Morality and the business of power

At least one person involved in raising money for Labour may have made inappropriate approaches to p

The net is tightening in the loans-for-honours scandal. It is easy to lose track of the many crises afflicting the government. To recap: "loans for honours" broke in March when Labour's treasurer, Jack Dromey, went public over the millions lent to the party by wealthy benefactors, some of whom were later recommended for peerages.

The disclosure was sandwiched between February's scandal, in which Tessa Jowell found herself in trouble over her husband's alleged links to an Italian fraud case, and April's foreign prisoner release saga, which led to the removal of Charles Clarke as home secretary.

Dromey hadn't been told about the loans; the Chancellor, Gordon Brown, hadn't been told; nor had the Parliamentary Labour Party. The only people in the know were a small group around Tony Blair. The police investigation has pushed the issue from the day-to-day political agenda, but it remains potentially the most toxic of all the current scandals. It tears asunder Labour's claim in 1997 to be ushering in a new morality in politics.

Police probe

All roads lead to Downing Street. One senior Labour source close to the events admits it is impossible now to dismiss the police investigation as a distraction: "It won't go away because, when the police complete the inquiry, there is a strong chance that charges will be laid."

Labour Party headquarters is convinced that individuals connected to Downing Street were explicitly offering knighthoods and peerages in return for loans to the party, or funding of the government's city academies programme. "There is a Downing Street culture that is profoundly corrupt and doesn't know how to handle its relationship with rich men," says the senior figure.

Labour Party officials who have looked into the affair believe that potential donors were specifically instructed to turn their donations into loans, which do not need to be declared, thus avoiding unwanted media attention. My source, who has the most intimate possible knowledge of the scandal, has information that at least one person involved in raising money for the party may have made inappropriate approaches to potential lenders. "I have no doubt [he] was trading cash for favours," the source says. There even appears to have been a crude price list, with a minimum sum for each honour.

The scandal has already severed the relationship between Downing Street and the Labour movement, probably irreparably while this Prime Minister is in power. Some have welcomed this, as it means the wider party has been freed from the stranglehold of No 10, which is fast losing its authority.

One perverse consequence is that Blair has been forced to recognise that he needs the trade unions and their political levy more than ever before. I understand the PM has warned the ultra-loyalists Stephen Byers and Alan Milburn to stop talking about moving the party away from its financial dependence on the unions. The débâcle has also led to a tentative cross-party consensus about the future of political party funding, which looks likely to lead to a cap on spending, the extension of state support for parties, and a limit on donations. But Labour insiders also know that "loans for honours" has had a profound effect on the government's confidence, further undermining its moral authority.

One man more familiar with Downing Street than most is Geoff Mulgan. Between 1997 and 2004 he held various senior posts in Downing Street, including director of the government's strategy unit and head of policy in the Prime Minister's Office. Mulgan is an ideas man and, to my knowledge, as honest as the day is long, so he must be horrified by what is unfolding. He has just published a book entitled Good and Bad Power, an ambitious volume that aims to be nothing less than the moral history of political power since the beginnings of empire.

Bunker woes

Blair and those in his depopulating Downing Street bunker would do well to read the following lines of Mulgan's conclusion: "Morality is not something to be considered as marginal to the business of power. It is wrapped up in every relationship of service, domination or trust. It is the currency in which human affairs take place, and all efforts to squeeze it out of politics . . . have in the past proven futile."

The government is in serious trouble and it knows it. One Blairite minister told me recently that he now realises the game is up. "You can just feel it," he said. "People don't want us any more and there's nothing we can do to change that."

If that is the case, then it is because, whatever they think of new Labour's achievements, they do not want to be associated with a government that said it was going to put morality at the heart of politics and has instead squeezed it to the margins.