The Labour funding scandal has made the already hard task of reforming party finance virtually impossible in the near future. And the main losers will be Labour. It is only a month since the cross-party talks on funding reform, chaired by Sir Hayden Phillips, broke down among much recrimination. His package involved tight caps on donations and cuts in spending, linked to increased taxpayer support, costing £20 million to £25 million a year.

The stumbling blocks were Labour’s desire to protect the union link via the aggregation of union members’ affiliation fees in one block, and the Tories’ resistance to overall limits on spending, especially at a local level during elections. In the absence of a £50,000 cap on all donations, including by unions, the Tories rejected the plan, including more state funding.

The Government has talked in general terms about bringing forward its own legislation (hoping for Liberal Democrat support). There has been strong pressure from Labour MPs for controls on local spending (to offset the alleged influence and money of Lord Ashcroft, the Tories’ target seats supremo). Amid the noise on Wednesday, Gordon Brown still hoped it would be possible to introduce reforms on donations from third parties and on the timing of donations on local party finance.

Some hope. This week’s events mean Labour lacks the credibility to push through reforms without cross-party support.

Any measure seen as partisan would be mauled in the Lords. Many big Tory donors have been hostile to new limits on donations, especially as the party is well placed with funds flowing in.

First, however, Mr Brown has to get control of the immediate scandal. The story is bad enough already. But there are two central questions: first, did anyone else know and condone the illegal diversion of donations via middlemen? Second, is David Abrahams the only donor to want to keep his identity secret? And has this practice been used by other political parties?

Only when these questions have been answered will it be possible to consider longer-term reform. The law is specific on what is permissible. But the duties of party officers could be tightened, and the investigatory powers of the Electoral Commission strengthened, as the Government has already proposed.

As often, the public has contradictory views. Voters both dislike big donations by wealthy individuals and taxpayer funding. The populist response is to say “let them stew”: the parties should cut their spending according to what they can raise. But the main sources of state and private funding are widely regarded as unacceptable and donors do not want the controversy of being seen to give big contributions.

A free-for-all could favour the wealthy and single issue pressure groups. But there is a wider public interest in healthy parties to sustain representative democracy. Moreover, we already have big taxpayer funding, with the Tories getting more than £5 million a year in cash from the State.

There is no case for unconditional state funds. But there is a case for tax incentives linked to small donations and membership subscriptions, together with tighter controls on spending. But Labour’s hand is weak.

It is hard to win a confidence for a deal when you are accused of stacking the pack of cards.

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