Another week, another government scandal. The loans for peerages scam that engulfed Tony Blair last week is breathtaking even by the standards that he has set since coming to office.

The prime minister retains the power to shock. Even though we knew that he once excluded Formula One racing from the government’s ban on tobacco advertising after Bernie Ecclestone made a large donation to Labour, even though he later lobbied the Romanian government on behalf of Lakshmi Mittal after the steel magnate paid money to the party, his latest display of cynicism exceeds what we had thought possible.

Having taken the credit for tightening the rules on political donations, Blair exploited a loophole in his own law. Lord Levy, his fundraiser, persuaded donors to convert their gifts into non-repayable loans that need not be declared, and then the prime minister proposed three of the donors for peerages.

Some in the Labour party see sleaze as an issue that can help to bring Blair down. If it drove John Major from office (although he was personally innocent of financial scandal), it ought to push Blair over the edge, given his central role in these shenanigans. That thought may have inspired Jack Dromey, the Labour party treasurer, to begin an inquiry into No 10’s money laundry.

Dromey’s timing sabotaged Blair’s media conference on Thursday. The prime minister had intended to mount a determined defence of his education reforms following the massive Labour rebellion against his bill in the Commons the night before. Instead, sleaze dominated the headlines. Blair has been offering peerages to those who pay up almost as blatantly as David Lloyd George had done.

Giving money to a party has been made to look shabby. That is a pity because it should be celebrated and applauded. Democracy needs parties. We have found no way to make the system work without them. The Americans tried it for a while after their revolution, but they were soon forced to abandon the attempt. Parties are necessary and someone has to pay for them. It is much better that philanthropists rather than taxpayers should carry the burden. It is reasonable to ask parties to demonstrate that they can attract money as well as votes.

The alternative is funding by taxpayers and sadly we are moving in that direction. That will merely provide more opportunities for the party in power to steer the cash towards itself. For democracy to work there must be other parties well enough financed to oppose the government effectively and offer an alternative at the polls.

Those who fund the parties should therefore be praised for fulfilling an important civic duty. Ideally donors should be encouraged to spread their largesse among the parties. Provided that everything is done transparently, they should be assessed for honours as other philanthropists are and their gifts should qualify for tax relief.

It surprises me that some people are so desperate to enter the second chamber. Peers are a mixed bunch. At the lower end Blair has used the offer of a peerage to lure old Labour has-beens out of their safe seats in the Commons in order to make room for new Labour whiz-kids. Some of that old guard are undistinguished and could scarcely have hoped to end their days on the red benches. Do rich people really yearn to be ranked alongside political timeservers?

On the other hand, do the highest calibre peers — for example, the renowned scientists and economists whose expertise often drives a coach and horses through bad government bills — gain any further distinction from being addressed as “Lord”?

One of the men whose nomination to the Lords has been blocked by the vetting committee that Blair set up is well known to me. Sir David Garrard may be a Labour donor now, but he has also been generous towards academy schools. I know that he and others have derived extraordinary pleasure from the opportunities for youngsters that their wealth can unlock. His largesse has brought its own reward. Perhaps that partly explains why Garrard has asked for his Lords nomination to be withdrawn.

The Lords should be filled with people capable of debating legislation. Part of Blair’s defence is that parties are entitled to nominate partisan individuals who would make good working peers. True, but the whips normally look to former MPs to occupy the front benches in the Lords and spout the party line. Tycoons usually have little flair for such work. But they might have plenty to offer, as backbenchers, in a debate on taxation or competitiveness.

Through his deviousness Blair has succeeded in humiliating his three nominees for the peerage. Garrard, Chai Patel and Barry Townsley must all regret accepting the prime minister’s nomination. Other potential donors will be scared off. The quango that vets the nominations will chuck out the names of those who have given to parties. The message will go out that you stand a better chance of becoming a lord if you have never made a political donation. The government will increase taxpayer funding and democracy will suffer.

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