Financial Regulations

Motives for regulating political finance may vary considerably and with them also the focus of the regulations. At least four different motivations can be identified: preventing abuse; enhancing fair political competition; empowering voters; and strengthening parties as effective democratic actors.

Preventing abuse is the driving force behind legal regulations such as limits on donations and prohibitions on sources of funds. The risk of political corruption and the distorting effects money can have on politics can be limited with this kind of regulation.

Enhancing fair political competition and levelling the playing field can be done by providing political parties with public funds, using positive action to enhance representation of under-represented groups, or by putting a ceiling on election expenditure.

Empowering voters can also be done through legislation. Requiring public disclosure of party income and expenditure gives voters a chance to know who is supporting which parties or candidates and to decide for themselves which sources of funding they find acceptable, and vote accordingly.

Strengthening political parties is often the most difficult goal to meet. Countries can help foster strong and democratic political parties with strong links to their members by providing matching grants for donations, giving extra funds for training and development, and in general providing legislation that is coherent and functioning.

The financial regulation of political parties and candidates is an area in which enforceability is critical to the credibility of the effort to control political corruption. In general, legislation that cannot be enforced should not be enacted. It is good practice to draft laws with their implementation in mind, also looking at the resources available to the body that will monitor and enforce the laws.

Direct and Indirect Public Funding

Public funding refers to funds or resources provided by the State/Government to political parties and/or candidates.

Political parties and candidates should have equitable access to public funds, and the rules regarding public funding should be clearly stated in law. It is particularly important that there be no misuse of public resources by the incumbent party or candidate. The legal framework should encourage the founding and sustainability of a multi-party system.

Public funding is divided into direct public funding or indirect public funding, depending on the form in which public resources are made available.

Direct public funding is given to political parties in the form of money – usually as bank transfers.

Indirect public funding refers to resources with a monetary value that the Government provides to political parties. For additional detail, see the file about indirect public funding of parties and candidates.

Use of Direct Public Funding

If public funds are given to political parties and/or candidates, the state may have an opinion on what the money should be used for. Sometimes, this can be expressed as recommendations to the political parties or candidates, while in other cases funds are earmarked for specific purposes, or certain uses are prohibited.

One main difference is whether or not it is expected that the funds will be used for election campaign purposes (more common where public funds are given to candidates) or for routine, non-election related operations (more common where funds are given to political parties). Specific funds may either be earmarked for specific purposes, or accepted purposes can be listed and it can be allowed that the party or candidate allocate the funds between them.

Apart from general election campaign purposes and routine operations of the party, funds are commonly earmarked for:

• The work of the parliamentary group/caucus, which may include administrative staff, legislative research, and publications or other information needed.
• Training of party members or candidates in everything from party ideology to membership recruitment and citizen outreach.
• Research, including research staff, information material, and opinion polls.
• Party solidarity work in other countries, often in the form of funds provided to a political party foundation to support sister parties in developing democracies.
• Activities aimed to support the participation of under-represented groups such as information campaigns aimed at increasing the participation of national minorities, immigrant communities, young voters, or voters in areas where voter turnout is lower than in the rest of the country.
• Electoral deposits in countries where political parties or candidates have to present a deposit to register for the elections.
• Support for collecting signatures in countries where signatures are a requirement for registration.
• Voter education, which is at times a responsibility of the political parties and/or candidates. If it is, they can often receive funds to cover their costs. In societies where there have been major changes to electoral systems, processes, and procedures and in the case of the newly enfranchised and first time voters, voter education may play an extra important role.
• Civic education, which may also be a responsibility of the political parties and/or candidates. Civic education deals with broader concepts underpinning a democratic society such as the respective roles and responsibilities of citizens, government, political and special interests, the mass media, and the business and non-profit sectors as well as the significance of periodic and competitive elections.
• Publishing of election manifesto, ideological publications, or party press.

Timing of Direct Public Funding

The timing of when political parties and/or candidates get public funds varies between countries. The timing is closely linked to two things: what parties and/or candidates are supposed or allowed to use the public funds for and how the public funds are allocated between parties and candidates.

Public funds can be distributed on the basis of election cycles, calendar or fiscal year, or both.

Distribution per election cycle

This is common in, but not restricted to, countries where the public funds are meant to be used for election campaign purposes. The public funds can be given before or after the election, depending on the allocation formula.

If the allocation is based on how many candidates a party is putting forward in an election, on the number of seats each party holds in the national legislature, or on the number of registered members it has, or if the country wants to support new parties that might not be able to fund their first campaign, there is the option of distributing funds before the election.

If political parties or candidates receive reimbursements for election expenses, or if they receive funds depending on how many votes or seats they gained, the funds are naturally distributed after the elections.

It is also possible to advance some funds to a party in advance of an election and some afterwards, with the final accounts adjusted after the election on the basis of votes received or seats won.

Distribution per year (calendar year or fiscal year)

In countries where funds are earmarked for the routine operations of the party rather than for election campaigns, funds are often distributed per year. This is sometimes expressed as the distribution taking place between elections rather than before or after.

Given that the public funds within the same country can both be earmarked for specific purposes and allocated according to a combined formula, parties and candidates often receive parts of the funds at different intervals and different stages of the election process.

Allocation of Direct Public Funds

The allocation of direct public funds is based on a formula on which a decision is taken on how much each party or candidate should receive. There are three main principles that can guide the allocation: equality, proportionality and need. The most common option is to use a formula combining elements of the three principles. All parties or candidates represented in parliament may for example receive a small, equal sum, or they may receive a larger part in proportion to the votes they gained in the last election, and a third part may be given only to parties that contest the election for the first time. One way of dividing the sums is to use different formulas depending on what the funds are supposed to (or allowed to) be used for.

Allocation based on equality can be of the following types:

• An equal amount is given to all parties and/or candidates that contest an election This allocation can prove very costly and risks encouraging political parties who are not in the game to win or try to influence politics, but rather to get a share of the public funds
• An equal amount is given to all political parties that received a certain number of seats/mandates in the last election

Restricting the equal funds to political parties with a certain representation in the body concerned by the election limits the risk of funds being allocated to parties that are not a serious election alternative, but also risks discouraging political parties and candidates who are new to the political arena. This risk is aggravated by the fact that all electoral systems reduce the number of parties that obtain seats and thereby discriminate against small parties. This discrimination fills a function in providing a body able to take decisions, but may unintentionally have a more far-reaching effect if the number of seats are used as allocation formula for public funding. Given that this allocation is based on political parties, it is common in countries with electoral systems based on political parties rather than candidates.

• An equal amount is given to all political parties and candidates represented in the national legislature

If funds are given to all political parties and candidates represented in the body concerned by the election, small and new parties are still discouraged but a wider range of actors are included.

• An equal amount is given to all parties and candidates that received a certain number of votes in the last election

Widening the target group even more would mean that parties and candidates that received a certain amount of public support in the last election would receive public funds, even if they did not reach the vote threshold for representation. The threshold is usually set between 1 and 2 percent of the national vote. It is less common that the threshold is set in real number of votes.

Proportional allocation refers to systems where parties or candidates receive more funds depending on the amounts of candidates presented, votes received etc. Common criteria for proportional allocation are:

• Funds are given in proportion to the number of candidates put forward

The allocation of funds depending on the number of candidates put forward for election by a political party is mostly used in countries with electoral systems based on political parties rather than candidates.

• Funds are given in proportion to the "representativity" of the candidate list put forward

Public funds are sometimes used to increase the participation of under-represented groups by encouraging political parties to field both men and women, and to field candidates of diverse backgrounds.

• Funds are given in proportion to funds raised (matching grants)

One often mentioned criticism against direct public funding of parties and candidates is that they would become increasingly independent from their members and supporters. With this independence there is a risk that they will tend to not listen to their members and supporters on issues of leadership selection and policy decisions. To counteract this, systems of “matching grants” where political parties and candidates receive public funds in proportion to what they have been able to raise from members and supporters have been introduced. This may work to the disadvantage of new or small parties unable to mount successful fund-raising campaigns.

• Funds are given in proportion to seats/mandates held

As mentioned above, all electoral systems tend to discriminate against small parties in order to create a legislature apt to take decisions. This discrimination may have more far-reaching implication and prove even more disadvantageous if funds are allocated depending on the number of seats held. The advantage is that parties that already have representation have thereby proven the level of their public support.

• Funds are given in proportion to votes received

Funds given in proportion to votes cast in favour of the party or candidate in the last election is a system which is still disadvantageous for new and small parties, but to a lesser extent than allocation based on seats.

• Funds are given in proportion to party membership or other signs of support

Allocation based on seats or votes stems from the idea that the political party should have to prove its public support before obtaining public funds. Other ways of ensuring that a party has support may be to base the allocation formula on membership registers. This would give new parties with a significant level of public support better chances to gain access to public funds. Membership levels are however not automatically a clear indication of how much support the party would get in general elections, and membership registers may be difficult and time consuming for the election authorities to verify.

Lastly, political parties with special needs may get access to funds aimed at levelling the playing field. The following are some allocation types based on special needs:

• Funds given to new political parties Party systems need to be open to new political parties, and public funding is often perceived as preserving a status quo where the established political parties remain in power much because of the allocation of public funds. This can be counteracted by providing special grants for new political parties.
• Funds given to small political parties Allocation criteria based on number of seats held or votes received in the last election work to the disadvantage of small political parties. At times special funds are set aside for small political parties if it is perceived as a common good to have small parties in addition to the bigger ones. In other cases, proportional allocation can be used to work to the advantage of small parties by for example letting the first percentage of votes translate into more funds than the following percentages.
• Funds given to minority parties or candidates Public funds can be used to encourage the participation of under-represented groups. Parties or party lists fielding national minority candidates can either receive special funds or be exempt from fulfilling threshold criteria mentioned above.

Indirect Public Funding of Parties and Candidates

Depending on the form in which public resources are made available, public funding is divided into direct public funding or indirect public funding.

Direct public funding is given to political parties and/or candidates in the form of money – usually as bank transfers but at times in cash or cheque.

Indirect public funding is when resources with a monetary value are provided by the Government to political parties and/or candidates. It is generally less controversial than direct public funding but also has less impact even though it can at times amount to quite a large monetary value.

Indirect public funding can take a number of different forms, the most common of which are the following:

• Media access, which in practical terms usually means free advertising slots in publicly owned media. Publicly owned media broadcasting multi-party election debates does not constitute indirect public funding.
• Interest-free loans for paying registration fees or mounting a basic election campaign.
• Free printing and distribution of ballot papers in multiple ballot systems where parties are responsible for providing their own ballots and in some cases basic campaign information.
• Free or subsidized office space for political party headquarters or local branches.
• Free or subsidized public transportation for candidates, key party activists, or in some cases even for supporters going to political rallies.
• Use of Government buildings like schools, administrative buildings, and sports arenas for meetings and rallies.
• Special taxation status for political parties, meaning that parties do not pay normal taxes on receipts and expenditures, that they are exempt from paying Value Added Tax (VAT), or that they are exempt from paying any taxes at all.
• Tax-free donations is a form of indirect public funding that provides the donor with tax incentives for contributing to a political party.
• Free or subsidized postage for disseminating informational material to voters or, in some cases, for any purpose.
• Free or subsidized telephone lines and telephone calls.

Advantages and Disadvantages of Public Funds to Political Parties and Candidates

Public funding are funds or resources provided by the State/Government for political parties and/or candidates. Provisions often state that political parties and candidates should have an equitable access to public funds. Oftentimes, the rules regarding public funding are not clearly stated in law, and even if they are, there is often a (real or perceived) misuse of public resources by the incumbent party or candidate. The legal framework can be drafted in a way as to encourage the founding and sustainability of a multi-party system.

Depending on the form in which public resources are made available, public funding is divided into direct public funding or indirect public funding.

Direct public funding is given to political parties and/or candidates in the form of money – usually as bank transfers but at times in cash or cheque.

Indirect public funding is when resources with a monetary value is provided by the Government to political parties and/or candidates.

Arguments against public funding

Those who oppose public funds to political parties or candidates often use one or several of the following arguments:

• Public funding increases the distance between political elites (party leadership, candidates) and ordinary citizens (party members, supporters, voters) When political parties and candidates do not depend on their supporters or members neither for monetary contributions (membership, donations) nor for voluntary labour, they might be less likely to involve them in party decisions or consult their opinions on policy issues.
• Public funding preserves a status quo that keeps the established parties and candidates in power Public funds are often allocated among political parties and candidates in the national legislature. This may make it more difficult for new political forces to gain representation. The legal framework can limit this negative influence by providing special funds for new political parties or candidates.
• Through public funds, taxpayers are forced to support political parties and candidates whose views they do not share

Many believe that ordinary taxpayers should not be forced to – through the public purse – support political parties or candidates that they would never choose to vote for. Instead they should have the possibility to decide if and when they want to donate money to a political party or candidate.

• Public funds to political parties and candidates takes money away from schools and hospitals to give to rich politicians

When introduced, public funding is often unpopular among the public. Public resources are scarce and needed for everything from schools and hospitals to roads and salaries for staff. To many people, using public funds to give to political parties and candidates would be far down their list of priorities.

• Political parties and candidates both take the decision and collect the money

The decision to allocate public funds to parties and candidates is most often taken in the national legislature (or in some cases in the Government). This means that the political parties and candidates who will collect the money, also take the decision.

• Political parties risk becoming organs of the State rather than parts of civil society

If all or a substantial amount of the party income comes directly from the State rather than from voluntary sources, political parties risk losing their independence and become organs of the State, thereby losing their ties to the civil society.

Arguments for public funding

A majority of the countries in the world give some form of public funds to political parties and/or candidates. Convincing enough as the arguments above might seem, there are also several good arguments for public funding.

• Public funding is a natural and necessary cost of democracy

Political parties and candidates need money for their electoral campaigns, to keep contacts with their constituencies, to prepare policy decisions and to pay professional staff. If a country wants to have stable political parties and/or independent candidates, some argue that they also need to be prepared to help pay for them.

• Public funding can limit the influence of interested money and thereby help curb corruption

If political parties and candidates get at least a basic amount of money from the public purse this has the potential to limit the likelihood of them feeling the need to accept “interested money” from donors who want to influence their policies, rhetoric or voting behaviour in the legislature.

• With public funding the State can encourage or demand changes in for example how many women candidates a party fields

In the same way as private donations can come with demands on party or candidate behaviour, the State can use public funds to level the playing field and encourage (or force) political parties to undertake reforms, hold internal elections or field a certain number of women candidates, youth or persons from an ethnic minority on their ballots.

• Public funding can increase transparency in party and candidate finance and thereby help curb corruption

If political parties and candidates receive a substantial amount of their income from the State, they can more easily be required to disclose their income and expenditure. If their financial statements are made publicly available, voters can decide which sources of funds are acceptable to them, and they will also have better opportunities to hold politicians accountable.

• If parties and candidates are financed with only private funds, economical inequalities in the society might translate into political inequalities in government

In many countries, the support base of political parties and candidates are divided along socioeconomic lines. The support base of labour or dalit parties for example, are traditionally less wealthy than the support base of other parties. If political parties receive all their income from private donations, there is a risk that (mostly accepted) socioeconomic differences in the society will translate into (mostly not accepted) differences in representation and access to political power.

• Political parties and candidates need support in meeting growing costs of campaigning

Politics and political campaigning is an increasingly costly business. While parties and candidates used to rely heavily on voluntary labour for door-to-door canvassing, they now need to pay for expensive advertising in newspapers or on posters, or buy time on radio or television to get their message through to the voters. Staff costs have risen in many political parties over the last decades.

• In societies with high levels of poverty, ordinary citizens cannot be expected to contribute much to political parties

In societies where many citizens are under or just above the poverty line, they cannot be expected to donate large amounts of money to political parties or candidates. If parties and candidates receive at least a basic amount of money from the State the country could have a functioning multi-party system without people having to give up their scarce resources.

Reporting and Public Disclosure of Party Finance

Very often, political parties and/or candidates are required to report their income and/or expenditure to the Electoral Management Body or other authority, or to have their accounts audited by the electoral authorities. If this is the case, the accounts are then often disclosed to the public after auditing. In reporting and disclosure regulations, there is a need to strike a balance between the wish by outsiders to know (transparency) and the wish by donors and recipients to maintain their private sphere (privacy). There is a bigger need to respect privacy in countries where the risk of harassment against donors to specific parties is greater. In societies with a low level of public trust in political parties, there is usually a higher demand for transparency and consequently more public disclosure of finances.

Reporting and public disclosure can serve many purposes ranging from assisting the election authorities to ensure that money is not accepted from illegal sources; to being an empowerment of voters in deciding which party or candidate they want to vote for. The main dividing line in reporting and disclosure regulations is whether or not the information gathered is made available to the public.

In cases where the information is made public, it is often argued that voters have the right to know where the political parties and candidates got their money from, to be able to make an informed choice on Election Day. If the reporting information is made available to the public it can:

• Help expose corruption

If a political party or candidate has received large amounts of money from an individual or a company, and is later seen to initiate or vote for decisions that would directly benefit the donor, public disclosure gives media and private citizens a better chance to question the grounds for the decision.

• Give taxpayers information about what public funds have been used for

In cases where political parties and candidate campaigns are wholly or partly financed by public means, disclosure gives taxpayers information about what the money has been used for.

• Serve as an alternative or complement to prohibitions and ceilings

Laws and regulations prohibiting certain sources of funds or expenditure items – and laws on ceilings and limits on how much a party or candidate can raise and/or spend – can be difficult and costly, or even impossible, to enforce. Public disclosure can either be an alternative to these laws or serve as a complement. By making the sources and expenditure known to the general public, voters can clearly indicate what they think is acceptable by not voting for parties and candidates who have received their funds from dubious sources.

There are four principles underpinning successful regulation on public disclosure. The information provided to the public needs to be [1]

• Accurate, which means that the enforcement agencies need to have the means to audit the reports and ensure that they give a correct picture of the finances of the party or candidate’s campaign.
• Timely, in the sense that information on election expenditure published long after the elections can neither affect the voters’ choice on election day, nor serve as a good basis for reasonable sanctions.
• Include the right amount of detail, and not overburden the reader with a level of detail that is not useful. If the reports are to be read by an informed public, they need to be presented in a way and with a level of detail to make them understandable to a non-professional.
• Publicly available, not only on public display in a government office in the capital during office hours, but rather published in a way that gives the maximum number of citizens the chance to read the reports. Depending on the country, this may mean publication in main newspapers or on the website of the enforcement agency (EMB or other) or even posting summaries on public notice boards.

[1] Karl-Heinz Nassmacher (2003): "Monitoring, Control and Enforcement of Political Finance Regulation", in Austin, Reginald and Maja Tjernström (2003): Handbook on Funding of Political Parties and Election Campaigns, International IDEA, Stockholm, p. 144.

Prohibited Sources of Funds

Apart from receiving money from public funding schemes, political parties can receive their funds from membership dues, private (or sometimes corporate) donations, or income from properties or businesses. Too much reliance upon public funds is claimed to reduce the linkage between political parties and their members, and turn them into organs of the state rather than voluntary organisations. Most countries in the world therefore accept, and sometimes even encourage, political parties to seek funds from other sources. All sources of funds are, however, associated with specific risks that may endanger the successful operation of a democracy. Therefore, donations from dubious sources are often prohibited or limited altogether. Grass-roots funding and membership dues are probably the only two sources of funds that are always allowed.

The sources that are most likely to be prohibited are:

• Funds coming from foreign governments, individuals, corporations, or (in some cases) exiled communities. If a political party relies heavily on funding from foreign sources – especially if it is in government – there is a risk that the national sovereignty could be threatened and that political decisions will be taken with foreign rather than domestic needs in mind. Many object to anyone who does not have voting rights in the country still being able to influence politics.
• Donations from government contractors are prohibited in many cases. The risk is that elected representatives would feel compelled to reward government contracts to those who have contributed to his or her campaign, or demand donations in exchange for contracts.
• Corporate donations from national, multi-national, and foreign companies are often prohibited on the grounds that they may corrupt politics by leading the donors to expect favours from elected politicians. It is mainly the fact that corporations can donate very large sums of money that has proven problematic.
• Donations from State entities (that are not part of public funding schemes involving all political parties) are prohibited on the grounds that donations from State entities would compromise the neutrality and impartiality of the State administration.
• Trade union donations are prohibited where there is a feeling that the trade union organisations should be kept separate from the political parties.
• Funds from illegal sources like organized crime, gambling, and the drug trade are banned in many countries and unacceptable in all, regardless of legal provisions, again on the grounds that the donors might expect favours from elected politicians.
• Religious groups are sometimes prohibited from donating funds to political parties following an argument that organized religion is a domain that should be kept separate from politics.

Prohibitions may be difficult to enforce since they demand that authorities keep a close eye on all funds – including cash, which is notoriously difficult to trace – that come into political party accounts and pockets. The administration of prohibition laws is difficult and consumes both time and resources. Many argue, however, that the importance of the protection it gives democratic politics is important enough to invest resources, while others seek other ways of regulating or monitoring party income. If prohibitions seem like a line that is hard to draw, introductions of limits on donations can help curb the potentially distorting effect of donations but still give political parties a wider range of acceptable sources of funds.

Ceilings on Elections Expenditure

Most political parties around the world have experienced an increase in the costs of running electoral campaigns. This leads to situations where unequal access to funds limits some political parties’ ability to campaign. Limits on election expenditure aim to put a lid on these increasing costs, thereby also levelling the playing field between different political parties.

Ceilings on election expenditure are often set by the legislature, the electoral management body (EMB), or other authority tasked with implementing political finance regulations. In the cases where the ceilings are set in law, they are often set not in absolute figures but in multiples of the minimum wage or with a provision for adjustment according to prevailing levels of inflation.

Limits on Donations

Apart from receiving money from public funding schemes, political parties can receive their funds from membership dues, private or (in some countries) corporate donations, or income from properties or businesses. All sources of funds are, however, associated with specific risks that may endanger the successful operation of a democracy. Many countries therefore choose to either limit donations from dubious sources or prohibit them altogether. For information on legal prohibitions, read the file about "Prohibited Sources of Funds".

Limits on donations attempt to draw the line between “participating financially” and “buying access or influence” by setting a limit on how much a donor can contribute or how much a political party or candidate can accept from one single donor. Limits can discourage big donations but also encourage a more balanced and diverse funding base for political parties. This can be especially effective when combined with a sufficiently robust public disclosure requirement.