by Peter Watt

I feel the need to return to a favourite topic of mine – the funding of the Labour party. Why? Well because this week has seen two developments. First, the publication of the party accounts for the year ending December 2010. And second, the announcement that Charles Allen, former ITV chief executive, has been asked by Ed Miliband to lead a commercial and management review of the party.

Taking the accounts first. At face value the accounts are a mixed bag. On the one hand, they show just how fragile the party’s finances are with a balance sheet showing a deficit of almost £7.5 million.  For the financially illiterate, that means we owe a lot more than we have. The reason that we are still solvent is that we are able to meet these obligations as they become due by making sure that we have enough cash year-on-year.

On the other hand there is clearly real improvement in the overall year-on-year position. Sound financial management, some purchasing of property and a sensible strategy of rescheduling debt has ensured healthy surpluses in the last few years. Ray Collins, Roy Kennedy and the Victoria street team should take huge credit for ensuring that the balance sheet improved from a deficit of over £27 million in 2005, in the aftermath of that year’s general election, to the 2010 position.

One contractual consequence of the debt rescheduling, is that the party has to pay off at least £2 million of debt every year. This enforced discipline lead to a policy of “if we don’t have it we can’t spend it” at the 2010 election. The result was, incredibly, that in an election year we reduced party debt. At this rate, the party will have a balanced balance sheet in the next couple of years.

But, and it is a very big but, the problem is the fragility of party income. As the treasurers report in the 2010 annual accounts say:

“Since the general election, 50,000 new members have joined the party, reversing a trend of year on year decline. In addition to helping to revitalise the party, they will make a huge financial contribution, boosting the subscription income used to cover the organisational costs. These costs are predominately fixed in nature and cannot be “switched off”, so reliable income is vital”.

So our costs are pretty stable. We have some staff, some property and some admin costs.  Throw in the cost of campaigning and there isn’t a whole lot else that we spend outside of a general election. Work has already been undertaken to reduce those costs further and of course there is always more to do. But costs are pretty much fixed at about £25 million per year. The only way that we can keep paring down the debt, and pay for a general election, is to increase income. But, as the accounts make clear, just covering organisational costs requires “reliable income”. And that takes me to the appointment of Charles Allen.

Over the years leaders have brought in a whole variety of experts to help with finances, commercial activity, membership and so on. The history is a mixed bag, but at their heart these experts are brought in for two reasons. First, because all leaders like to show that they have a circle of rich and successful acquaintances that they can call upon. It makes for a good headline, by showing virility and a breadth of support amongst those who have done well. And second, because leaders believe that there must be a solution. A magic bullet, that only an outside expert can find and help them fire at whatever problem they have identified. The former is fair enough, but the latter is often naïve at best and at worst allows a leader to think that a problem has been dealt with. I hope that I am wrong but I fear that Charles Allen’s appointment falls into this latter category.

The problem with party finances is not complicated. For years we overspent, and then for the last few years we have had to consolidate, reduce costs and reduce debt. The party has become more efficient and generally controls its costs well. But its income is potentially incredibly unstable. We are reliant on the trade unions and (currently) Short money – simples.

We get a bit from rich folk, a bigger bit from our members and a little bit from conferences, fundraising dinners and so on. But it is the trade unions and the taxpayer that fund the party.  Wealthy donors can be fickle. With the threat to trade union funding by the potential of legislatively enforced restrictions on the size of political funding, even covering our existing costs may become tricky. If we win an election we lose Short money.

You can fantasise about raising enough money from members and small donors if you want, but it really is just a fantasy. Just do the maths: divide £25 million by the number of small donors that you would need to make that sort of money.  What about becoming “more commercial”? Well you can only become more commercial to raise income if you have something to sell. But unless you are in government, or it looks like you might be soon, then the amount raised by the conference exhibition and the numbers lining up to sponsor things will be sparse. What about membership? After all we have just recruited 50,000 new members. Great, but lots of those will leave if we get elected. It is the nature of the thing, membership income is unstable as the 2010 accounts imply. Lots of people join to achieve something like kicking out the Tories. Once achieved it is job done, people leave and income falls.

So the only long-term solution is to either significantly downsize the party, resulting in an operation the size of the Lib Dems, or we need to start taking the prospect of further reform of party funding seriously. This needs a political not a commercial approach.

In other words, it needs the engagement of Ed Miliband; not Charles Allen. I just hope that Charles’ appointment doesn’t allow Ed to think that in terms of party finances; it is job done.

Peter Watt is a former general secretary of the Labour party.

Tags: Charles Allen, party accounts, Peter Watt

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