Conservative party plan described as ‘entirely partisan’ by Labour with one estimate saying annual affiliation fee income could fall to £1m

An expected £6m fall in Labour’s annual income as a result of legal changes being proposed by the Conservatives will make it impossible for the party to maintain its current structure, staffing or offices, a confidential party document released to the Guardian reveals.

The document calculates the party is expecting to lose as much as £6m in trade union funding as a result of the changes to the political levy being introduced in the trade union bill due to be debated in the House of Lords on Monday. The figure is the first internal party estimate of the impact of the bill on the party’s finances. It is in addition to separate cuts to so-called Short money – public funding received by opposition parties – that were included in the chancellor’s spending review in November.

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The paper says the unions provide 20% of the party’s core funding and the consequences of the legal changes will be huge. It reads: “The party could not absorb a loss of £5-6 m and maintain its current structure. With an annual salary cost in excess of over 50% of total costs, it is clear that current staffing levels could not be sustained. In addition to a staffing review, all contracts would need to be challenged to remove any discretionary costs and offices considered for sale or sublet.”

The legal changes being introduced by the Conservatives have been condemned as the most unfair alterations to political parties’ funding since the second world war. They mark an end to a long-standing convention that issues of party funding are agreed on a cross-party basis.

The change will mean a cut in income to the party from the unions of at least £35m across a five-year parliament. The loss of income will come in both annual union affiliation fees and grants. The bill is due to become law in the summer and is already forcing the party to make contingency plans including the possible sale of property.

The trade union bill changes the way trade unionists pay into their union political fund, the only source from which unions can give money to Labour. The changes mean each union member will have to agree in writing every five years to opt into paying the political levy, as opposed to opting out via the current system. The new rules will apply to all existing 4 million political levy payers in unions affiliated to the party and those that are not. The bill gives the unions only three months to get a union member’s signature assenting to the payment of the levy.

Lord Collins, a former Labour general secretary involved in the fight against the changes, said: “These changes are entirely partisan, unfair and going to hit the income of the party and union political funds very hard. No balancing measure is being taken to cap the donations of the Conservative party.”

He said the changes were far more significant than the 20% cut in Short money that will cost the party an additional £1.3m annually.

The paper calculates the number of trade unionists paying the political levy, and hence the size of union political funds, will collapse from this autumn.

Although there are 14 unions affiliated to Labour, a huge bulk of the funding comes from five unions that together in 2014 affiliated 2,032,297 political levy paying members who provide the party with £5.554m in annual income. In addition, unions draw on their political funds to provide one-off donations to the party mainly at election times, amounting to about £12m. The unions provide on average about a third of Labour’s funding over the course of the parliament.

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The confidential paper says it had been predicted that about 10% of union members would opt in, based on a review of the number of union members who did so in the 2010 party leadership election. This would mean the number of members paying the political levy in the five largest affiliated unions would fall from 3.352 million to 333,000, thereby slashing the numbers that can be affiliated to the party. Unions cannot afford to affiliate every political levy payer since they need to retain funds for other political activities and one-off donations. On one estimate, annual income from affiliation fees would fall from £5.5m to £1m.

The trade union and Labour party liaison organisation claims the Conservative party “will establish an overwhelming financial dominance over the Labour party, making British elections uncompetitive”.

The government says the switch to opting in ensures unions only receive political funds from members who actively want to be engaged in politics.

In the year ending December 2013, the last date for which official figures are available, the total number of union members paying a political levy was 4,954,606. But the number paying it in unions affiliated to Labour was 3.7 million, producing an annual income for the political fund in the affiliated unions of roughly £22m, an average payment of about £6 per political levy payer.

On the assumption that only 370,000 (10%) of political levy payers agree to pay the political levy within the three months proposed in the trade union bill, then the annual income to the political funds of affiliated unions would collapse to £2.2m. Not all of the £2.2m will go to the Labour party, since some is tied up in funds that cannot be spent on Labour.