Labour short of £2m and 30,000 members

The Labour Party is £2m in the red and has lost more than 30,000 members. With the prospect of a general election next year, it has been forced to go cap-in-hand to the trade unions for funds.

The Labour Party is £2m in the red and has lost more than 30,000 members. With the prospect of a general election next year, it has been forced to go cap-in-hand to the trade unions for funds.

Union sources confirmed that they have been asked to contribute £12m to the election fighting fund, but denied Conservative charges that the Government is "in hock to the unions". A union source said: "We are not going back to the days of beer and sandwiches at No 10."

A senior Labour source admitted the deficit but insisted the party was not in a crisis: "We're not broke. We know we can raise what we need to fight the election. It's the Tory party that's in trouble."

Labour is also due to report that party membership has fallen by more than 30,000 from a peak of around 400,000, contributing to the turnaround in its finances.

The deficit was caused by heavy investment in the party's Millbank headquarters, including a new computer system to replace the Excalibur program which helped Labour to win the last election.

The Conservative party chairman, Michael Ancram, said: "This is a matter of serious concern. This will make Labour even more beholden to the trade unions as their only secure source of funding. Now we know why Labour have returned to their old ways of giving in to the unions so easily."

However, the Conservative leader, William Hague, is also facing the prospect of embarrassment when the party's accounts are published: they are expected to show that the Tories managed to raise only £8m last year, indicating a reluctance by big business to make donations.

In a development potentially even more embarrassing for Mr Hague, the Independent on Sunday has learnt that the party treasurer, Michael Ashcroft, who has donated more than £3m to party funds over recent years, has yet to fulfil a commitment to move to Britain from Belize, where he has offshore funds, before the end of the year. If he fails to do so he will forfeit his right to a life peerage.

With the three main parties this week beginning their long campaigns for a predicted election next May, the problems they are facing in raising cash will almost certainly reopen the argument for state funding of parties.

The Government has rejected state funding and instead introduced a Bill to limit spending on the election by each of the parties to £20m, in line with the recommendations of the Neill Committee on Standards in Public Life.

However, Labour policy documents circulated to supporters for the annual conference this month reveal that the Government is prepared to review its position.

The documents also show that the Prime Minister, Tony Blair, is facing challenges from grassroots members on several issues including train safety and reform of the House of Lords and the voting age.

He will face demands for more expensive warning systems to be fitted to all trains after a series of crashes; greater democracy in the Lords with a demand for a majority peers to be elected; and a call for Labour to reduce the voting age to 16.