public financing in Canada bring a combination of floors and ceiling, by providing, on the one hand, direct and indirect floors by means of reimbursements of party and candidate election expenses, annual allowances to the parties and tax credits for individual contributions and, on the other hand, ceilings on candidate spending, nomination contestant spending, political party spending and strict limits on special interest or "third party" spending.
Contribution limits relate to who may contribute, how much, to whom, and when. The 2003 amendments introduced:
·  A ban on contributions from corporations and unions (and unincorporated associations) to political parties and contestants in party-leadership selection contests;
·  $1,000 annual limit on contributions from these three sources to candidates, nomination contestants and local party constituency associations;
·  $5,000 annual limit on contributions from individuals to parties, constituency associations, candidates affiliated with a registered party and nomination contestants;
·  $5,000 per event limit on contributions to independent candidates;
·  $5,000 per event limit on contributions from individuals to party-leadership contestants;
·  $5000 exception for contributions subject to the limit for contributions from a nomination contestant or candidate to his or her own camping and a $5,000 exception for contributions from a leadership contestant to his or her own campaigns and;
·  contributions are barred from government corporations or corporations that receive more than 50% of their revenues from the government.
Contribution limits are adjusted for inflation each April.
The National Democratic Party of Canada has not been financially disadvantaged by a ban on trade union donations, nor has their historic links with the unions been severed by this change in the financial relationship. Instead, the NDP has seized the opportunity to re-evaluate links with the unions, which not only have served to strengthen the relationships, but also to broaden the party's membership base (see paragraphs 104 and 105).
Quarterly allowances to the political parties were introduced by the 2003 amendments. To qualify, a party must have received 2% of the national vote in the previous election or 5% of the total vote in the constituencies where they nominated candidates. The party then receives on an annual basis $1.75 per vote obtained in the previous election. This allowance is adjusted for inflation each April 1^st. If they fail to make the thresholds, they lose their access to public funding. Beyond annual allowances, the parties that qualify receive partial reimbursement of election campaign expenses; they will receive 60% of their actual expenses in the first general election held after January 1, 2004, and thereafter, 50% of actual election expenses; since the 2003 legislation, research expenditures are included as election expenses and are partly refundable.
Candidates that receive at least 10% of the valid votes cast are also eligible to receive a partial reimbursement of election expenses. 60% of election and candidate personal expenses are reimbursed to eligible candidates up to a maximum of 60% of the election expenses limit.
Indirect government funding includes provisions of the Income Tax Act, which provide individual tax credits for political contributions, as follows:

75% of contributions not exceeding $400;
contributions over $400 but not exceeding $750, $300 plus 50% of the amount that exceeds $400;
contributions exceeding $750, the lesser of $475 plus one-third of the amount exceeding $750, or $650.

Adapted from: Herbert E. Alexander, Comparative Analysis if Political Party and Campaign Financing in the United States and Canada, in Griner and Zovatoo The Delicate Balance between Political Equity and Freedom of Expression: Political Party and Campaign financing in Canada and the United States (Organization of American States (OAS) International IDEA, Washington D.C.)
Note: Unincorporated associations are defined by the Canada Elections Act as an unincorporated organization-other than a trade union-together with all of its branches, chapters or any other divisions. Such organizations may make contributions from funds collected from individuals for the purpose of making a contribution to a candidate, nomination contestant or registered association.
$1 Canadian =£0.44p.

The Impact of a Donation Cap

107. A cap on donations would result in an income shortfall for the political parties. As part of its 2004 review the Electoral Commission performed some calculations as to the potential impact of a cap on donations on the income profiles of the political parties. Between 2001 and 2003 the total value of cash donations, non-cash donations and donations from exempt trusts was just under £68 million. It was calculated that had donations been capped at £5,000 during this period, political parties would have had to reject some 3002 donations totalling just under £60 million, leaving just under £8 million in reported donation income. A similar situation would have arisen had a capping threshold been set at £10,000. Under this scenario, 2,940 donations totalling almost £56 million would have been disallowed, leaving the parties with approximately £12 million in reported donation income. If the capping threshold were set even higher at £50,000 political parties would, between 2001 and 2003, have refused 2,747 donations worth £46 million in total. The total amount received by parties in donations would have been almost £22 million.[176] However, these estimates ignore the likely behavioural effects: parties would almost certainly react by widening the base of smaller donors, as has happened in other countries where caps have been introduced such as Canada. The New Policy Network pointed out that if a cap were to be introduced, parties would have to receive some other form of income in order to operate effectively nationwide.[177] While we acknowledged that this shortfall is likely, we were surprised that following a cap on large donations in the United States, huge sums of money continue to be raised consisting of small donations of less than $2000 each.

108. It was noted that the existing system of donations currently benefits the Labour and Conservative parties, as other political parties do not have the same historic links with either the trade unions or business.[178] However, Jacob Rowbottom, Fellow in Law at King's College, Cambridge warned us that while

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Some have argued that, in the context of the history and organisation of the Labour party, to distinguish between donations from trade unions and trade union affiliation fees which are a form of collective membership fee.[180] However, these fees are a substantial contribution to the income of the Labour party, which others regard as equivalent to donations.

109. Any meaningful limit on donations from individuals, corporations and trade unions would lead to a shortfall in funds, which would not be addressed by a reduction in the current level of the cap in spending alone. However, a donation limit would greatly increase the incentive for parties to widen their support base to a larger number of small donations, a development we would welcome. In principle, therefore, we agree that transparency of donations is not enough and the parties should take steps to agree voluntarily to binding limitations on donations. However, such a limit should only be considered within the broader context of a discussion about alternative sources of funding, including state funding, for political parties.

110. This issue is difficult to resolve, not least because of the present disagreement about the status of trade union funding to the Labour party. Any move to change the nature of party funding must not stray into prescriptive devices to require political parties to organise internally in ways that violate their democratic relationships with other institutions.

A Cap on Donations? The U.S.A Example
The United States federal limits on hard money contributions from individuals are as follows:

$2,000 per candidate per election (primary and general election)
$5,000 per political action committee
$25,000 per political party committee

The U.S. contribution limit of $2,000 is indexed to inflation and is to be adjusted in odd-numbered years.
The BCRA increased the overall limit for an individual from $25,000 per year to $95,000 in a two-year election cycle, in all federal party, candidate and PAC giving. But the BCRA has sub-limits within a cycle: $37,500 to all candidates; $57,500 to all PACs and parties, but no more than $37,500 of which is to state and local parties and PACs at a limit of $10,000 contribution to a state party committee. Accordingly, the increase from $20,000 to $25,000 in the amount that can be given by an individual to national party committees per year, is a $5,000 increase; but since the limit is per year, a contributor can give $50,000 of the $95,000 upper limit per election cycle.

Loans

111. Following a series of allegations with regard to loans in early 2006, in March of that year the Electoral Commission called on parties voluntarily to report loans on the same basis as donations. This was the first quarter to which this voluntary agreement applied and three parties reported loans totalling over £31.5 million.[181] It is difficult to compare the total amount of loan income received by the political parties. In their reporting, both the Labour party and the Liberal Democrats included loans previously reported, and reported total sums of £28,200,693.85 and £584,239.08 respectively. The Conservative party only reported loans received in the reporting quarter, April-June 2006, a total of £2,812,000.00. However they had previously reported all aggregate loans totalling £13.083 million.[182]

112. In their written evidence to us, the Department for Constitutional Affairs stated their intention to amend the Electoral Administration Bill in order to introduce a transparent regulation regime for loans, similar to that for donations under PPERA. From the 11September 2006, political parties had a statutory duty to report loans under provisions in the Electoral Administration Act 2006. [183]

113. Both the Conservative party and the Liberal Democrats argued that a ban on all forms of loans to parties, except from financial institutions on fully commercial terms, should be imposed. The Electoral Commission must oversee these to ensure that they cannot become disguised donations.[184]

114. We welcome the new provisions for the reporting of loans under the Electoral Administration Act 2006. However, recent allegations with regard to loans (be they substantiated or not) have had a negative impact on public confidence in the political system. In order to restore this confidence fully, we recommend that all loans to political parties be made illegal, with the exception of those from UK based financial institutions, at commercial rates.

State Funding

115. In their written evidence to us, the Democratic Unionist Party told us that "to speak of state funding of political parties is to speak of a present reality not a future possibility".[185] The extent of existing public funding for political parties was outlined earlier in paragraphs 33 to 39 of this report. The Conservative party estimated that this funding accounted for 40% of the cost of party activity in a non-election year, and around 60% in an election year.[186] Some degree of state funding existed in most countries throughout Europe and North America. Indeed, Professor Robert Leicht, Co-Editor at "Die Zeit," and teaching professor, told us that in Germany, parties "could not work without state funding". The degree of affirmative state action taken to facilitate electoral and party activity in the United Kingdom was on the low side compared to most countries in Europe and North America.[187] This support, both in cash and in kind, supports the policy making functions of political parties, staff costs and some communication costs, for example, free party political broadcasts. They key areas of activity not directly funded at present are campaigning and recruitment costs, and some administration and compliance costs.[188]

116. An increase in public funding was rejected by the Neill Committee (Commission for Standards in Public Life) in its 1998 report and also by the Government in its response. However, the Government have decided to re-evaluate this issue, in part due to the financial difficulties in which the parties have recently found themselves.[189] In its 2004 review, the Electoral Commission recommended a "degree of increased public funding".[190] The Liberal Democrats recommended a "limited extension of state funding",[191] while the Conservative party argued that cutting the costs of politics would "make it fair to ask taxpayers to contribute more to the costs of political parties".[192]

117. Opposition to the state funding of political parties is not as strong amongst members of the public as is commonly believed. In 2004, an ICM poll found that 62% of respondents agreed that political parties with significant public support should be provided with public funds to limit their dependency on donation form wealthy individuals, businesses an trade unions, while 59% agreed that there should be some element of funding from taxation for political parties.[193] By 2006, 41% of respondents agreed that political parties with significant public support should be provided with public funds to reduce their dependency on donations from wealthy individuals, trade unions and businesses, however only 36% disagreed with this statement.[194] Indeed, in the most recent State of the Nation Poll, published in December 2006, nearly 3-1, or 50% to 17% of the public now back state funding for political parties.[195] Qualitative research undertaken by the Electoral Commission indicated that when informed of an estimate as to how much public funding of political parties might cost each tax payer they felt this to be a small price to pay for the benefits that result.[196]

118. In their written evidence, the Conservative party highlighted that state funding for political parties could help to purify the political process by removing reliance on large loans and donations, thereby contributing to the restoration of public confidence.[197] Indeed, were told repeatedly in Canada " if you want clean politics, you have to pay for it". However, it should not be thought that direct state funding will automatically curb the financial influence of large private donors. In the United States and Israel, the "porosity of electoral spending ceilings and a fluid electoral market structured around loose knit catch all parties, have favoured a rapid increase in electoral expenditure and, therefore, in the need to attract the large private donations that direct state funding was meant to prevent".[198]

119. On our visit to Germany, we found that state funding, of itself, does not make scandal over party finance impossible, and that there are risks to relying excessively on state funding to keep politics clean. However, our German witnesses did not feel that state funding had worsened the impact of these scandals in the eyes of the public, as they were all associated with the abuse of private rather than public funding. The Conservative party emphasised to us that "nonetheless, when combined with an effective system of oversight and caps on spending and donations, it can make an important contribution. State funding, particularly if it can be implemented on the basis of consensus, can address the problems caused by the abuses and scandals of recent years and can contribute to the vital process of restoring public confidence".[199]

The Mixed System: Party Funding in Germany
Following a landmark judgment of the Federal Constitutional Court in 1992 on the constitutionality of state party funding, the system of party funding was fundamentally reformed. Further reforms, relating to the sanctions available in cases of a breach of the party finance publicity rules were enacted in 2004. The President of the Bundestag is responsible for administering state party funding and overseeing the adherence to party funding publicity rules at both Federal and Länder level
The German system of party funding is one of mixed state and private funding. This is exemplified by the rule that annual state funding must not exceed a party's annual income from other sources (the so-called relative limit). Thus, state funding can ever only amount to half of a party's overall annual income.
The Parties Act lays down an absolute limit to the overall annual state party funding budget of currently € 133 million. Where this sum would be exceeded by the sum of the funding accorded to the individual parties under the normal methods of calculation of state grants, each party's annual grant will be downward adjusted proportionately.
In order to be eligible for state funding , a party must have obtained a share of at least 0.5 % of the national vote or, at least 1% in the last Länder election. In addition to this criterion, a party can only claim state funding if it has filed a certified annual financial report with the President of the Bundestag. The state grant to a party is calculated on a) the basis of both the number of votes the party has accrued in the relevant election and b) membership fees, contributions by elected representatives and donations by natural persons it has received in the previous financial year.
For each vote of up to 4 million votes, a party can claim € 0.85, and € 0,70 per vote beyond the initial 4 million votes. On top of that, a party can claim € 0,38 per each € 1,00 it has received in membership fees, contributions by elected representatives and donations of up to € 3,300 from natural persons in the previous year. Thus, per annual donation/membership fee of a natural person a party could claim up to € 1254.00 in state grant per year. This overall sum is then subject to the relative limit of state funding: the state grant must not exceed the party's last year's overall income, which includes any sort of income apart from standard rate loans and credits. Finally, the grant will be subject to proportionate downward adjustment so that the overall sum of state grants to all eligible parties does not exceed the annual absolute limit of € 133 million. Where a party's annual report is found to be incorrect after the grant allocation has been taken by the President of the Bundestag, he or she will recall that grant allocation.
In addition, indirect state funding is provided through the exemption from inheritance tax of legacies to parties by testament and by donations by individuals being tax deductible up to a limit of € 3,300.
There is no cap on donations from natural persons, or any other source of party income, but parties are also prohibited from accepting individual donations of more than € 50 million where the identity of the (true) donor cannot verified.
(February 2006: www.bundestag.de/bic/finanz/01_finanz_00.pdf)

120. Since the publication of the Neill report in 1998, both devolution and the adoption of new voting systems for some elections has increased the presence of smaller parties, and encouraged the creation of new parties. In his interim report, Sir Hayden Phillips recognised this, and argued that any funding system "needs to reflect the reality of this changed political situation and the needs of smaller parties, and enable entry to the political system".[200] While the Lord Chancellor pointed out that it was "very difficult to come up with any formula that does not favour to some extent those who are already established as a party",[201] we were told by the Green party in Germany however, that the system of state financing based on votes cast had significantly assisted their party's growth in the early years.[202]

121. A further objection to state funding is the argument that it removes healthy, market like competition from the political parties, and that it is wrong to attempt artificially to create a "level playing field". The Conservatives addressed this by proposing that any state funding should be voluntary: "a party which does not qualify, or chooses not to apply, for state funding will not be required to accept the limits on donations. Its access to political competition is therefore unfettered. A new party should have to prove that it can attract a certain level of support before obtaining recourse to public funding.[203] However, the Labour party disagreed and argued "political parties should not be able to opt out of a transparent, sustainable and fair system with greater investment from the state, simply because they believe they may be able to raise a greater sum outside of the recognised system".[204] Indeed, the ability to opt out had been partly responsible for the collapse of the state funding and regulation of Presidential elections in the U.S.A.

122. The German system was interesting in this respect as it was based on a combination of both private and public funding. Public funding was not only allocated on the number of votes cast in elections, but also as match funding for membership fees, and individual donation up to the value of €3,300 per annum. An element of competition and the need to raise external funds were therefore maintained. Furthermore, in Canada, party funding was allocated on a votes cast basis, thereby encouraging the parties to broaden their base and to strengthen local party organization and get the vote out even in those areas where they did not traditionally succeed.

123. Finally Navaraj Singh Ghaleigh warned that:

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The Consequences

124. Jack Straw warned the Committee of some potential consequences of extending state funding. He said: "you may resolve one set of problems but you gain all sorts of others and effectively you get state bureaucracies running political parties and all sorts of other problems, including detachment".[206] UNISON added that there was a risk of "increasing state intrusion into the internal affairs of the parties".[207]

125. A second consequence would undoubtedly be increased scrutiny of party spending. Canon Peter J Winstone echoed the views of many of our witnesses. He said "it would be quite improper for taxpayers' money to fund makeup or hairdressing for politicians or their wives, consultancy fees for outside organizations... which are an embarrassment to people like me who vote, and which no doubt discourage many people from voting".[208] Frank Hindle put this in context and said "if you see it being used for suits and hairdos and so forth it is headlines, but then they disappear. What people do want is a strong democracy but people have not always thought through how you get a strong democracy that needs paying for. We have all got a process there in educating people in some way and being responsible in how we do things".[209] Evidence from other jurisdictions suggested that when faced with increased public scrutiny, parties do moderate and self-regulate their spending to a greater extent, as it would be counterproductive for them to do otherwise.

126. Any extension of state funding should offer the taxpayer visibly cleaner and healthier politics; it should be accompanied by robust regulation and be focused towards the local level. It should also seek to maximise flexibility in determining funding for new parties, and towards stimulating local activity. These aims should be kept in mind when considering different methods of how any potential system of the state funding of political parties is devised and operated.

How Much Funding is Required?

127. It is only meaningful to have a debate about party funding if there are some agreed principles about how much funding parties require. What has been strikingly absent from the debate thus far is a discussion of this issue. It is a question not only of financial facts and figures, but of the values and principles that should be attached to state funding; not so that "good" or "bad" funding and expenditure can be defined, but so that principles about the purpose and nature of party funding could be devised.[210] In its written evidence, the Conservative party argued that "parties need to be funded at a level that allows them to put their message across to the electorate, and in a way which permits some independence from filtering by the media by means of, among other things, new information technology. However, they should not be assisted beyond the minimum level that is judged to allow this. Making this judgement should be the responsibility of the Electoral Commission, who already similarly advise on the spending cap for General Elections".[211]

128. While we consider it is neither helpful or desirable to try to distinguish between "good" and "bad" expenditure, we recognise the need for further debate around the values and principles that should govern state funding.

How will Funds be Raised and Distributed?

129. An associated set of issues that must be resolved before any scheme for state funding is proposed, are the questions of how the funds will be raised and distributed, and who should be eligible? The different options are outlined below.[212] TULO recommended that any state support "should build in incentives that encourage the parties to enhance electoral turnout, as well as recruit and retain members".[213] Indeed, if there is to be increased state funding for political parties, there is overwhelming public support for this funding being targeted to support local activity by parties. 59% of respondents supported this, against less than one fifth who opposed it (18%).[214]

130. We agree that state funding should not be used as a tool to dictate to parties how they should behave or organise. Neither should such funding be simply applied to shore up such parties' existing arrangements. However, while we are sympathetic to the argument that any state funding should be directed towards the local regeneration of parties, this would be difficult to monitor.

131. Instead, we are of the view that the means by which state funding is determined and distributed should incentivise party activities. Matched funding for membership fees should be introduced as a means of encouraging recruitment, as well as the introduction of a fixed annual amount of funding on the basis of votes cast at the previous election to give greater incentives to parties to increase activity, and thereby engagement and turnout, in seats other than marginals.

EXTENDING THE CURRENT ARRANGEMENTS?

132. The most immediate way of increasing state funding would be to extend the current arrangements. In 2004, the Electoral Commission made two specific recommendations on how this could be achieved. First, they suggested that additional funding should in principle also be made available for all candidates contesting local elections through the extension of the freepost facility. Second, they recommended a modest increase in policy development grants so that they could be extended to all parties with at least two members elected to any legislature above the local level.[215]

133. The first recommendation was widely supported. However, the Lord Chancellor suggested that any extension of this type of provision (i.e. including free party political broadcasts) could not alone be a "a significant part of the solution".[216] There was no dispute in regard to an increase in the policy development grant. In addition however, UNISON suggested that Short money be extended to include the party in Government.[217] Some of our witnesses responded, and argued against this, and suggested that rather than extend Short money to the governing party, party funding should be used to further compensate opposition parties for what is described as the incumbency advantage. However, Sam Younger rejected this. He said:

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MATCHING FUNDS

134. Jack Straw argued that "the most attractive case for additional support for political parties is that of matched funding by one device or another".[219] The New Policy Network agreed: "if…it is desirable to encourage greater participation in parties then giving an incentive to parties to recruit and retain members would be a good way of going about it. This could be done by offering to match funds for membership subscriptions and donations up to a maximum of say £100. For example, if a party received a membership subscription of £10 it would receive another £10 from public funds". The Network suggested that if combined with a ban on large donations, this would go some way towards ensuring that parties are accountable to their members and through them to the population as a whole. However, they added "that whilst this option may have the effect of halting the decline in party membership, it is unlikely to produce the revival in party membership that in our opinion is necessary".[220]

TAX RELIEF ON DONATIONS

135. At present, political parties, unlike charities, are unable to reclaim the tax on donations. The one exception to this was that under the Inheritance Tax Act 1984, legacies to political parties with two members elected to the House of Commons, or to those parties that have one elected member and gained at least 150,000 votes were exempt from inheritance tax.[221]

136. In 1998 the Committee on Standards in Public Life concluded in favour of tax relief at the standard rate on donations up to £500 to 'eligible' political parties. The Committee argued that in order to prevent abuse, this should be limited to political parties with two members at Westminster or one member with at least 150,000 votes. This was the only major recommendation the Government failed to take up from the Neill report. The Electoral Commission in their recent report on the funding of political parties also proposed a system of tax relief on donations of up to £200 or on the first £200 of a large donation, and that any tax relief scheme should be extended to non-taxpayers, possibly though a match funding system.[222] The Conservative party agreed that a matching funding scheme for non-taxpayers should be introduced.[223]

137. The Labour party said that they "support the principle of political parties having charitable status".[224] Jack Straw clarified this position: "our democracy could not operate without people who are willing to give large and small sums to our political parties…we should find some means of moral recognition of the importance of that activity".[225] The New Policy Network recognised that by giving donations to political parties a similar status to those of charities, it would "imply that as a society we regard political activity as a worthwhile public good".[226] Frank Hindle, Deputy Chair, Northern Region Liberal Democrats agreed, citing two advantages to this scheme: " it would first of all make small donations more valuable to us and, secondly, to some extent it would make it more respectable to go and donate and also encourage people. It is like charity. It is always a good incentive to say, "If you put some money in, the taxman will put some in as well".[227]

138. However, despite support in principle, our witnesses identified several practical problems with this scheme. The New Policy Network told us that even with a threshold fixed as low as £100 and set at the standard rate for tax relief, the poorer supporters of a party would lose out, as it would only apply to tax payers.[228] The Electoral Commission proposed solving this problem by introducing matched funding for non-tax payers. The Conservative party also supported this approach.[229] Colleen Fletcher, of North East Coventry Labour party, expressed a note of caution and reminded us that "it would be important to have something that did not complicate things for treasurers of political parties".[230]

139. We see positive benefits from allowing small donations to political parties to benefit from tax relief, but we suggest that this should be limited to £250 per donor per annum. We also recommend that a 'matched funding scheme' for non-taxpayers should be set up alongside it.

DETERMINING THRESHOLDS

140. Virtually all countries with direct state funding have enacted a threshold of eligibility for the subsidy.[231] The eligibility is frequently defined by the achievement of parliamentary representation in the previous election (for example in Finland), or it may also consist of an absolute number of votes (as in Denmark and Portugal), a given percentage of the vote (e.g. Germany) or a combination of representation and votes (e.g. Sweden).[232] The Electoral Commission suggested to us that the current eligibility criteria for the distribution of Short money and Policy Development Grants could be used to determine thresholds for increased state funding.[233]

141. However, the Electoral Reform Society suggested "a note of caution against any formula that assumes the votes for the parties in general elections is an accurate indication of their support in the country".[234] They argued that the fact that turnout in safe seats is demonstrably lower, and evidence of tactical voting misrepresents actual levels of support for the political parties.

142. Furthermore, Plaid Cymru impressed upon us the need for "some recognition of the specific national contexts of political parties reflected in any formulas that may be developed to distribute funds".[235] In practice, they suggested that "in the first instance…the threshold should be calculated individually within each nation of the UK. We would then propose a threshold of an average 5% of valid votes and at least one parliamentary representative across National, UK and European elections within the national area".[236]

143. Plaid Cymru also raised a broader point about the utility of thresholds in attributing funds for basic party functions. They asked that any formula recognise "that certain basic party functions are undertaken by all parliamentary parties of a certain size. While clearly some account must be taken of party size, the mechanism must also recognise that parties have basic functions, which all have to undertake regardless of the votes won".[237] The German system recognised this: the first four million votes earned the party 85 cents per vote, while each vote above this earned then 70 cents. The intention was that each eligible party has enough income to perform their basic functions.

Conclusion

144. Some increase in state funding seems to us to be a necessary component of a solution to the problems of party funding. We believe it is neither helpful nor desirable to try to distinguish between good and bad expenditure, and recommend that parties should be allowed discretion in their spending. It is not logical to assist parties in policy development and parliamentary opposition activity while excluding the primary democratic activity of campaigning from financial assistance. Any attempt to allocate particular monies for particular activities, with value labels attached, would only encourage parties to look for loopholes in the regulations.[238]

145. However, any increase in state funding should rightly be accompanied by more detailed scrutiny and auditing of how party funds are spent. The evidence suggests that this would lead to self-regulation in the way that political parties spend their money. If one of the aims is to bolster public confidence, and indeed support for a political party, then it would be counter productive for parties to be irresponsible in their spending.

146. We recommend that any proposals for the reform of the system of party funding should be based on the following key principles:

Any system of funding should be transparent, and be subject to the full scrutiny of the regulating body, in order to ensure sufficient public support and bolster public confidence in the integrity of the political system.
It should be workable.
It should, as far as is practical, be fair between existing parties and new entrants.
Every effort should be made to attract a consensus among the major political parties.
It should be based on the principle that the main purpose of political parties is to be a vehicle for public activism and engagement, and should subsequently be focused on making political parties fit for this purpose.