Andrew Grice: Cleaning up political funding will help remove the smell of scandal

The cloud has hung over British politics for years. How our parties are funded has added to the bad smell that has turned off many voters. They suspect that donors expect – and get – something in return for their money. The MPs' expenses scandal added to the stench. Money and politics are a dangerous cocktail, as Liam Fox discovered. The funding of his self-styled adviser Adam Werritty by businessmen contributed to his downfall as Defence Secretary. Although the official inquiry found that Mr Werritty was not a lobbyist, the affair shone a light on the murky world of lobbying.

There have been some attempts to clean up political funding. The arms race between the Conservatives and Labour, as they ran more professional election campaigns, peaked at the 1997 election. The Blair government brought in a ceiling on general election spending. It unintentionally made a painful rod for its own back by forcing donors giving more than £7,500 to be named.

But parties still needed money. More than half their income goes on day-to-day running costs. The "cash for honours" affair, in which some people who made secret loans to Labour were nominated for peerages, fuelled voters' suspicions.

Most politicians agree in principle with the goal of "taking big money out of politics". But they can't agree how to do it. Inevitably, they come to the negotiating table determined to protect their own interests. There was a deal to be done in 2007, when an inquiry headed by Sir Hayden Phillips produced a sensible blueprint including a £50,000 cap on individual donations to parties, which would be compensated by sharing about £25m of state funding.

But Labour wanted to curb the money being channelled into marginal seats by Lord Ashcroft, while the Tories wanted a tougher line on Labour's donations from the trade unions. Some involved in the process believe the Tories didn't really want a deal, preferring to play the union card against Labour at the forthcoming election.

"Cash for honours" frightened off Labour's millionaire backers so the party became even more dependent on its union drip-feed. It is unhealthy, but Labour had nowhere else to go. The unions contribute less than some headlines suggest – about half of Labour's total income, but about 80 per cent of its donations over £7,500. The unions will again be the potential stumbling block when another attempt to clean up the funding mess is made next month by the independent Committee on Standards in Public Life. The Tories want Labour's income from affiliation fees counted as a donation from each union, while Labour argues it should be viewed as a series of small gifts by the 2.7 million trade unionists who pay the political levy.

The committee cannot impose a settlement and the Government will make the final call. The task of trying to square the circle will fall to Nick Clegg. Of course, the Liberal Democrats are not unbiased observers. Lacking the big donors of the two biggest parties they have long supported more taxpayer funding.

The word "more" is important because any talk of "state funding" for parties sends many people into a rage. Yet parties already receive policy grants and free TV airtime for election broadcasts.

The introduction of a cap on donations by individuals and organisations would almost certainly have to be matched by some extra taxpayers' money. But the parties could and should be forced to earn it. The state could match small donations – of perhaps £5 or £10 – to give the parties an incentive to rebuild their flagging memberships: in the 1950s, one in 11 people were members of a party. Today the figure is one in 100.

The problem with providing more state funding is that there is never a good time to do it. The Conservatives, who have long opposed more taxpayer aid for parties, say the public would never understand why politicians were feathering their own nest while cutting public spending and squeezing living standards. In fact, with the next election no due until 2015 there probably won't be a better time to reform party funding. Instead of being on the sidelines, the Liberal Democrat leader is centre-stage, ideally placed to bang the other two heads together. Labour suspects he will favour his mate Dave and fears the legislation that will follow the committee's report could bankrupt it by cutting off most union funding.

However, the signals from Mr Clegg suggest he will try to find a consensus, and not play party politics. Let's hope he can finally sweep the smelly stables clean.