Labour accused of 'cash-for-honours' smears

The bitter row between the parties over funding deepened when a Tory member of the Metropolitan Police Authority (MPA) claimed that John Yates, the Metropolitan Police chief in charge of the "cash for peerages" investigation, was being targeted with a smear campaign.

Richard Barnes, a Conservative MPA member, said: "I have certainly become aware of smear tactics and an 'anti-John Yates' campaign being run by various individuals."

He did not name those responsible for the alleged smear tactics but some Labour MPs are furious at his handling of the investigation, including the unprecedented grilling of the Prime Minister in No 10, and have accused Mr Yates of "going over the top". The fresh allegation came as a cross-party committee of MPs recommended that the taxpayer should fund election campaigns by the political parties to clean up politics following a series of "sleaze" allegations.

The recommendations by the committee, chaired by the veteran Liberal Democrat MP Alan Beith, could give Tony Blair a way out of the quagmire caused by the "cash for peerages" row and help him to reach an accord with David Cameron, the Conservative leader, on party funding.

Sir Hayden Phillips, the senior civil servant who was appointed by Mr Blair to review party funding, is also expected to support an increase in state funding for the political parties, making it almost certain to be adopted before the next general election, in spite of protests by taxpayers.

Sir Hayden admitted yesterday that he was finding it difficult to reach a consensus between the party leaders and set them a deadline of 31 January to reach a deal.

They are split over Sir Hayden's proposal for a cap of £50,000 to be imposed on individual donations. Mr Cameron and the Tory party back the proposal. Mr Blair signalled he was willing to consider the idea, but Labour backbenchers revolted last week, because they fear it could destroy the historic link between Labour and the trade unions, who give millions in members' donations to the party.

Sir Hayden said reaching a consensus was not going to be easy. He said: "The extent and nature of any additional public funding for parties will depend on the overall package.

"While there is some public scepticism about additional public funding, solvent political parties are essential to our Parliamentary democracy."

The Commons constitutional affairs committee said the Chancellor Gordon Brown should take immediate action to give tax breaks to small donors of up to £250 a year in his Budget next year.

The parties should also be given matched funds from the taxpayer of £10 for every £10 they raise in donations. They would also ban all loans unless they were by the financial institutions at commercial rates. At the moment, loans are permitted but since the latest scandal over "loans for peerages", all loans over £5,000 have to be declared.

They also call for the £20m cap on spending to be reduced, possibly to £15m for elections, to end the "arms race" between the parties; and a voluntarily agreed binding framework for a limit on donations. It would be overseen by the Electoral Commission, the public watchdog on electoral law.

The MPs agreed on a two-stage approach, leading to voluntarily agreed binding limits on donations, and a cap on party spending, including outside the election period, as the precondition for "substantially increased" state funding.