Who should pay the piper?

DUNCAN Bannatyne is exactly the sort of person that New Labour has been desperately wooing. He's an immensely successful businessman, self-made from humble roots, who was once a Tory voter - indeed, one of his early business partners in Quality Care Homes was Darlington's former Conservative MP Michael Fallon.

But Mr Bannatyne, like the rest of the country, fell out of love with the Conservatives during the mid-1990s and has been so impressed by Labour's stewardship of the economy since 1997 that he was prepared to give the party £6,000 - with the promise of another £10,000-a-year to come - to help it continue its valuable work.

This should have been a huge publicity coup for Labour, especially for Mr Bannatyne's local MPs, Alan Milburn and Tony Blair.

Instead it has been an embarrassment. Mr Bannatyne's donation coincided with the Government publishing a White Paper which proposed the opening of Las Vegas -style casinos. Mr Bannatyne's next money-making business venture - to create a couple of Las Vegas-style casinos in the North - would be impossible without the Government changing the law.

The timing has been unfortunate but if Labour, which is a massive £6m in debt, was so desperate for a measly £6,000 that it radically altered its policy to suit a potential donor, it would be the most corrupt administration since President Marcos frittered away the Philippines' fortune on his wife's amazing collection of shoes. It isn't.

Yet this is the latest in a string of similar embarrassments. Bernie Ecclestone, the Formula One motor racing impresario, gave £1m and somehow Labour altered its policy banning tobacco advertising so that motor racing was exempt.

Lakshmi Mittal gave £125,000 and somehow won Mr Blair's support for his takeover of a Romanian steel plant.

Pornographer Richard Desmond gave £100,000 and somehow was allowed to takeover the Daily Express newspaper.

Dr Paul Drayson gave £100,000 and somehow his company PowderJect won a £28m contract from the Department of Health to produce a smallpox vaccine - which may, or may not, be effective.

A pattern does appear to be emerging - although it is only emerging because of Labour's reform in 1997 when it said all donations over £5,000 would be made public. This was a stark contrast to the secrecy of the Tory years, and Mr Blair's first attempt at being "whiter than white". It has, though, backfired and now every three months Labour's opponents rifle through the party's accounts in the hope of finding someone spuriously controversial like Mr Bannatyne to dirty the party's image.

But it isn't only Labour that is damaged. The Tories were kicked out in 1997 because of their sleaziness; now Labour is tarred with the same brush - it is little wonder that politics in general is becoming even more of a turn-off to an already disillusioned electorate.

It is, though, Labour's big problem. It is doubtful there will be many more businessmen brave, or brazen, enough to donate in the knowledge that they might share Mr Bannatyne's fate - yesterday his holiday in France was rudely interrupted as the media demanded that he was hauled before them to account for the way in which he had spent his private money.

Without men like Mr Bannatyne, deeply-indebted Labour will be driven even further into reliance on the pockets of the trades unions. But earlier in the summer, the RMT union tried to force Labour MPs to back its political agenda - including renationalisation of the railways - or it would withdraw its financial support from them. Embarrassed by such public blackmail, Deputy Prime Minister John Prescott and York MP Hugh Bayley resigned from the union.

Such a stance typifies the new wave of militancy sweeping through the union movement, and the last thing Labour wants, having spent a decade trying to loosen its ties, is to be bound even tighter.

To address this dilemma, in June the leader of the House of Commons, Robin Cook, suggested that it was time to look again at the way British political parties are funded. In September, a committee will bring forward some ideas, and state-funding is sure to feature. It is already supported by Mr Cook, Mr Prescott, Home Secretary David Blunkett and party chairman Charles Clarke, and Mr Blair himself is believed to be moving towards the concept.

For the Tories, there would be great political mileage in valiantly refusing to accept a penny of taxpayers' money on grounds of principle - but it, too, has severe financial problems. The new party chairman, Theresa May, said last week that the party would accept state-funding if it were "imposed".

THE Tories, being the main Opposition party, already get some state-funding to the tune of £20m a year. This is called "Short Money", named after the Labour Leader of the House Edward Short who introduced it in 1974, and it is supposed to be spent developing new policies.

In an election year, all parties benefit by about £111m of state-funding in terms of free mailshots and TV advertising (or party political broadcasts, as they are commonly known).

The biggest problem with state-funding is getting it past the public. With all the public services desperate for more money, there will be an outcry at the next election when posters of the grinning Prime Minister - or gloomy leader of the Opposition - are plastered all over the place with taxpayers' money.

State-funding would also increase the feeling that our politicians are too distant from the electorate. At least at the moment both the Labour and Conservative parties are attractive enough to have more than 200,000 paid-up members. Their subscriptions and their money spent at party fund-raisers and on raffles, and their time during elections, are so important that the party leaders do have to keep an ear open to what they think.

But state-funding would sever what is possibly the last connection between politicians and ordinary people.

And state-funding is no panacea. German political parties are state-funded but former Chancellor Helmut Kohl - possibly his country's greatest post-war leader - retired in disgrace as allegations of his illicit fund-raising came to light. Earlier this year, he was "let off" with a £100,000 fine for his part in a slush fund scandal which makes the Bannatyne or Ecclestone affairs pale into insignificance by comparison.

There is, though, a half-way house whereby the state matches the money that a party raises through subscriptions and donations. Donations would be capped at a low level like £5,000 and so the emphasis on a mass-membership political party in touch with its grassroots, while allegations that influence is for sale would be minimised.

But it, too, is no simple solution. America operates a system of matched funding, but President George Bush is still indelibly linked to the fallen corporate giant Enron and the big oil companies who were the largest donors to his campaign.

When Duncan Bannatyne handed over £6,000 - small change to a man whose fortune is estimated at around £90m - he can never have envisaged being plunged into such a large row.

It looks likely, though, that his small change will force the Government into a big change in the way British political parties are funded.