1.  While space precludes a detailed discussion of the subject, the arguments referred to here are set out in greater length in the journal articles "Political Donations and the Democratic Process" [2002] Public Law 758 and "The Electoral Commission's proposals on the funding of political parties" [2005] Public Law 468.

WHAT IS WRONG WITH LARGE DONATIONS?

  2.  Before considering how the system of party funding should be reformed, it is important to identify the harms caused by the existing system of party funding. Below I consider three possible harms created by large donations: the danger of quid pro quos; the perception of corruption; and inequality in the opportunities to participate in the political process.

  3.  Often the harm is thought to be an individual receiving a benefit from the government in return for a donation. An example of this concern can be seen in the current investigation of allegations that individuals were nominated for peerages in return for political contributions, and earlier controversies surrounding Lakshmi Mittal and Bernie Ecclestone's donations to the Labour Party. The harm is seen to arise from the decision-maker's response to the donation, for example in making an appointment or awarding a state contract. The Political Parties, Elections and Referendums Act 2000 (PPERA) attempts to deal with this problem by making the donations transparent. By requiring that donations over £5,000 be disclosed, suspected influence is identified through public scrutiny and the government has to justify its decisions in response. The transparency rules then work in combination with other rules regulating government decision-making, for example rules governing the award of state contracts or government appointments. [11]In practice this method has been unsatisfactory because it so difficult to establish whether a donation has secured a benefit. The issue is open to contest, and while critics may point to the donation as evidence of an improper motive, there will always be legitimate reasons that can be invoked to support the decision. For example, while both the National Audit Office and Public Accounts Committee found no impropriety in awarding a vaccine contract to a company owned by Labour donor Lord Drayson, this has not stopped the matter being referred to in the media. [12]Donation limits are seen to prevent such situations arising in the first place and aim to limit such disputes and continuing suspicion.

  4.  An alternative to this may be to impose stronger controls on the decision-making process not only to prevent to quid pro quos occurring, but also to avoid conflicts of interest. This would aim to stop the perception of corruption arising. Under such an approach, the fact that a donation is one of several potential motivating factors is sufficient to taint the decision, regardless of the actual motivations. The solution would be to close certain options off from the decision-making process. For example, that a donor should not be eligible for a particular appointment or contract. One major problem with this approach is that it may penalise those who deserve that appointment or contract for reasons other than their political activities. It is likely discourage donations being made, as it not only fails to secure a benefit, but also rules out eligibility for certain benefits. However, I think there are even stronger reasons why such an approach would not be appropriate. The conflict of interest approach does not guard against donors being influential on broader issues of policy. If an individual frequently makes large donations to a political party and is known to hold a strong opinion on a particular policy, the party may find itself unwilling to change that policy for fear of alienating that frequent donor. [13]The donation may still be influential, but it is not possible simply to say there is a conflict of interest and that no decision about that policy can be made. For this reason it is seen as more important to control the supply of money than impose controls on the decision-maker.

  5.  The latter example highlights that the problem with donations is not simply that benefits are passed on to the donor, but rather that the donor has greater opportunity to influence the political process using his or her wealth. Even if the money does not guarantee a particular outcome, the donation is a method of expressing support for a particular party or policy and a way for individuals to engage with the political process. Just as it is objectionable that a person can buy himself or herself a peerage or contract, it is objectionable that he or she can buy greater opportunities to participate in politics. Those individuals who give very large sums of money can transform the fortunes of a political party and enable it to fight a national campaign. By contrast someone with the average wage, giving a small donation may express the same level of feeling and commitment to that party as is expressed by the wealthy donor, but has minimal impact. The much greater impact exerted by the wealthy individual is not based on the merits of their views, but solely on their wealth. Such disparities send out a signal that some individuals of great wealth have greater value in the political process. The large donations thereby distort the process in favour of those with greater wealth and offend against the principles of political equality. The real harm is not just the decision-maker's response to the donation, but the very fact that such large donations are being made in the first place. Once donations are viewed in this way, an obvious difficulty arises in that this form of participation is only open to sections of society with sufficient wealth. A strong case can be made for donation limits not only to reduce conflicts of interest, but also to remove the greatest inequalities in the opportunities for participation.

DONATION LIMITS

  6.  A cap on donations set at a low limit such as £1,000 or £5,000 per person would remove the worst excesses of the current system and would end the wealthiest individuals providing the bulk of funds to the political parties. However, it would not create equality between individual voters given that the vast majority of individuals cannot afford to donate anything near to £1,000 or £5,000 per year. If a limit at that level were imposed, political parties would have to appeal to a wider range of wealthy and upper middle class supporters. The system of political funding would not be dependent on a small visible collection of super-rich individuals, but would be reliant on the wealthier sections of society for funds. The influence in such circumstances would be less visible, but could still have a substantial impact on political parties. A cap on donations would be an important step in removing the greatest inequalities, but inequalities in wealth would continue to influence the political process.

INSTITUTIONAL DONATIONS

  7.  The role of groups and associations in facilitating political participation must not be overlooked. By making a donation, an interest group may give a voice to a section of society that would not be heard if left to individual action. Limiting interest group donations at a level equivalent to individual donations could undermine this method of participation in the political process. Given that one goal of reforming party funding is to improve participation by encouraging more small donations, any reforms should not curtail this activity. Institutional donations need not raise concerns about equal participation, as long as the donations are in proportion to the overall membership and that those subscribing are contributing roughly equal amounts. However, if left unregulated, institutional donations could be used as potential loopholes that allow wealthy individuals to donate large sums either to one or a wide range of institutions, which then make donations to a political party or run sympathetic campaigns of their own. The difficulties of regulating such groups can be seen with the rise of political action committees and similar organisations in response to campaign finance restrictions in the US. [14]The role of institutional donations requires careful consideration to ensure this channel of participation and representation is maintained, while limiting the scope for evasion.

  8.  Trade union donations—Contributions from trade unions are distinct from those made by other interest groups. Union donations must come from a political fund from which members can opt out, and the membership is balloted every 10 years to decide whether to maintain a political fund. [15]A person will generally belong only to one trade union, avoiding a risk of duplication through other union donations. Trade unions do not simply donate money to the Labour Party, but affiliate its members to the party, creating the closest thing to mass membership of a political party in the UK. The affiliated unions have a defined role in the decision-making under the Party constitution, which is transparent and proportionate to the membership it represents.

  9.  If the ability to make aggregate donations is restricted to trade unions, this may be seen to skew the system of funding in favour of the Labour Party. However, given that most of the people paying into the union political fund are unlikely to be making large direct payments to the political parties, this channel of donation may offset the emphasis given to wealthy and upper middle class donors referred to above in paragraph [6]. For these reasons, if a limit is to be imposed on trade unions, it should be at a much higher level than individual donations limits and be proportionate to the members paying into the political fund.

  10.  Company donations—While there is a role for company donations to political parties, the position of companies is different to that of trade unions. The company does not normally exist to represent the political interests of stakeholders. People may hold shares in a wide range of companies creating opportunities for multiple representation through donations. While political expenditures must be approved in general meeting, [16]company donations are not an aggregate of smaller payments of roughly the same amount made by each shareholder. Consequently, there is no reason in principle to fix such a donation limit much higher than individual donation limits. However, there may be a case for a different limit if the political expenditures are subject to democratic regulations, determining how much each shareholder can pay into the fund and with a maximum limit on how much a person can pay into any number of company political funds.

  11.  Interest groups—As with trade unions, larger donations by representative institutions would be consistent with the equality principles outlined above if such donations are an aggregation of smaller contributions made by group members. However, it would raise some difficulties in practice. As with companies, people may belong to a range of different interest groups, so aggregate donations from such institutions may duplicate the contributions made by that individual and the other institutions to which he or she belongs. This may require some regulations on the interest group if it is to make a contribution above a certain threshold, such as establishing a political fund, limiting the amount that can be paid into it by members, and a maximum amount that people can donate to any number of political funds. While this reduces the scope for interest groups being used to evade the rules, such regulations would impose a considerable administrative burden on those organisations.

STATE FUNDING

  12.  If the funds from large donors are cut, then parties will have to look for alternative sources of funding if they are to maintain current spending levels. The Electoral Commission's report of 2004 made clear that if donations were capped at £50,000 then the parties would have had to refuse £46 million worth of donations between 2001 and 2003. [17]This is not conclusive. If donations had been limited in this way the parties would have responded by seeking out a broader base of donors. It is difficult to speculate how much revenue such a drive would have brought in, but given the current rates of party memberships and activity such a cap would leave the major parties short of funds in the short-term at least. An extension of state funds to supplement private donations and subscriptions is seen as the method to fill this gap.

  13.  This raises the question of how the additional state funds would be allocated to the political parties. At one extreme, equal funding could not be granted to every electorally active political party, as it would either require extremely large costs in giving each party sufficient funds for a national campaign, or would give each party a smaller yet insufficient subsidy. Furthermore, there is little reason in principle to give full funding to parties that lack any significant support or interest. At the other extreme, funds should not be granted to parties solely according to their existing representation or share of the vote. Such an approach would make the system static, with established parties attracting greater funds, which in turn maintains their hold on the political system. While this is seen to create a cartel among the established parties, if one party wins an election by a landslide the implications could be more far reaching. The party achieving the landslide would have the extra funds in addition to benefits of being the party in government, which would reinforce the hold on power. Even if public opinion were overwhelmingly in support of one political party, it would still be desirable to have other political parties providing alternative viewpoints. Underlying these extremes are the different functions performed by political parties. Parties act as representative institutions that reflect the views of members and supporters, so state funding should be structured in a way that reflects the membership and encourages engagement with members and supporters. However, parties also play a role in political debate, informing the public of policy alternatives and the opposition parties have a function in holding the government to account, a function which should also be considered when allocating the state funds. [18]

  14.  Recently the Power Inquiry proposed a voucher scheme where individuals would choose which party he or she wishes to allocate £3 of state funds to while casting the ballot. [19]This solution would allow each voter to contribute regardless of his or her personal wealth. While it is conceivable that an individual may allocate funds to one party and vote for a different party, there is still a danger it could entrench the existing parties, and make it harder for less popular parties to get their messages out (and thereby remain less popular). Another issue is whether the voucher scheme would lead to greater citizen engagement/interest in politics. Critics of such schemes argue that as the citizen is not being asked to make any payment to demonstrate the commitment to that party, there is no greater incentive to consider and deliberate political issues than is already encouraged through voting. [20]

  15.  The Electoral Commission has considered matching grants and tax relief on donations to eligible political parties as a method of distributing state funds. [21]Unlike the voucher scheme, this would require some level of sacrifice from the individual voter to trigger the allocation of state funds. However, in requiring such a sacrifice matching grants or tax relief could exaggerate the advantages given to those parties that attract donors in the first place. For example, if donations were matched with state funds of up to £200, this would benefit those parties that attract donations from those who can afford to donate £200 and who are in the habit of donating. One solution may be to ensure that the level of financial sacrifice triggering the allocation of state funds is minimal. This could be done with a system of matching grants for very small sums (maybe with state funds exceeding the amount being contributed by donor on the small sum). Such a system would have to be accompanied with voter education to ensure the full advantages are taken, and to get those not in the habit of donating to realise the benefits of the scheme.

  16.  No system of allocating funds is perfect and each raise different concerns. Despite the flaws, it is at least preferable to the funding of parties being dependent on securing the donations of a small number of very wealthy individuals or groups. One option that minimises the flaws may be a combination of different criteria to allocate state funds that combines elements of popular support (such as the matching grants referred to above) with a scheme that allocates funds to promote diversity of parties. The latter could take the form of a minimal basic grant to all parties contesting a particular proportion of seats (or some other formula). While there is not sufficient space to consider the details of each system, a mixed system would avoid the risk that any one of these schemes be the sole determinant of a party's success.

SUMMARY

  17.  I believe there is a case in principle for a limit on donations to eliminate the worst inequalities in the system of party funding. However, one should also be clear that such limitations do not secure equal opportunities to contribute, which will still depend to some extent on the individual's wealth. Imposing a limit would also raise some difficult questions, in particular devising a scheme to allow aggregate donations from groups while avoiding abuse of the system through evasion, and deciding how state funds could be allocated to make up for any shortfall in funds. The current concern about loans demonstrates that parties have an incentive to find ways around the existing laws. Even if loopholes are found, the regulation of party funding sends out an important signal that such a use of wealth to influence politics is not acceptable. While difficult, none of these problems are insurmountable and the reform of party funding could be an important step to creating a fairer political system.

Jacob Rowbottom

Fellow in Law

King's College Cambridge

April 2006

12   National Audit Office, Procurement of Vaccines by the Department of Health (2003) and the Public Accounts Committee, Procurement of Vaccines by the Department of Health, Fifteenth Report of Session 2003-04 (2004). Back

13   For example Stuart Wheeler often gives his view on the performance of the Conservative Party in media interviews. Such statements from a large donor could be a factor (although by no means decisive) that shapes party policy. For a discussion, see Rowbottom [2002] at 764 and Rowbottom [2005] at 471. Back

14   The problems posed by such groups have emerged in response to the US regulatory framework and constitutional rules. For a recent discussion of the US system see N Persily, "The Law of American Party Finance" and R Briffault, "Soft Money, Congress and the Supreme Court" in K Ewing and S Issacharoff, Party Funding and Campaign Financing in International Perspective (Hart, 2006). Back

15   Trade Union and Labour Relations (Consolidation) Act 1992, Ch VI. Back

16   Companies Act 1985, s 347C. Back

17   The Electoral Commission, The Funding of Political Parties: Report and Recommendations (2004) at para 5.52. Back

18   Such a function is recognised to some extent in the allocation of Short and Cranborne money, and the Electoral Commission awarding policy development grants. Back

19   The Report of Power: An Independent Inquiry into Britain's Democracy (2006) pp 211-213. Back

20   See D Lowenstein, "Voting with Votes" (2003) 116 Harvard Law Review 1971 at 1990 discussing voucher scheme proposals in the US. Back

21   The Electoral Commission, The Funding of Political Parties: Report and Recommendations (2004). See also The Fifth Report on Standards in Public Life, The Funding of Political Parties in the United Kingdom Cm 4057-I (1998) (the Neill Report) para. 8.20. The Neill Report proposed that tax relief be eligible only to those parties represented at Westminster, in order to avoid the potential for abuse. By contrast the Electoral Commission believed that such relief should be available not only to those with representation at Westminster, but also to those that can show "a significant level of electoral activity at the Westminster, European, devolved or local level". Back