FINANCING OF POLITICAL

PARTIES FROM PUBLIC

SOURCES: CAUSES, FORMS AND
Dražen Vitez • Hrvoje Mataković: FINANCING OF POLITICAL PARTIES FROM PUBLIC SOURCES: CAUSES, FORMS AND CONSEQUENCES

CONSEQUENCES

Dražen VITEZ
[email protected]

Hrvoje MATAKOVIĆ
[email protected]

Abstract
The structure of the political parties financing is one of the central problems
of modern democratic states functioning and efficiency. Modern political par-
ties were established in the 19thcentury as associations of citizens who wanted
to promote their interests through the political parties, and these associated
citizens financed activities of their parties themselves. Opposite to this classic
liberal conception which sees political parties as private associations, in the
1950’s there was introduced financing of political parties from public sources.
The aim of this paper is to analyze the causes, forms and consequences of this
type of party financing. The causes of public party financing are numerous, but
the most important are increase of parties’ operational costs and raised aware-
ness about the dangers of political corruption. Thus, the parties are supported
from public sources through a number of ways, of which the most important is
direct public funding, but also through free access to the media and through tax
relieves. Regardless of the obvious advantages of public party funding, excessive
public funding can lead to “etatisation” of political parties and their alienation
from the public, since political parties that have a safe financing from the public
sources can easily lose interest to build and maintain relationships with their
sympathizers and citizens in general.
Keywords: financing, political parties, public sources, corruption
JEL Classification: E6, E60

666
 1. INTRODUCTION
Although modern political parties were formed in the 19th century, the issue
of financing political parties became a matter of intense debate and scientific
research in the last third of the 20th century (Casas-Zamora; 2005, 1). Money
has a “symbolic and practical value in political competition” (Burnell; 1998, 7)
and just because money is important in politics, it can threaten democracy if its
role is not adequately regulated. Collecting and spending political money has
several possible consequences:
1) The electoral equality is often influenced by money in politics - if its dis-
tribution is uneven, uncertainty of elections will likely be compromised.
2) The inevitability and indispensability of money in politics gives donors
possibility to acquire political influence, which may endanger the equality of
citizens if economic power becomes a major factor in the electoral competition,
only those who have the economic power will be able to gain political power.
3) Political contributions are opening a multitude of possibilities for finding
dishonest or illegal “common interests” between donors and politicians, which
finally can lead to privatization of policy maker’s decisions (Casas-Zamora;
2005, 2).
According to the classical liberal understanding political parties are associa-
tions of citizens who promote their interests in the state through parties. Con-
sidering political parties in this way , it seems appropriate that these associated
citizens bear the costs of the parties functioning themselves, since they promote
their interests though these parties (Prpić; 2004, XIX). This solution favours
large and wealthy parties or parties that represent the interests of wealthy citi- INTERDISCIPLINARY MANAGEMENT RESEARCH XII

zens, and the poor strata of society or minority groups can hardly or cannot at
all seriously participate in politics, especially since the 1950s, when significant
financial resources have been required thus having prevented political plural-
ism. To allow all relevant political actors to participate in political life under
the same conditions, but also to prevent donations from inappropriate sources
which expect a counter-service for their donation, in the 1950s began introduc-
tion of parties funding from public sources. Public party funding, which first
appeared in South America and then spread around the world, beside positive
effects has also negative: in countries which too intensively financed political
parties from public sources there appeared financial dependence on the state
on one side, and alienation from party members and sympathizers on the other,

667
 since public funds made their help and support unnecessary. In this paper we
will discuss the causes, but also the consequences of party funding from public
sources.
Dražen Vitez • Hrvoje Mataković: FINANCING OF POLITICAL PARTIES FROM PUBLIC SOURCES: CAUSES, FORMS AND CONSEQUENCES

2. PRIVATE FUNDING OF POLITICAL PARTIES

The classic liberal approach has seen political parties as voluntary social as-
sociations, and held that they should be fully financed by their members and
sympathizers, so until 1950s private party funding was quite common. Par-
ties were seen as “intermediary organizations” and their finances rest on pri-
vate sources: contributions of their members and revenues from organizations
and companies (Brändle; 2002, 3). Private party funding was traditionally to a
greater extent supported by the right wing than the left parties, and for them
money obtained from private sources was always more preferable than funding
from the state or local budgets. Private party funding has undoubted advan-
tages, but the most important is that “this form of resources acquiring encour-
ages larger participation of party activists, and thus also more efficient party
organization” (Kregar et al.; 2003, 10).
Membership fees are the most traditional source of political parties fund-
ing. The fact that the parties should be primarily financed by members con-
tributions clearly come out from the parties character as a social associations
or from its state-political functions (Schefold et al.; 1990, 832), and contribu-
tions from individuals who are not party members may arouse suspicion that
party is under foreign persons or institutions influence (Beyme; 1999, 118).
However, lifestyle changes in mid-20th century made party membership look
less attractive, but also the development of mass media like radio and television
had far-reaching consequences for the communication processes within politi-
cal parties (Bartolini; 1983, 181). Most European countries, with the exception
of Belgium, Germany and Austria, experienced the decline in the number of
members in the period from the 1960s to the 1980s, and the direct consequence
of a smaller number of members was the smaller amount of money collected
from membership fees (Ware; 1998, 232). Recent studies have shown that, in
general, the share of membership fees is decreasing in total party income, and
that membership fees generally amount less than a quarter of the total party
income (Kregar et al.; 2003, 11). Size of political party also affects the amount
of collected membership fees, and only large parties which usually have many

668
members were able to collect a significant share of party funds from member-
ship fees (about a quarter of total revenue), while in the medium and small par-
ties share from membership fees usually amounts less than ten percent of their
total income (Nassmacher; 2000, 251).
One of private sources of party income are the so called “party taxes”. Party
taxes include payments to a political party from people who have been, due to
party support, elected to various bodies or have been appointed to certain posi-
tions, and represent a fixed percentage of their salary (ibid., 254). Parties justify
party tax saying that “MPs must honour their election in the Boards” (Drysch;
1998, 89). The amount of these apparently voluntary contributions is different,
and it depends on the type of party and on the type of functions that members
perform; in Germany parties take from their city councillors from a quarter to a
third of their salaries, and from representatives on regional or federal level from
5 to 20 percent of their salary (Nassmacher; 2000, 256). In countries where
fractions are particularly strong MPs were trying to resist this giving to party so,
for example, in the Netherlands even socialists had difficulties to take modest
amount of 2 percent (Beyme; 2002, 113).
Donations have always been an important source of revenues for European
right-wing and center parties, and they consider individual donations as well as
companies donations as their traditional source of funds (Nassmacher; 2000,
252). The private sector motives for money donation to political parties may be
very different; the desire to participate, as a good citizen, in the political process
or, in specific cases, to affect the direction of public policies (Gunlicks; 2000, 5).
Private financing, with very personalized or clientelist orientation will facilitate
the reproduction of various clientelistic cliques (Burnell; 1998, 7). In societies INTERDISCIPLINARY MANAGEMENT RESEARCH XII

with very large differences in income, a few very wealthy individuals can fully
control the political scene. Brändle claims that “the larger the dependence of
parties on large incomes from influential interest groups, the higher the risk of
corruption and abuse” (Brändle; 2002, 3).
Left-wing parties are in some countries, particularly in the United Kingdom,
financially supported by the unions. Unions contribute significantly to Labour
finances and financially assist the party in various ways, through gifts and ad
hoc donations, sponsoring candidates and MPs, sending union members to the
Labour summer schools and a wide range of other various payments (Fisher;
1996, 78). Since donations are the most controversial form of private party

669
 funding, over time there have been developed legal mechanisms to precisely
regulate various forms of donations to political parties (Kregar et al.; 2003, 12),
in order to limit the impact of (wealthy) individuals or special interest groups
on political parties and to prevent potential conflicts of interest (ibid., 13).
Dražen Vitez • Hrvoje Mataković: FINANCING OF POLITICAL PARTIES FROM PUBLIC SOURCES: CAUSES, FORMS AND CONSEQUENCES

3. PUBLIC FUNDING OF POLITICAL PARTIES

The idea of financing political parties from public funds became possible
only after the political parties were legally and constitutionally accepted and
were no longer seen as “disruptive factor in the parliamentary system, which
is designed on power-sharing” (Beyme; 2002, 117). From the second half of
the 20th century, political parties are seen as “important subjects of pluralist
democratic regimes which citizens must have equal opportunity to participate
in shaping of political will” (Prpić; 2004, XIX), and their functioning is also
constitutionally regulated. Awarding political parties with this kind of financial
benefits, in relation to other organizations and interest groups, was certainly
favoured with the transfer of new functions from the political system to political
parties (Beyme; 2002, 117).
Public financing of political parties was introduced to achieve several goals:
a) Introduction of public party funding intended to provide equal opportu-
nities for all political parties and public funds contribute to the removal of dif-
ferent conditions between the parties. This principle is ignored if, for example,
smaller parties or those who are not in power are excluded from public funding.
b) Public funding should reduce parties’ dependence on strong financial do-
nors “from the shadows”, and thus reduce or even completely eliminate the im-
pact of different lobbies on parties;
c) The next goal is to eliminate corruption, since corruption encourages po-
litical cynicism and contributes to undermining of public confidence in the legal
system (Drysch; 2000, 158).
Public party funding was introduced in almost all European countries, but
at different speed and intensity, so Naßmacher (in Brändle; 2002, 14) differenti-
ates three stages through which public party funding was introduced:

670
 a) “Experimental phase” represents the first step towards public funding,
where it will “carefully begin this new way of public financial support for this
voluntary private law organizations”.
b) In “Expansion phase” party’s requirements for public support are being
spread (for example, covering expenditures of electoral campaigns) and new ar-
eas of parties’ activities will be financed, which until then were not covered by
the public support (for example, such as education).
c) The last phase is “adjustment phase”, in which new forms of public support
are not being introduced, but rules for the adjustment of public support on in-
flation are being established. Since public funding was introduced with different
dynamics in different countries, some of which were kept for a long period of
time in each stage, and some of them rather quickly passed from one phase to
another; this speed depends on specific conditions in each country.

.. Causes of public party funding

One of the basic causes of political parties financing from public funds is a
strong increase of party costs in the second half of the 20th century, with rise of
election campaigns costs, as well as parties functioning costs.
For example, in Germany, in the period from 1953 to 1965 the increase in
the election campaigns costs was amounted to 300%, and the sum of the total
cost of all the parties and candidates was increased from 10 million DEM in
1949 to 120-130 million in 1969 (Schleth & Pinto-Duschinsky; 1970, 27).
INTERDISCIPLINARY MANAGEMENT RESEARCH XII
When we look at individual political parties, the CDU total cost in the period
from 1968 to 1987 increased from 34 million to 193 million DEM, and the
total cost of SPD in the same period increased from 48 million on 214 million
DEM (Landfried; 1994, 91). In the United Kingdom the amount that the Con-
servative party spent on election campaigns increased from 135,000 GBP in
1950 to 8,7 million GBP in 1988, thus increasing 63 times ( Johnston & Pattie;
2000, 136). Significant growth was also evident at the Labour Party: in the elec-
tion year 1950 there was spent 292,000 GBP and 202,000 GBP in 1952 which
was non-election year, and that amount has grown to 10 million GBP in the
election year (1987) and to 6,1 million GBP in 1986, which was non-election
year (Beyme; 1999, 139).

671
 Party costs were significantly increased by modernization of the electoral
battle, i.e. professionalisation of services which were previously mostly per-
formed by party members and sympathizers: election campaigns are now
prepared and implemented by advertising agents; people for posters printing
Dražen Vitez • Hrvoje Mataković: FINANCING OF POLITICAL PARTIES FROM PUBLIC SOURCES: CAUSES, FORMS AND CONSEQUENCES

and pasting are also professionals, as well as marketing companies and media
consultants. In their direction parties organize carefully arranged events (con-
ferences, large events) that are primarily aim at journalists and their positive
television reports. Advertising means also follow trends in consumer goods ad-
vertising: print media (ads in newspapers, flyers, posters) have lost somewhat
in importance, and audio-visual media (TV, and lately the Internet) are becom-
ing an essential part of the election campaigns, thereby causing significant costs
(Nassmacher; 2002, 11).
In countries where broadcasting of political advertising spots on television is
paid according to market prices, such as for example, in Australia, Canada and
the United States, causes of the party costs increase could be seen as a demand
for a multitude of commercials, therefore, in literature a hypothesis has been
made that electoral advertising on private television stations causes an explo-
sion of election expenses. However, in the United Kingdom where the election
advertising on radio and television is prohibited by law, election campaign ex-
penses increased significantly, i.e. nine times in the period from 1983 to 1997.
In Austria, where the costs of election campaign doubled in the period from
1975 to 1990, until 1997 there was no private television station, so advertis-
ing on television could not be the cause of this increase (Nassmacher; 2002,
9). Extent of election costs is also affected with the characteristics specific to
each country; for example, shorter period between election cycles (two or three
years) require more resources than longer (four or five years), and it should be
also taken into account that in addition to national parliamentary elections
there are presidential election, European and local elections, which also require
significant financial resources (ibid., 10).
In addition to the election campaign costs, political parties must cover cost for
maintenance of the party organisation, and this includes office and communica-
tion costs and personnel costs. Office expenses cover the use of a party headquar-
ters and branch offices, equipping them with furniture and equipment, supplies
and minor printing costs, and throughout longer period of time this cost will
depend on the volume of technical equipment and its modernization. Commu-
nication costs which are mainly related to communication within the party are

672
difficult to estimate, since they are different in certain time periods and differ-
ences are also significant among various countries and “party families” (ibid, 12).
Another cause for introduction of public party funding is the necessity
to allow all relevant political forces to participate in the political game under
equal conditions. The classical liberal view that political parties are citizens as-
sociations for promotion of their interests and therefore citizens should finance
them from them own resources, prevents small or new parties to participate
under equal terms in political life and reach out to potential voters, because
large parties or those in power can more easily secure financial resources than
smaller parties or those just entering the political arena (Falguera; 2014, 348).
During the 1950s in Germany, being the first country in Europe which intro-
duced public party funding, the main topic of discussion about party finances
at that time was whether the parties which were not represented in the federal
parliament were to receive public financial support and favourable tax treatment
of donations (Scarrow; 2004, 660).
One of the fundamental causes for the introduction of public party fund-
ing is corruption, i.e. corruption offences connected with political parties.
The consequences of corruption can be very serious because the corruption,
especially political corruption, “undermines the core values of social relations
of democratic and civil society” (Mršić; 2006, 111). Political corruption is not
exclusively a phenomenon of the modern society, since the initial forms of the
electoral competition in the 19th century were characterised with corruption
and various forms of bribery; in England, during the early stages of the Queen
Victoria reign, it was possible to buy a place in the House of Commons (Pinto-
Duschinsky 1981, 15). In 1832, 850 out of 1,000 voters from Stamford con- INTERDISCIPLINARY MANAGEMENT RESEARCH XII

stituency were bribed. In the period of 25 years (from 1832 to 1857) the public
was presented 443 petitions that tried to challenge the results of the parliamen-
tary elections due to a variety of election abuses ( Johnston & Pattie; 2000, 124).
Today, the public perceives political parties rather negatively and numerous
public opinion polls conducted in very different countries have generally shown
very low level of trust in political parties. Average citizens in the political parties
do not see promoters of democracy, they are bothered by their connections with
powerful economic lobbies, and their confidence was also shaken with numer-
ous misuses of money for political purposes (Rose-Ackerman, 2001). Corrup-
tive acts related to the political parties financing are the following: the undue

673
 influence of wealthy individuals or groups in the political decision-making; en-
try of illicit funds in the politics; the influence of business interests on politics;
misuse of public funds and vote buying (Ohman; 2014, 20).
Corruption scandals that have erupted several times even in well-regulated
Dražen Vitez • Hrvoje Mataković: FINANCING OF POLITICAL PARTIES FROM PUBLIC SOURCES: CAUSES, FORMS AND CONSEQUENCES

countries such as Germany have shown that the risk of plutocracy is “very direct
and practical” (Kregar; 2003, 13). When obtaining funding from large donors
there is a risk that parties will forget that “the financing of party activities or
‘goal’ is one of the ways to secure and maintain the relationship between leaders
and followers” (Nassmacher; 2003, 7) and they will no longer feel the neces-
sity to work in the field and to intensively collect membership fees and “small”
donations from party members and supporters. This certainly contributes to
the weakening of trust in party democracy, already shaken with numerous cor-
ruption scandals and clientelistic relationships, which have turned away citizens
from “interest for stronger identification with political parties” (Milardović;
2007, 18). Except on relations with voters, big donors can also affect on the re-
lations within the parties so that the party donors who repetitively donate large
sums of money start to interfere in the intra-party issues, especially in appoint-
ment of candidates on electoral lists (Greven; 1977, 278).

.. Forms of public party funding

Support for political parties appears in several different forms. The most
important is direct public funding, but it is also important an indirect support,
so parties receive assistance through subsidies, tax deductions and free access to
the media.
In most of European countries legislation does not stipulate expenses on
which direct public funding can be spent, and in countries where spending is
regulated purpose of the funds is described in a very general way like “campaign
spending” or “ongoing party activities” (Piccio; 2014, 224). However, this fund-
ing is really spent mostly on the cost of maintaining of the party functioning and
election campaigns. Qualifying for direct public funding and the way of their
distribution (allocation criteria) can be determined in several ways. In a small
number of countries, all registered political parties receive public support, but
this way of fund distribution is associated with the risk of founding political
parties only in order to receive public support or that public funds will be wasted
on parties which do not have the support of the electorate (Ohman; 2014, 23).

674
However, most of the countries allocate funds on the basis of votes obtained in
the elections (this limit is averagely 3,5%), or support is given only to the parties
represented in the parliament, or combine both of these criteria (ibid., 24).
Table 1: Introduction of direct public party funding
Year Country
1954 Costa Rica
1955 Argentina
1957 Puerto Rico
1959 West Germany
1965 Sweden
1967 Finland
1970 Norway
1973 Israel
1974 Italy, Canada
1975 Austria
1977 Spain, Portugal
1984 Greece
1986 Denmark
1988 France
1989 Belgium
1991 Cyprus
1997 Ireland
1999 Netherlands, Luxembourg
2006 Iceland
Source: Brändle; 2002, 12; Piccio; 2014, 222.

Subsidies are common in the most of European countries; providing cer- INTERDISCIPLINARY MANAGEMENT RESEARCH XII
tain forms of support for political parties, it helps them to expand their basis
in society and to develop organizational and mobilization capacity. Subsidies
are provided in the form of financial assistance to specific activities such as the
education of citizens, strengthening of research capacity or political work with
women and youth ( Johnston; 2005, 14).
The possibility of tax deductions for donations to political parties is not very
often in Western democracies (Drysch; 2000, 170), and it is implemented in
Germany, the Netherlands, France and Canada. If this measure is carefully con-
ducted, tax incentives can encourage party competition and strengthen the party’s
capacity for mobilization, but it should be moderate since exceedingly generous
tax policy can weaken the interest of the parties to be organized in different areas.

675
 Ensuring political parties with free access to television, radio and other media
in some countries is associated with the prohibition of using funds for advertis-
ing in private and party media. Despite the fact that free access to the media is a
common practice in many countries, Johnston points out that free access to me-
Dražen Vitez • Hrvoje Mataković: FINANCING OF POLITICAL PARTIES FROM PUBLIC SOURCES: CAUSES, FORMS AND CONSEQUENCES

dia, a measure which should help reduce political corruption is very overrated,
but has certain advantages as “a way to open up political debate to more parties
and viewpoints” ( Johnston; 2005, 16). The basic question is how to assign, in a
fair way, free media time to various parties. Regulation of this issue should be
especially careful, because if the distribution of free media time is based on the
results of previous elections, the party whose support has increased since the
last elections and new parties that emerged on the political scene will be denied.
If free media time is equally distributed to all the parties, then minor parties,
which are in fact not interesting to the public, will get the significance which is
disproportional to their real impact and in this way media space could become
congested (Petak; 2001, 42).

.. Consequences of public party funding

Besides the indisputable advantages of this method of financing parties,
what also needs to be taken into account is that generous public funding, espe-
cially exceedingly generous direct public funding can lead to addiction of parties
on public funds. Public funding is the most important income source for parties
in most of the Western European countries, and in a sample of 17 countries it
amounts an average of 67% of the total party income. The share of public funds
in the parties’ total revenues is very different among countries, ranging from 22
per cent in the United Kingdom and up to almost 90 percent in Spain. Between
these poles is Germany with 35% and the Netherlands with 42%, as well as
Belgium, Italy and Portugal, where public funding amounts more than 80% of
the total party income (Piccio; 2014, 224-225).
Direct public funding, with secure funds from public sources, can weaken
the interest of the parties for closer integration with citizens through their mo-
bilization and building ties with the society. With introduction and gradual
increase of direct public funding, donating parties as a way of expressing politi-
cal views significantly lost its power, which can finally lead to the creation of a
small number of wealthy parties separated from citizens and society, which will,
instead working on the ground with members and potential “small” donors, pre-

676
fer to turn to mutual cooperation in order to preserve the financial status quo
( Johnston; 2005, 16). Thus, in the most extreme cases it can lead to the cartel
parties system (Katz & Mair; 1995) where the parties ensure their own survival,
to a larger or smaller extent, secretly cooperating on various issues and thereby
colonizing segments of the state. Cartel parties “become agents of the state and
exploit state funds (of party state) to ensure their collective survival” (ibid, 5)
on the basis of mutual agreement between the parties, in which large opposi-
tion parties are also included, but new or small parties are excluded, which are
with legal constraints disabled to fight in political arena. Although the cartel
members compete in elections and dispute about different issues, however, they
are willing to cooperate on issues of common interest; they refuse to compete in
issues that can initiate changes in the institutional framework and thereby harm
the party in power, but also the parties in opposition. (Scarrow; 1997, 455).

4. CONCLUSION
Parties funding from public sources has obvious advantages, since it ensures
equal opportunities for all parties in the electoral arena, and also reduces parties’
financial dependence on donations from wealthy individuals or interest groups,
who often expect a counter service for their donation. However, too intensive
public funding can lead to financial dependence on the state, which will result
in the parties’ dissociation from its members and supporters, since they are no
longer needed as a source of funding or manpower. Therefore, the best solu-
tion is a mixture of moderate public and private financing; so public funds will
INTERDISCIPLINARY MANAGEMENT RESEARCH XII
ensure financial stability and independence of political parties, and through pri-
vate donations there will be maintained ties with the society, i.e. with members
and sympathizers. Germany has introduced an interesting mechanism of so-
called matching funds, according to which public support cannot be higher than
the funds collected by political party (Falguera; 2014, 354). This mechanism
has two positive effects: as the level of public funds depends on the amount of
funds collected by the parties from private sources, parties are forced to connect
with citizens and to attract as many members and supporters who are willing to
donate to the party, and in addition parties are forced to record all donations in
their financial reports (Toplak, 2003, 53). This could be a good way for other
countries that want to avoid parties’ financial dependence on the country, but at
the same to time preserve their connections with the society.

677
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