How money talks to Labour and Tories

BBC business editor Robert Peston on political funding

My analysis of the latest cash-flow figures for the two main political parties yields two stark conclusions:

1) Labour is dangerously dependent on funding from a tiny number of wealthy individuals and trade unions;

2) The Tories still rely on contributions from the City of London and financial services, especially hedge funds and fund managers, to a considerable extent.

In the crucial second quarter of this year, from 1 April to 30 June - the general election quarter - the Tories and Labour received almost identical cash donations, according to figures supplied to the Electoral Commission. The Conservatives received £10.23m and Labour £10.3m.

The cash was much more important for Labour, because for some years now it has been lagging well behind the Tories in fund-raising. But when Labour's late surge came, some 68% or £7m of that £10.3m was provided by just four extraordinarily wealthy individuals and four trade unions.

Lakshmi Mittal, the steel magnate, Nigel Doughty, the private-equity pioneer, Lord Sugar's private company and Lord Sainsbury collectively donated £2.75m, with Mittal and Doughty each handing over £1m.

A further £4.2m came from the GMB, USDAW, Unite and Unison.

Now it's very doubtful that Labour's new leader, whoever that turns out to be, will believe it is good either for Labour or for democracy that Labour's financial fate - and by extension, its political fate - is in the gift of a quartet of plutocrats and a quartet of trade unions.

That said, it is not at all obvious how the new leader will be able to significantly broaden the party's sources of funding. And making the case for state funding would not be easy, under the long shadow of the parliamentary expenses scandal.

The Tories, by contrast, didn't receive a single seven-figure donation. In fact, six of the gifts to Labour were bigger than the largest single contribution to the Tories, which was £750,000 from JCB Research, an arm of the Bamford family's construction equipment business.

But the Conservatives would be considerably poorer if they hadn't received substantial financial support from City firms and individuals.

My estimate of what the Tories were given by City interests of various sorts is £2.5m, or almost a quarter of their cash receipts.

In that estimate, I've only included the names of donors whom I recognise. So my hunch would be that the actual amount of City money received by the Tories would be a bit more.

Why does it matter that the City is a substantial prop of the Conservative Party?

Well, there is an important debate taking place about whether the British economy is too dependent on the financial sector - and if it is too dependent, whether that dependence should be lessened by shrinking the relative size of the City or the absolute size of the City.

To state the obvious, those important City donors to the Conservative Party would presumably not be pleased if the coalition government became converted to the view that the absolute size of the City is too great.

However, it is striking that the Conservatives are not beholden in any way to the big banks. Neither an executive of a big bank nor a big bank as an institution has made a meaningful contribution to the Conservative Party.

So if the coalition were to bash the big banks - through additional taxes or by way of breaking them up - that would not (in theory) cost the party a penny in lost donations.

On the other hand, hedge funds and investment managers are a very important source of finance for the Tories.

Here are some of the well-known hedge fund names who have donated in the three months to the end of June, with their donations in brackets next to them: Jon Wood (£500,000), Michael Farmer (£258,000), Moore Capital (£200,000), Michael Hintze (£123,000), David Harding (£50,000), Michael Alen-Buckley (£25,000), and Manny Roman (£15,000).

The names of Wood and Alen-Buckley are particularly resonant, because their funds - SRM and RAB respectively - lost colossal sums as investors in Northern Rock after the previous government nationalised the Rock.

Of course that doesn't mean that David Cameron and George Osborne will bend over backwards to help hedge funds.

But the prime minister and chancellor do have a financial incentive to listen carefully to the hedge funds, in this the final stages of important negotiations on new European rules governing hedge fund regulation and remuneration.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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