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All political parties need funding. It is highly undesirable that all funds should come from the Government as used to, and may still be the case in Sweden, since it greatly reduces the need to go out and recruit members and give more contact with the voters. Equally, however, it would be at least as undesirable—or even more so—that party funding should come mainly from a small number of rich donors making very large donations. That would be a travesty of democracy; it would give too much influence to the big donors, both in the setting of the donee party’s policy and in enabling the donee party to run a more effective campaign. It is important to encourage parties to seek small or moderate donations from people who are not in a position to exercise influence over the party but who give money to it because they believe in and support it.

One way of doing this is to give tax relief for small or moderate donations, including membership subscriptions, which enables donors to give a larger sum of money for the same net cost to them as now prevails. This does not involve the payment of any taxpayers’ money to political parties out of government funds; rather, it reduces the amount of tax that the donor has to pay to the Government, which I believe is considerably more acceptable to the public than payment out of government funds.

Political parties are an essential part of any democratic system. We recognise that giving to charities should be encouraged by tax relief to the donors. By extending tax relief to donations to political parties, we would recognise that those donations are also very much in the public interest and deserve tax relief. It may not be known by many Members of the Committee, but tax relief has already been extended by the Inheritance Tax Act 1984, previously called Capital Transfer Tax Act 1984 to bequests by will to a political party which won at least two seats at the preceding general election or one seat and a total of no fewer than 150,000 votes.

Tax relief on modest donations is not linked to the question whether there should be a cap on very large donations. If there is such a cap, then increasing the value of smaller donations would be an acceptable way of restoring some of the income lost to the parties. If there was no cap, tax relief would increase the value to the parties of smaller donations and reduce the extent of their dependence on large donations. Both of these seem to be desirable conclusions.

On the question whether tax relief might work, we have the advantage in this country of an established system of tax relief for donors to charities through the

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gift-aid system. I have no doubt that using a modified form of gift aid is the best way of achieving tax relief on gifts to political parties. It would, as I said, be a modified form. There are two main modifications. First, gift aid applies to gifts of any amount. That is, indeed, the right thing for gifts to charity—the bigger the gifts the better—but it does not apply to donations to political parties because it is an essential purpose of the tax relief on political donations to increase the value of smaller donations as against bigger ones.

As I have mentioned, the Committee on Standards in Public Life recommended that relief should be given on donations of £500 in any one year, or on the first £500 of donations exceeding that total in the year. As that committee recommended the limit in 1998, I have increased the limit in paragraph 5 of Amendment 132B to £1,000, which may or may not be an appropriate figure. I shall certainly be happy to consider any variations.

The second modification is that tax relief for gift aid extends to higher rate tax so that higher rate taxpayers get refunds of their higher rate tax on the amount of their gift to charity. Again, that is fair enough for gifts to charity, but to apply that rule to donations to political parties would give greater tax relief to donations from higher rate taxpayers than to donations of the same initial amount from a donor who is not paying higher rate tax. Paragraph 6 of the proposed new schedule in Amendment 132B restricts tax relief for any donor to the basic rate of tax.

Another question concerns the parties that should be eligible to receive donations that give rise to tax relief. Gift aid is of course available for donations to any registered charity, but I doubt whether tax relief for any registered political party would be appropriate, at least initially; it may be possible to widen the number later. That could lead to the problem which arose in Germany, where state funding is available to minor parties. One such party was the Grey Party, which campaigned for pensioners. Having received a generous fund from the state, the party used it for building residential homes for their members rather than using it for fighting elections. It is undesirable to give it to a party—even a registered party—which might act in that way.

I put in the test of two seats at the previous general election on the basis of the exemption from inheritance tax. By an oversight, I am afraid, I failed to add the possibility of one member being elected and at least 150,000 votes being cast as an alternative test. There could indeed be further possible tests or different tests to decide which parties are entitled to the benefit of the tax relief.

Tax relief on the lines suggested by these amendments is plainly desirable. It reduces the influence of very rich donors; it encourages parties to seek more members; and it recognises that modest donations are an important part of the democratic process. The part that modest donations can play has been highlighted dramatically by President Obama’s huge success in funding his campaign by myriads of small donations. That should be the target for which we look. I beg to move.

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Lord MacGregor of Pulham Market: I support the noble Lord, Lord Goodhart, on the proposed new clause. As he indicated, I was a member of the Committee on Standards in Public Life which produced this report on the funding of political parties in the United Kingdom, and he and I were strong advocates of this measure. We persuaded all our colleagues that it was very worthy and it was therefore a recommendation of the full committee. I have not changed my mind since.

The noble Lord has given the main reasons for it and I can be brief in adding to them and, to some extent, repeating them. First, it would reduce the dependence on large donations and, I hope, considerably extend the number of small donors. In the report, we said:

“We have found very widespread support for the view that it is more democratic, and therefore in the public interest, that political parties should be funded by a large number of small donations rather than by a small number of large donations. A system of tax relief which increases the value to political parties of smaller donations is likely to encourage the parties to make greater efforts to obtain them”.

Much more important, in my view, is the second reason. To my mind, supporting and participating in the political process is just as important a part of public life as supporting charities, and just as worthy. In this day and age when, sadly, so many people take the view that being involved in the political process is not an honourable activity, recognising it in the tax system would be an important indication that it was worthy. I suspect that most people in this Room share my view that the way in which politicians and the political process are now perceived is most disappointing, and I would hope that the amendment would be a small step towards putting that right. Aligning tax relief would recognise the importance of participating in the process. I cannot do better than quote the noble Lord, Lord Parkinson, who gave evidence to the committee in 1998. When asked for his reaction to a tax incentive scheme, he said:

“I think that is a very attractive idea. I think anything that encourages people to participate in a political process, to get involved in political parties, to broaden the base of their membership is to be welcomed because I think politics is a very honourable profession and supporting a political party is a very worthwhile way of spending one’s time and money”.

Lord Campbell-Savours: I am sorry to trouble the noble Lord, because I support the amendment, but does he have any idea what it would cost? The noble Lord, Lord Goodhart, said that it would not represent a cost to the taxpayer, but does he have any idea? Has anyone tried to cost it at any stage?

Lord MacGregor of Pulham Market: I was intending to come to that. It would obviously depend on the level of take-up. However, the fact that donations that are eligible for tax relief are limited by size and limited to the basic rate means that the cost would not be very great. However, I will come back to that point in a moment.

I wanted to quote the noble Lord, Lord Razzall, who, in giving evidence to our committee, was also asked what he thought about this. His was not such a

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rousing response as the one from the noble Lord, Lord Parkinson, which I thought was much better, but he did at least say:

“I think that as a weapon for the political parties to build up their membership base in particular ... as part of that armoury as long as it was structured in a way that was designed to benefit the small donations, I wouldn’t be against it”.

In fact, the proposal in the amendment is to limit tax relief in the way that the noble Lord, Lord Goodhart, described.

It is interesting to note—I certainly did not until I came to look at this matter—that in inheritance tax, relief is given not just in relation to limited donations but for donations of whatever scale. That indicates that the tax system recognises the points that I have been making and it shows that there is a precedent.

My third point, which brings me to the question that I have just been asked, is that there would be a small—I think, fairly small—reduction in tax revenue. The argument in favour of giving a state benefit, as one might describe it, to political parties in this way rather than through direct funding is that it would involve decisions and choices by a lot of citizens around the country. In other words, the allocation and amount of the relief given would depend on choices by citizens who—this is an important point—would have to make a contribution themselves.

I now come to the really difficult point. As a former Chief Secretary, and looking at the current appalling state of the public finances in the debate on the economy on Thursday, I will be arguing that every proposal for tax relief or for further state funding should be looked at extraordinarily carefully and be very well justified. Given the state of the public finances today, I would not put forward such a case.

The Government will no doubt be resistant to this proposal, as they were when our report was published. As the noble Lord, Lord Goodhart, said, this was the only amendment that the Government refused to accept. Interestingly, they gave no reasons; they just rejected it. I suspect that some of the reasons were that they have the trade union contributions and felt that this proposal would benefit other parties more than themselves.

I hope that the Minister will give reasons other than cost—I accept that argument—and the reasons for the principle being rejected. The principle is what matters, and why I support the amendment. I hope that, in more propitious times, we can address this again in preference to further state funding. It is the right way to proceed.

Baroness Gould of Potternewton: I follow the noble Lord, Lord MacGregor, on the question of principle—I hope that my noble friend will support it. There may be some details, such as the maximum amount of £1,000 in the schedule and at what level we should determine whether tax relief is available. However, the principle is, without doubt, absolutely sound. I support the idea, and the concept that we should be thinking much more about small donations to political parties rather than the big donations that all have relied on. It is an important part, not only of increasing party membership, but of building a better democratic base on which our political parties actually work.

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We all say that democracy relies on the political parties; it is a nice slogan. Well, the political parties rely on getting people’s support and this is one way of doing it. There may be some details still to be looked at, but the principle is just right.

Lord Tyler: I endorse the amendment, to which I have put my name. I am slightly disappointed that the noble Lord, Lord MacGregor, thinks that this is the right thing to do but not now. We want to get more people involved in our political process now. There is a crisis of confidence, which is partly related to the economic crisis: people do not see the political parties and Parliament as representing them. The case has increased since 10 years ago, when the Committee on Standards in Public Life so strongly put the argument to which the noble Lord, Lord MacGregor spoke. Given that we seem unable to reach another way to help the individual citizen to be more directly involved, and seeing that they are involved—at a modest level in terms of contribution—in the political process, it would be a pity to put this into cold storage for “better times”. Better times may not come for some time.

I confess that I was attracted by the idea of the Power commission, chaired by the noble Baroness, Lady Kennedy of The Shaws, that electors could in some way or other indicate which party they thought should receive a limited part of the available state funding when they went to the polling station. Frankly, that is a long way off; we will not be able to get it. This, however, is an intensely practical, simple solution. A huge number of people already adopt a similar provision for charity contributions. I see no reason why taking an active interest in how your country is run should somehow be demeaned as less important than contributing to a charity.

Lord Campbell-Savours: The noble Lord, Lord MacGregor, referred to the impact of this, and whether it might treat political parties unfairly in the sense that people on higher incomes, paying higher taxes, might be inclined to vote in a particular way and the benefit would therefore arise for a particular political party. I am not altogether sure about that. In the period up to 1997, if such a scheme had been in operation I am sure that there would not have been very much difference between the application of this principle, whether it applied to Conservative, Labour or Liberal voters. I suspect that Labour was sufficiently popular at that time to have been able to attract as much donation as other political parties. Maybe at the moment, because we have a little difficulty which we all know about, contributions under this system might drop off. That is just the to and fro of politics.

7.15 pm

The noble Lord, Lord MacGregor, said that he would not support it right now, for reasons that I perfectly understand. I wonder whether the principle could be carried in the legislation. Why cannot we just set a limit of £15, or something? That would establish the principle and would be at minimal cost to the state. By regulation, that figure could be increased over time. It is not something particularly expensive, and I do not know whether all those brilliant people sitting behind the Minister who know all about these matters

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can advise him very hurriedly on whether it would be possible to introduce a regulation of that nature or whether it would simply be a decision taken in a Budget. It might be that in the course of a Budget the actual figure could be increased, but the fundamental arrangement could be in place to allow those changes to take place. I am very much in favour of that idea. It takes us along the state funding route; it is the beginning of a process. It is a very cheap way of establishing a principle that would, I think, carry very wide public support. I am in favour of state funding, and I am sure that this would sell with the public, because they would feel that at least it was they who were deciding and not the state—whereas, obviously, I would want the state to decide on these matters. I would certainly go down that route, and it is good to see that there is all-party support for the principle.

Lord Hodgson of Astley Abbotts: I rise briefly to support the proposal, with an eye on the clock. I do so because the amendment has twin objectives and could kill two birds with one stone. Unlike the noble Lord, Lord Campbell-Savours, I am not in favour of direct state aid, because it does not answer the question of introversion or force parties to look out—it can tend to make them look inwards. However, we need to recognise the need for political parties and that they need funding. We need to reduce the dependency on large donations. For me, it is a way in which to get modest amounts of state aid to parties without having to have the direct connection, which would otherwise be the case.

The second bird that it kills is that of encouraging political parties to reach out. We examine why the turnout in elections is low and falling, but people fail to see their relevance to them. That may be their fault or that of the political parties, but we surely need to make greater efforts to try to build a mass membership. As the noble Lord, Lord MacGregor, said, that would be a further encouragement to reach out to present policies in a way that is attractive and is seen to be relevant by our fellow citizens, and would do so in a way that would reward political parties with a modest sum. I agree that the sum should be modest. I am attracted by the idea suggested by the noble Lord, Lord Campbell-Savours, that we might put a tiny marker down, because the state of our public finances is such that anything more than a tiny marker would be very difficult. But let us get something on the record that would enable us to start this new approach, avoiding direct state funding and encouraging parties to reach out to rebuild a mass membership, which sees the political process as relevant and important to themselves and to the country.

Lord Norton of Louth: I endorse my noble friend’s remarks. I add my support, too, to what the noble Lord, Lord Campbell-Savours, said, which is something that I have said in the past about allowing for tax relief but doing it on very small amounts. I am attracted by his suggestion that one can have a regulatory mechanism and increase the amount over time.

Although it might seem like quite a technical amendment to some, it is worth stressing what has already been touched on. It is fundamental to the

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health of our political system. Political parties are at the heart of a healthy democracy. They aggregate opinion and provide the essential mechanism for accountability in the political process. Without them electors are lost; there is no accountability. We need to stress the fundamental role of parties but recognise that they are under threat at the moment, not least from a shift in the interests of electors to organise interest groups. Such groups help to absorb the energies; they are much more directed, so people are more willing to give to groups than to political parties.

Interest groups enjoy no democratic legitimacy, but it is worth mentioning that some of them enjoy the tax advantages, as mentioned by the noble Lord, Lord Goodhart, that political parties do not. A case has been made that it is essential to try to help to sustain political parties within our political system, but as the noble Lord, Lord Campbell-Savours, has conceded, there is a certain public wariness about direct support from public funds, which is understandable. We already provide indirect support for a whole range of mechanisms, such as free mailing, election broadcasts, Short money and Cranborne money, so there is something coming indirectly. I concur with the argument against going down the route of direct public funding on which I am completely at one with my noble friend Lord Hodgson.

I prefer the option embodied in the amendment for the reasons given by the noble Lord, Lord Goodhart, and my noble friend Lord MacGregor. It is essentially a democratic option in that electors choose how to allocate money. Capping the amount has been mentioned, which would encourage the parties to solicit funding from a wide range of supporters. Perhaps even Mrs Campbell-Savours senior will be solicited.

Lord Campbell-Savours: She would not give it to Labour.

Lord Norton of Louth: I found the arguments of the noble Lord, Lord Goodhart, and my noble friend Lord MacGregor compelling, and I reiterate my support for the overwhelming arguments for moving in this direction.

Lord Tunnicliffe: The amendments essentially propose a system of gift aid for political donations, enabling political parties to benefit by reclaiming the tax paid by individual donors. They would benefit only established parties—those with two or more MPs. In addition, higher rate taxpayer donations would not attract tax relief.

We understand the motivation for these amendments and confirm that we support and encourage smaller donations from individuals and encourage political parties to reach out to a wide proportion of the population. We, too, have seen the lessons from the Democratic Party’s fundraising ahead of the recent elections in the United States. That is a striking example of how it can be used to good effect.

However, we cannot seriously support a proposal that suggests, in effect, an increase in public funding for political parties in the current economic climate. The noble Lord, Lord MacGregor, was right to point

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out that this is real money. It might not divert public money towards political parties, but it would reduce the amount of money available in the public purse for public expenditure. Even without the current downturn, we are not sure that we shall be presenting political parties as analogous to charities. Gift aid is an important development that encourages donations to charities and helps them to do good work with the additional income they receive as a result, but politics is not charitable work.

Lord Tyler: I apologise to the Minister but does he not see that there is an essential irony in that many charities campaign on policy issues? The argument that he is advancing suggests that he would now wish to take away that opportunity for those NGOs that campaign on policy issues simply because of the economic crisis. I do not think that that is what the Minister is saying but will he at least accept the irony that charities can be political and have donations set against tax while political parties whose main function is politics cannot?

Lord Tunnicliffe: Irony is in the eye of the beholder and the beholder in this case is the great British public. While the analogy drawn by the noble Lord between political parties and campaigning charities may have some point, I do not believe that is how the public feel about political parties at this moment and we should not press on that basis.

Lord MacGregor of Pulham Market: Can the Minister explain why it is right to allow tax relief for inheritance purposes but not for income tax? Surely the principle that it is right to give some form of tax relief for political donations is already accepted.

Lord Tunnicliffe: I am sure the noble Lord would not argue that in a splendid taxation system there are not anomalies from time to time. Clearly this is one and we are against the principle of extending it. The Committee probably think more highly of politics and political parties than some other parts of the population, but we cannot support the proposal in the amendment that political parties should benefit from additional sums of taxpayers’ money. It is with some temerity that I must shatter this consensus. On that basis, I hope the noble Lord will withdraw the amendment.

Lord Goodhart: By my watch, I reckon I have about four minutes to go and I will finish well within that time.

I am immensely grateful for the support from all sides of the Committee, if that is the right expression, that I have received for the amendment; that is, from three members of the Labour Party, three members of the Conservatives and my noble friend Lord Tyler.

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