Andrew Grice: The Week In Politics

After Tony Blair became Prime Minister, some senior Labour figures begged him to drop plans to force political parties to disclose donations over £5,000 to "clean up politics" after the sleaze-ridden Tory years.

"We will be making a rod for our own backs," warned one far-sighted party boss who predicted the media would revel in "cash for favours" allegations about the party's business backers.

This week the rod was revealed - Rod Aldridge, whose personal £1m loan to Labour forced him to quit as executive chairman of the IT-support company Capita amid controversy over its government contracts.

To his credit, Mr Blair pressed ahead with a disclosure law on donations. Not that he is getting any credit for it after becoming the crucial link between four rich businessmen who secretly lent Labour money and who he nominated for a peerage. Even his most loyal allies are embarrassed and are not making excuses. "This is incendiary in the party," one Blairite MP admitted.

Whenever advisers urged him to embrace state funding for parties, Mr Blair would reply: "The public would never wear it; we would be crucified." He would only consider it if there was all-party support, and the Tories opposed it.

One silver lining amid the dark clouds hovering over Mr Blair is that David Cameron has performed a U-turn and would accept more state support for parties. This should eventually get Labour off its painful hook.

If you have been wondering why the Tories haven't tried to embarrass Mr Blair over the £14m of secret loans he helped to secure, it is because they can't. It was the Tories who cooked up loans to circumvent the Political Parties, Elections and Referendums Act introduced by the Government in 2000. It left a gaping loophole: while donations have to be published, loans do not.

For all the headlines about Labour, the Tories' own "secret loans" total an estimated £10m more than Labour's. Mr Cameron has promised to reveal future loans, but Jonathan Marland, the Tory treasurer, is resisting pressure - from inside his party as well as Labour - to disclose existing ones like Labour because they were made on a confidential basis. Mr Marland refuses to say whether any of the lenders are foreigners, breaching the spirit of the 2000 Act, which banned donations from people not registered to vote in the UK.

Nor are Tory hands clean over honours. Andrew Tyrie, a Tory MP who has drawn up a thoughtful state funding package for Mr Cameron, told BBC Radio 4: "I have no doubt that people who, in the past, [have] given money, one way or another to the Conservative Party, have benefited from that by being given honours."

When the Cabinet discussed the affair on Thursday, ministers were unimpressed by the Tory proposals. The view was that the £50,000 proposed ceiling on individual donations would suit the Tories very nicely given their more affluent membership but harm Labour. So would the Tory plan to end trade union donations.

There was a time when Mr Blair would have loved an excuse to sever Labour's links with its union founders. Some ultra-Blairites think the present crisis may provide such an opportunity.

Mr Blair is having none of it. He does not have the political capital left to expend on a fight with the unions by tearing up his pre-election agreement with them, which ruled out a cap on donations.

Ministers plan a system that would count a £1m donation from a union as a tiny gift from each member. There would be an extension of state funding to parties - which, although the public don't realise it, is already worth an estimated £30m. It would enable parties to run their operations but would not fund expensive advertising campaigns at elections. It would be coupled with tax relief on donations of up to about £3,000 to encourage parties to recruit ordinary people.

Labour is reluctant to return to a system which allowed the Tories to outspend it comfortably. "What is at stake here is not only transparency but the viability of non-Tory politics," said Peter Hain, the Northern Ireland Secretary and a long-standing supporter of more state funding. "The Tories are trying to exploit the situation to re-establish their financial grip on politics."

Mr Blair no longer needs to fear a voter backlash over state funding. He doesn't have to fight another general election and is damaged goods on funding anyway. He should also tackle another issue arising from the crisis by dropping his opposition to a mainly elected House of Lords. No "loans for peerages" then. I suspect he will do so.

a.grice@independent.co.uk