Only politicians could contrive to create the situation unfolding before our eyes on party funding and House of Lords reform. On Tuesday Tony Blair and David Cameron will discuss the Tory leader’s proposals for state funding of political parties. Whatever their differences, the two are united in embarrassment on this issue. Both carry guilty secrets; the prime minister over cash for honours and Mr Cameron over the Tories’ own loan book and the fact that he was able to produce a list of party lenders only after hastily arranging a £5m whip-round to pay off those who would not be named.

Politicians do not stay embarrassed for long. The prime minister, having been caught out dodging his own rules on party funding through loans from rich benefactors, no doubt expects the police investigation into cash-for-honours to run into the sand. Mr Cameron believes that as a new leader he is absolved from his party’s past sins. So when they meet they are likely to agree in principle to push forward on state funding. The great Adam Smith had it right more than two centuries ago: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” In this case the conspiracy would be comical were it not so serious. The party leaders will be saying, in effect, that because they cannot be trusted to raise funds in an open way free from corruption, you, dear long-suffering taxpayer, will pick up the bill.

Even before this newspaper exposed the scandal of party loans for peerages, talk of state funding of political parties had resurfaced. The Power inquiry in February called for a £10,000 limit on individual donations and a £100-a-member limit on donations from organisations (mainly trade unions). Under its plan, voters would tick a box on general election ballot papers and gift £3 a year of taxpayers’ money to their chosen party. The more ticks, the more funding.

Mr Cameron proposes a £50,000 limit on individual donations and tax relief on donations up to £3,000 a year. The main thrust, however, would be state funding — parties that win seats would get £1.20 for each election vote cast, plus 60p a year until the following election. It sounds neat but it is still state funding. After the past few weeks, few rich folk will want to prop up the parties. Funding at grassroots level will wither away.

Do we want state funding? Politicians waste enough of our money, anyway, and parties are already partly state-funded through so-called Short money for opposition parties and policy development grants. Full state funding would force taxpayers into further support for parties that they oppose politically and would change the nature of campaigning for the worse. When many are turned off politics, the neutering effects of state funding would spread further apathy. Party subsidies have not stopped corruption abroad.

The loans-for-peerages scandal has also kick-started the debate over Lords reform. Lord Falconer, the lord chancellor, who owes his elevation to the fact that he was once the prime minister’s flatmate, said yesterday that he favours a mainly elected second chamber, albeit one that would lose the right to block the will of the Commons on any government bill. That, as Lord Norton of Louth, the political scientist, points out, would give us a House of Lords that costs more (elected peers costing the taxpayers four times as much as unsalaried lords) and achieve less. “What is the point of election if the House adds nothing?” he asks. “If the Lords’ powers are reduced, who would seek election?”

He is right. We are in danger of drifting into state funding of political parties and creating an enfeebled House of Lords, all because our leaders have been unable to separate party funding and political privilege. Voters will not easily forgive them for that. Mr Blair and Mr Cameron should reflect on that when they meet this week.