All politicians know the sound of lost credibility. Laughter

SPONTANEOUS LAUGHTER is often more politically revealing than any number of sanctimonious newspaper columns and political debates. The first time I became aware of this was in 1967, when Denis Healey was being interviewed by David Frost in front of a live studio audience. As is so often the case during a Labour government, the economy was in a rocky state, though Labour had inherited a huge trade deficit three years earlier.

In response to David Frost's gentle probing, Healey launched into the standard spin of the day, that the government was struggling to tackle deep-seated economic problems that had built up over the previous 13 years of wasted Tory government. The audience just broke into deep guffaws and you knew that blaming our economic problems wasn't going to work any more. I could tell from the look on Denis Healey's face that he realised that as well.

A similar incident occurred to me nearly a year ago, when I was invited to appear on the Friday night edition of Newsnight, when there was a studio audience present. The row over Formula One funding and Bernie Ecclestone's pounds 1m gift was at its height and so I wasn't surprised when I was told that my interview was being put back to squeeze in a live outside link to Peter Mandelson. I thought that Peter gave a reasonable defence of the Government's actions, but then I had never had any doubt that there was any question of any impropriety involved in Labour's taking Bernie Ecclestone's money. I knew with absolute certainty that even if Bernie Ecclestone had given his money to the Tory Party, Tony Blair would undoubtedly still have been prepared to defer the ban on tobacco advertising as soon as he was told that there was a risk to jobs.

As Peter Mandelson struggled to make much the same points, his words were drowned out by a rising tide of laughter. Had he gone on for much longer, there would have been a danger of people falling off their chairs, with tears running down their faces. I realised that all my prepared comments would have had almost exactly the same effect, and decided to take a different tack.

There was clearly nothing any Labour politician could do to reassure the public that there was no impropriety in Bernie Ecclestone's donation. Sadly, there is such a general presumption that we are all crooks that the public is prepared to believe the worst about any of us. I therefore simply said that the only way to clear the air was to have an independent judicial inquiry, and we were then able to move on to other matters.

Apparently this suggestion was not well received at the top of the Labour Party, and one particularly loyal MP promptly went rushing about getting other Labour MPs to sign a round robin denouncing me for what they saw as a scandalous undermining of our beloved leader. My defence that such a suggestion clearly demonstrated my belief in his integrity served only to spur the MP concerned into even more frantic endeavours to get signatures.

Not surprisingly, therefore, I am delighted that the Neill Committee is proposing a complete transformation of the way political parties are funded. Lord Neill's proposals are broadly in line with the evidence that Labour's NEC submitted to his inquiry, and if anything he is a bit tougher on the likely sources of Tory Party funding than we were recommending. As the incident with Peter Mandelson so tellingly revealed, politicians' credibility on the issue of who funds their parties is virtually at absolute zero.

We must never again allow the situation in which prime ministers sit around the dinner table in Downing Street with half a dozen foreign businessmen, giving them assurances that there will be no change in their tax-exempt status, only to find that said businessmen have spontaneously decided to donate several million pounds to the prime minister's re-election campaign fund.

The Tory defence through the scandals of recent years has always been that there is no difference between trade union funding of the Labour Party and voluntary donations by big business to the Tories. Just how voluntary some of these donations have been is called into question by Richard Branson's revelations that he was invited to make a substantial donation to the Tory party just days before his bid to run the National Lottery was due to be determined by a Tory cabinet minister.

The contrast with Labour's trade union links could not be clearer. Even before Mrs Thatcher's anti-union laws, the Labour Party published precise details of every donation received from every trade union.

Mrs Thatcher erected several new hurdles to try to stop trade union funding of the Labour Party, all of which were counter-productive.

The new laws stipulated that before any trade union could even have a fund from which to make political donations there had to be a secret ballot of every trade union member. To her horror, as each trade union held its ballot, members voted by eight and nine to one in favour of political donations. Turn-outs in these ballots ranged from 60 to 80 per cent and some trade unions who had not had a political fund found their members deciding to start one.

Mrs Thatcher's law had exploded messily in her own face, and led to a strengthening of the link between Labour and the trade unions. A few years later a second round of mandatory ballots produced identical results.

Not only did every trade unionist have to sign a form agreeing to make a voluntary contribution to the political fund, but these had now been legitimised. The contrast with the Tories was striking. Out of all the hundreds of millions of pounds that have been paid to the Tory party over the years, very few companies have ever balloted their shareholders on whether or not they wished their money to be used in that way.

At Labour's NEC meeting, when we considered our evidence to the Neill Committee, hotheads such as Ian McCartney and myself had to be dissuaded from maliciously including recommendations that there should be legislation to demand balloting of shareholders before any company could make donations to the Tories.

The most important principle in the new proposals is to introduce a cap on the amount political parties can spend on the general election. At local level, tight restrictions have applied since the war, and at the present time these allow a candidate to spend up to about pounds 7,000 during the campaign.

This has prevented candidates who have substantial personal fortunes from being able to buy advantage. There is no earthly reason why the same principle should not be applied nationally.

I can see no reason why a political party needs to spend more than pounds 15m at the national level, and the Government's stated intention to introduce national limits will be regarded as one of the most positive outcomes of the whole dreadful sleaze saga we have had to endure under the Tories.

It is a bizarre twist that many of the most hard-line advocates of state funding for political parties are at the same time opposed to just about any other new form of public expenditure.

I am delighted to say that Neill's recommendations should have the joyful effect of knocking on the head that particular tax-and-spend diversion.