Party funding reform is firmly back on the agenda, with the Deputy Prime Minister pushing strongly for reforms which will make good the coalition’s promise to ‘remove big money from politics’. As with other areas of constitutional reform, events have moved quickly. The Committee on Standards in Public Life has commenced an inquiry into the issues, while Nick Clegg has indicated that inter-party talks will be held to agree reforms once the committee has reported in mid-2011.

While everyone accepts the need for change, seasoned political observers will understandably take the view that they will believe reform when they see it. The case for reform has been made time and time again, but rarely acted upon. The failure of the most recent attempt to broker agreement between the parties in 2007 (following the review conducted by Sir Hayden Phillips in the wake of the ‘cash for honours’ controversy) underlines the challenges which lie ahead.

In a Democratic Audit report published today, we offer a somewhat more optimistic assessment. We argue that the need for reform is clear, but that the scope for short-term agreement on a number of issues is also evident. Indeed, the fact that the Phillips review is still fresh in the minds of those who will be returning to the table over the next 9-12 months is no bad thing – there is more agreement between the parties than the ‘breakdown’ of the talks in 2007 tended to suggest.

However, we also stress that the sense of urgency must not translate into attempts to take ‘big money’ out of politics simply by capping donations. Introduced in isolation, donation caps would almost certainly create more problems than they would solve. A donation cap would probably be set at around £50,000 - a level which 99 per cent of the electorate would still regard as ‘big money’ - and would risk being ineffective. For instance, wealthy individuals could potentially channel a large donation via multiple members of their family, or ‘front’ organisations could be set up for similar purposes.

Yet, if it did work, the implications could be worse - a donation cap would potentially starve the parties of funds, which would hardly be likely to make them more effective at engaging with voters. In short, an elite-level ‘fix’ to party finance offers no prospect of tackling popular discontent with party politics.   

We suggest that the solution lies in identifying a medium-term approach to party funding reform, rooted in clear principles about what we want such reforms to achieve for our democracy. Donation caps will surely have a role to play in such an approach, as will tighter restrictions on how much parties can spend on general election campaigns – but reforms to party funding will also need to go much deeper.

For instance, we surely need to pose the question of whether existing forms of ‘in-kind’ state support - such as party election broadcasts - risk becoming irrelevant to the realities of 21st century election campaigns. Likewise, if we want to broaden the base of party funding, a broader definition of what it means to be a party supporter will be needed, as will a clearer recognition of the ‘public benefit’ which derives from the financial support provided to political parties.

Plenty of mechanisms have been proposed which could facilitate far wider popular engagement with the funding of political parties – including making donations eligible for ‘gift aid’ and giving every voter the scope to direct small amounts of state funding to a political party of their choice.

Such policy options will need to be considered very carefully, particularly during a time of almost unprecedented austerity. Yet, it is essential that this opportunity is grasped to move party funding onto a new pathway – one which offers genuine scope to re-connect voters with party politics.