How to fix UK political party finance

The reform of political party finance is essential to address public mistrust. It could also benefit parties themselves and help refresh democracy. 

Samuel Jones Sam Van der Staak
25 June 2015

British political parties need to regain citizens’ trust, and their funding is at the heart of this process. For several years, a majority of the British public has viewed parties as the most corrupt institution in the political system and politicians themselves as widely abusive of taxpayers’ money. A reform of party funding, and reducing the influence of a small pool of large donors, are essential to meeting those concerns. For the Conservative prime minister David Cameron, these measures would address a serious deficit of trust and thus help him to carry through his far-reaching policy agenda in other areas. In the longer term, they would bring substantial benefit to the quality of Britain's democracy.    

In the year leading up to the general election on 7 May 2015, political parties received £100m in donations. This made it the most expensive UK election on record, and a significant increase on the equivalent year before the previous two elections (£44m re 2005, and £72m re 2010). Much came from large individual donors, contributing hundreds of thousands of pounds apiece. This follows a spate of negative press coverage of the relationship between money and politics, from the millions of pounds purportedly given in exchange for a peerage to the parliamentary expenses scandal in 2009.

The campaign machines of the main UK parties are raking in more money than ever before. But their heavy reliance on a small pool of large donors is made possible by the absence of any regulatory limit to the amount that an individual may donate. The risk for undue influence on policy is clearly greater when dependence is allowed to prevail. Even if direct influence on policy is hard to prove, the statistical link between donations and peerages recently documented by Oxford University is now clear - to the extent that if it were to be explained by mere chance it would entail the equivalent of winning the National Lottery five times in a row. Cash for honours, or access to policymakers in return for financial loans or donations, damage public confidence in the political machinery; a Transparency International report in 2013 found that 65% of people in Britain believed political parties to be the country’s most corrupt sector. At a time of pending large policy reforms - among them a £12 billion austerity plan, a referendum on European Union membership, and further devolution to Scotland - such suspicions represent a key vulnerability for the prime minister.

A direct way of making parties less dependent on big donors would be to limit the amount any single individual is allowed to donate. This would have the added indirect result of reducing the overall amount spent on election campaigns. The International IDEA political finance database shows that half of Europe already limits the amount that a donor can give over a certain time period, a practice that is internationally recognised as helping to minimise corruption. Any limit should aim to strike a balance between allowing for individual supporters to make financial contributions to a political party and preventing wealthy interests from dominating the funding landscape. Getting this balance right is important - if the limit is too high, for instance in the case of Spain (€100 000/£72 000) and Finland (€30 000/£21 600), the impact of the legislation will be void. Set the limit too low, as some may argue is the case in Canada ($1,000/£545) or the United States ($2,600/£1,717), and there's a risk that donors look for alternative ways to fund parties, as Americans have done through political action committees (PACs).

Whatever the amount is set at, any donation limit should specify donations per donor and per year to avoid legal loopholes where a donor could make multiple donations just below the limit. Likewise, donation limits for both parties and candidates need to be established to avoid the possibility of funds being channelled from one to the other, as the International IDEA political finance database shows is possible in Spain, Romania and thirteen other countries.

To further reduce the disproportionate influence of large donors, David Cameron should also consider closing a currently existing loophole, namely that donations made by individuals through a company are not subject to income tax, whereas donations made by individuals in a private capacity are. In practice, this means that the donations of wealthy individuals who donate via their private companies are immediately worth around one third more than those of smaller donors who are more likely to donate as individuals. Tax breaks should either apply to both individuals and companies alike, or just to individuals so as to encourage ordinary voters to make financial contributions to political parties, as is the case in Australia for example.

Competitive elections require basic levels of money and in-kind support, to campaign and inform voters. By taking large donations out of UK politics, the leading parties (especially the Conservatives and Labour) will lose a significant source of income. This is further compounded by the fact that membership of political parties - and therefore volunteerism and party fees - has declined from 3.8% to less than 1% of UK citizens since the 1980s, as a House of Commons library report has found. 

In the absence of large-scale membership support and fees, the only realistic option to help compensate for the loss of funds that a donation limit would engender is to increase the amount of public funds that parties receive. Although 61% of the British public believe that the system of party funding is corrupt and should be changed, they might find this change hard to accept. An increase in state funding would by no means, however, need to replace all lost income that a limit on donations would incur; reform of this kind could even contribute to a reduction in overall spending without harming the competiveness of British elections.

It could well be argued that this is a small price to pay for taking the big money, one of the main sources of political corruption in the public's view, out of British politics. The UK does already provide parties with some taxpayers’ money, but mainly for their day-to-day running costs and other non-campaign related activities. UK parties receive only 22% of their annual income through state funding, which International IDEA research shows is at the very low end compared to the European average of 67% of party income. It is certainly not desirable for a party to be overly dependent on public funds, as is arguably the case in for instance Denmark (74%) or Spain (87%). But increasing the low levels of public funding in the UK to mitigate the effects of a limit on donations would guarantee the minimum funding required for political parties to perform their crucial role in society as well as help level the competitive field between them. Together, these measures would go a long way to ending the culture of big donors dominating party funding and give more control of electoral politics back to the citizen,  increasing both the vibrancy and independence of political life.

A continuation of the status quo, by contrast, means the threat to the integrity of British politics will remain, and with it the general public’s mistrust of politicians and their interests. The prime minister’s gargantuan policy agenda, if it is to be implemented, requires broad public trust in the fairness of British politics. An emerging debate on political donations could undermine much or even all of it. The major UK parties have all at some point made commitments about tackling the culture of big donors. The key variable in this area, however, is the strength of political will to push through reform proposals. That is especially hard for electoral victors. But strong politicians are remembered for their political courage, including when it involves restricting their own power. David Cameron should "put the money where his mouth is" and make political finance reform a priority.

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