Labour in cash crisis after huge fall in donations to party plummet

Donations to the Labour Party have plummeted by 83 per cent in only three months, deepening its cash crisis.

The collapse in contributions, disclosed yesterday, follows a series of rows over Labour's links with wealthy businessmen, including the steel magnate Lakshmi Mittal and the pharmaceuticals manufacturer Paul Drayson. With the party up to £8m in the red and Britain's biggest unions threatening to cut their contributions, the slump in donations will alarm Labour fund-raisers.

The figures from the Electoral Commission reveal Labour took £591,052 between April and June, down from £3,379,641 in the first three months of the year. Labour received more than £2.7m in the third quarter of last year and almost £1.5m in the final quarter.

Meanwhile, the Tories raised £1,977,807 in the latest three months, compared with £2.7m in the previous quarter. The Liberal Democrats came a distant third, with gifts totalling £214,671.

Labour's dismal fund-raising effort is likely to increase pressure on Tony Blair to endorse the introduction of state funding for political parties. There are already growing calls from Labour backbenchers and ministers to back such a scheme.

While party chiefs privately believe that state funding could help to alleviate their financial crisis, the Prime Minister recently declared that he would not press ahead with such plans unless there was all-party agreement on the issue. Any such move would run into opposition from the Tories, whose finances appear healthier than Labour's, and whose party chairman, Theresa May, is opposed to state funding.

Millbank's single biggest donation came from the West End theatre impresario Bill Kenwright, who gave the party £200,000. The advertising agent Sir Frank Lowe, who was recently knighted, gave Labour £25,000. The tycoon Duncan Bannatyne, whose company Bannatyne's Casinos is likely to benefit from the proposed shake-up in British gambling laws, contributed £10,000. Barbara Follett, the MP for Stevenage and wife of the millionaire novelist Ken Follett, donated cash to her local party. The magazine magnate Felix Dennis gave his local branch in Islington £5,000.

A Labour spokeswoman insisted not too much could be read into the fund-raising effort over one quarter. She admitted that the party had encountered an "atmosphere of adverse press comment" over its financial links with big business, but added: "We are very happy with these donations and also have a very broad base of funding."

The spokeswoman said the party's new general secretary, David Triesman, had "made no secret of the fact that our financial situation post-general election was in dire straits".

A report to Labour's National Executive Committee last month warned it faced the "biggest financial crisis" in its history. It has an overdraft of £6m and other debts estimated at £2m.

In an effort to save money, it has swapped its Millbank headquarters for a smaller base in Westminster, transferring most staff to North Shields on Tyneside. The Co-operative Bank has been asked to draw up savings plans, which could threaten many jobs.

Almost half of the cash for the Tories was from the taxpayer, including money paid to help MPs with parliamentary research. Sir Stanley Kalms, the new party treasurer, successfully tapped a number of wealthy Tory donors for funds, ranging from the banker Robert Fleming to the Reading FC owner, John Madejski, and Lady Victoria de Rothschild.

The Scottish National Party received £58,259, Plaid Cymru £17,284 and The Green Party (England and Wales) £7,237.

* Alan Milburn, the Health Secretary, said last night that the Labour party should embrace the traditional Conservative policies of diversity and choice in the same way in which it has seized traditional Tory principles on economy and crime. Failure to do so may risk defeat in the next general election, he added.