Leading article: Clegg's chance to clean up

Surely, if we learnt anything from the "loans for peerages" story, which this newspaper helped to break six years ago, it was that party funding should be kept away from the honours system. Yet the New Year Honours list tries again to push that water back uphill.

It has been alleged that Paul Ruddock is unsuited to a knighthood either because he ran a hedge fund, or because his fund made money by betting against the viability of Northern Rock and other banks, or both. The Independent on Sunday is not, we hope, naive about free markets. A hedge fund is simply a kind of investment vehicle, and it is neither desirable nor possible to legislate against financial speculation. The "short sellers" were not the cause of the troubles of the banks in 2007-08; they were more like a disclosing tablet, revealing problems that were already serious.

No, the reason for feeling uneasy about Sir Paul is that he has donated ?500,000 to the Conservative Party since 2003. That unease is not assuaged by knowing that he is chairman of the Victoria and Albert Museum and that his citation is "for services to the Arts". It is slightly reduced by his nomination being made by the independent honours committee, the defence to which David Cameron's spokesman clung yesterday. But Tony Blair set up the independent committee system and tried to pretend that he had done away with "political honours", and much good it did him, too. It was no use his protesting that party donors should not be disqualified from receiving honours. The only way to ensure confidence in the honours system is to separate it from political donations altogether.

Yesterday's honours list looked like a tentative step in the wrong direction. The appointment of Gerald Ronson, convicted of fraud in the Guinness scandal, as CBE didn't help. Mr Cameron's doctrine of the second chance was tested enough by his keeping Andy Coulson, disgraced editor of the News of the World, as his head of communications for so long. The idea that the honours system is a necessary part of the rehabilitation of offenders is also going too far.

To whom, then, should we look to take forward the reforms of honours and of party funding? What about Ed Miliband, the Leader of the Opposition? Despite his being imposed upon his MPs and party members by a form of guided democracy among trade unionists, he has promised to reform the party's trade union links. As we report today, important new plans are expected from him soon. If he can break the deadlock over party funding reform by linking the party directly with individual trade unionists rather than union bosses, Mr Miliband will deserve praise. Until then, his way of avoiding over-reliance on union leaders takes the form of Andrew Rosenfeld, the former tax exile and Tory donor.

While we wait for Mr Miliband, what are the Liberal Democrats for if not to keep the coalition honest? Whose answering machine at the last election asked us to leave a message after the high moral tone? It was Nick Clegg who, when MPs' expenses were reported, declared: "We need to use this as a once-in-a-generation chance to clean politics up from top to toe." And Mr Clegg does have leverage: he forced Mr Cameron to set up the Leveson inquiry into the excesses of, among others, the Prime Minister's friends, the Murdochs.

But three-party talks on a set of rules to limit the influence of rich donors and union general secretaries ran aground on the vested interests of the Conservatives and Labour. So let us hear from the Deputy Prime Minister about how he will persuade Mr Cameron to accept some limits on rich donors in return for reform of trade union funding, at a time when public opinion will not accept further increases in public funding.

The early signs are not hopeful. The Lib Dems have accepted donations that they should not have accepted in the past. It has been noted that the knighthood for Bob Russell, the Lib Dem MP, was for "public service", whereas Roger Gale and Joan Ruddock, the Conservative and Labour MPs, were honoured for "public and political services". Changing the words does not change the system, Mr Clegg.

The Lib Dems will have to do more than this if they are to restore confidence in the honours system; and a great deal more if they are to shame the two larger parties into agreeing rules to ensure that politics is free from the purchase of influence.

That is a huge test for Mr Clegg in 2012, but he cannot afford to fail.