On the backbenches, a sense of alarm

Labour backbenchers supported Jack Dromey's calls for a full inquiry into the party's acceptance of undeclared loans yesterday, warning that the furore was making the government look as sleazy as the last Tory regime.

The dispute has dismayed backbenchers as much as it has delighted the Conservatives, with Tony Blair's promises to further clean up the political funding system doing little to reassure some normally loyal MPs.

Undoubtedly, some leftwingers hope the controversy will weaken Mr Blair's authority, forcing him to adopt a more consensual approach - or speeding his exit from Downing Street. But privately, even loyal MPs are alarmed. One backbencher said that while serial rebels might seize upon the argument as a political weapon, the concern was widespread.

"It's bad for us, isn't it? The impression is of the same old sleaze. We came [to power] in 1997 on a clear platform of cleaning up British politics and we have to continue that," he said.

"If you look back at the Tories, you can't remember the individual instances - just a general sense of sleaze."

Another usually loyal backbencher said that "everyone" was unhappy at what had emerged. "It's not good. I've had a couple of emails from my constituency and I think this, combined with the Tessa Jowell stuff [about the business dealings of the culture secretary's estranged husband], is not comfortable," he said .

Ann Cryer, MP for Keighley, was angered by the fact the loans were not declared and by the possibility they might be connected to peerages in some way.

"It's inexcusable. I don't know why they did it," she said, arguing that Labour's attempt to make donations more transparent heightened the need for the party to clearly live by the rules."We set out the legislation requiring people to declare gifts. That was laudable - the Tories never did it. We are better than that. I'm ashamed that this went on.

She offered clear support to Mr Dromey, who is married to the constitutional affairs minister, Harriet Harman. "I'm sure there are people saying he [Mr Dromey] behaved abominably, but he could do what he did or carry the can - and why should he?" Ms Cryer said.

"I don't think he was left with any choice. It came up on Tuesday at the NEC and quite rightly he wasn't going to be hung out to dry."

Mike Gapes, MP for Ilford South, said: "If I was treasurer of the Labour party and I wasn't aware of a major loan, I would feel unhappy and I have sympathy with what Jack Dromey has done. I would want to get to the bottom of it."

But Mr Gapes welcomed Mr Blair's statement yesterday. "I am very pleased that we are getting state funding up the agenda. I think that's the answer. I don't believe that democracy needs to be dependent on wealthy people funding political parties."

The concern is not just about the fact that the loans were not declared to the Electoral Commission, but that they had been kept secret from Labour's elected officials. "I don't expect minnows like me to know where the money is," a senior backbencher said. "But I expect the treasurer should. If he doesn't, there's something wrong; even if it's an honorary role, he does sign the accounts off."

Family business
But one MP closely involved with the Labour party's organisation said it was accepted internally that the general secretary of the party, not the treasurer, had control of the party's finances. The treasurer post was an elected position which had been used as a weather-vane of opinion within the party. "It's not so much about the finances but more about the politics of the party," the MP said.

"I understand Jack's position and privately people will be a little bit surprised how it was handled. But it was family business [within the Labour party] and family business is usually dealtwith within the family."

Ian Davidson, MP for Glasgow South West,said: "There is still a great deal to be looked at. Who raised the money, who knew about it and in particular how was it spent? It seems to have been an entirely separate funding system."

Clear signal
He argued that parallels could be drawn between the handling of the loans and Mr Blair's handling of policy arguments within the party, such as last night's education vote.

"He's had a very clear signal that he cannot just produce things out of the hat and expect people to salute them. With invalidity benefit reforms, the subject has been pretty thoroughly discussed and efforts made to build consensus.

"There's disagreement but it shows MPs can be brought on board for radical change if their views are taken into account and the direction of travel is comfortable. People feel the education bill was produced from on high."

One critic characterised the argument between Mr Dromey and Downing Street as yet another sign that Mr Blair was losing touch with the party at large. And even some supporters of Mr Blair acknowledged that the Dromey issue and the bruising party debate over the schools bill had brought forward the prime minister's departure from Downing Street.

"I think it will happen this year, some time," a loyalist MP said. "There is a big enough group of people for whom education isn't the only issue." But the MP, like others, dismissed Westminster village talk that Mr Dromey's comments were engineered by supporters of Gordon Brown to weaken the prime minister's position.

FAQ: Reform package
How would the PM's proposals work?

Is Tony Blair backing state funding of political parties, and any greater transparency?
Mr Blair says that he will seek out an independent figure to forge an inter-party consensus on extending state funding of political parties. Parties are required to declare any donations over £5,000. Loans accepted at preferential interest rates also have to be declared. The prime minister and the Electoral Commission said yesterday that commercial loans from individuals should also be declared, since such loans might make the receiving party beholden to the lender.

Will Labour end the practice of cash for peerages?
The lord chancellor, Lord Falconer, yesterday held talks with the other parties on the terms of a free vote in the Commons on the composition of a reformed Lords, including the proportion of elected peers, and the powers of the upper house. Legislation is expected to be introduced in the next parliamentary session.

Is Mr Blair, as prime minister, withdrawing from the honours system?
Yes and no. He has agreed that he will not use his powers to nominate for non-political honours, leaving the task to the cabinet secretary. Until the Lords is reformed, he wants to retain his right to nominate party political working peers, and for the 10 peers he is allowed to appoint per parliament as prime minister. Mr Blair wishes to retain the role of the independent honours scrutiny committee, which is blocking three Labour peers on the basis that they do not have sufficient Labour history.

How is he recasting the policing of the ministerial code?
Mr Blair announced yesterday that he now agreed that an independent person should be appointed to advise ministers in every department on how to comply with their responsibilities on disclosure under the ministerial code. At present the departmental permanent secretaries undertake this task. This independent individual will also be responsible for investigating the facts surrounding any alleged breach of the code. At present the cabinet secretary, Sir Gus O'Donnell, undertakes this time consuming task that might compromise his relationship with ministers.

The prime minister will still be responsibe for deciding what, if any, disciplinary action should be taken against ministers who breach the code.