Parties forced to disclose all loans in wake of cash for honours affair

Political parties will be banned from disguising donations as loans under proposals to be announced by the Government today in response to the "cash for honours" scandal.

Lord Falconer of Thoroton, the Lord Chancellor, will table emergency amendments to the Electoral Administration Bill already going through parliament to require all parties to disclose loans worth more than £5,000 -- putting loans on the same footing as donations.

The move will close a loophole that allowed Labour and the Tories to accept secret loans of millions of pounds from wealthy supporters, without making them public, by claiming they were taken out on a commercial basis. "Foreign" loans from people not registered to vote in the UK or companies not registered to trade here will be outlawed.

In an interview with The Independent, Lord Falconer said he was acting ahead of an inquiry into party funding by the former Whitehall mandarin, Sir Hayden Phillips, in an attempt to rebuild trust in the system.

"I hope very much it will will increase confidence. But I think more needs to be done," he said. Admitting that the scandal had damaged politics, he said it had been "a mistake" not to include all loans in a 2000 law forcing parties to disclose donations over £5,000.

When the Bill becomes law this summer, parties will have to reveal any existing loans above £5,000, even if they were taken out on commercial terms from financial institutions.

But the measure will not force the Tories to name the individuals who lent them £5m but were hastily repaid to preserve their anonymity when the party named 13 backers who had lent it a total of £16m. Labour has named 12 businessmen who lent the party almost £14m.

Lord Falconer said there was some "retrospection" in his measures because parties would have to disclose any outstanding loans taken out before the Bill becomes law. But he said it would be difficult to set a start date after which any previous loans should be revealed.

The inquiry is expected to lead to an increase in state funding for parties -- perhaps combined with a cap on individual donations.

Lord Falconer pointed to polls showing that 70 per cent of people opposed more state funding but that the same number did not want parties to rely on large individual donations.

"Squaring that circle is the difficulty," he said.

He hinted at his backing for a reduction in the £20m spending limit for each party at general elections to halt what he called the "arms race," in which the two main parties match each other's budgets. He suggested that would make "more palatable" an increase in state funding for legitimate local spending by parties.

The Lord Chancellor believed the Government would find it difficult to reject the Phillips recommendations but defended Labour's financial links with the trade unions, which would be jeopardised by the £50,000 cap on donations proposed by the Tories.

Pointing out that unions must consult their members before making donations, he said: "I do not see any reason for breaking an historical and entirely open link between the trade unions and the Labour Party."

Lord Falconer, who had put the reform of the House of Lords on the agenda before the cash for honours affair broke, said he could "certainly live with" 70 per cent of the second chamber being elected but will begin talks with other parties next month. He welcomed the Power commission report into the state of Britain's democracy published in February without endorsing its specific recommendations.

Lord Falconer, who is reviewing voting systems, was cool on the commission's call for proportional representation at Westminster, saying there were "no plans" for reform before the next general election. He argued that the first-past-the-post system produced the result the country wanted without "changes at the edges" of coalition governments.

He defended the Government against claims it has brought in "authoritarian" legislation, saying its Human Rights Act ensured the executive and parliament upheld rights. "Yes, we have taken particular measures to deal with terrorism which have led in certain areas, on proper and proportionate grounds, to restrictions of individual freedom -- but only for good reason."