Mr Dromey's remarks prompted the loans investigation

Jack Dromey told Labour delegates there would be between 15 and 20 voluntary job losses as Labour battles to pay off its �27m funding deficit.

But he insisted there was no pensions crisis and said taxpayers' money would not be needed to plug the black hole.

Commons Leader Jack Straw said caps on the spending of all parties were needed to end the political "arms race".

He was explaining Labour's submission to former civil servant Sir Hayden Phillips' inquiry on party funding.

New state funding

Labour wants to extend limits on spending beyond election time, both locally and nationally, but does not want to cap donations.

The submission also calls for a "modest" extension of existing state funding to include the party in government.

Party officials say the extra funding would cover policy development, research and training candidates - but not campaigning.

But Peter Facey, from the Unlock Democracy campaign group said: "A grants-based system will do nothing to engage the public and because the money will go to the party nationally, could increase centralisation.

"Even worse, they are open to abuse, which in the longer term will only increase public cynicism about political parties."

'Democracy call'

The Phillips inquiry was prompted when Mr Dromey revealed that he knew nothing about Labour's secret loans from wealthy businessmen.

Scotland Yard is still investigating whether the loans and other donations broke the rules on selling peerages - something Labour and other parties vehemently deny.

Mr Dromey said part of Labour's recovery plan was to make sure there was "democratic overview" of all key financial decisions in the future.

But he said the sale of Labour's former HQ in Old Queen Street, London, was not a "panic" measure.

Instead, the building was not suited to being a modern campaign centre and selling it had helped cut Labour's debts by �8m.

'Lost confidence'

Mr Dromey also said the party was confident it could fill the �6.3m deficit in its pension funds.

JACK STRAW SPEECH Job: Commons leader Leadership ambition?: Seen as a possible deputy leadership contender but stuck to his brief in this speech, explaining how party funding should be reformed Reception? His defence of the trade union funding link went down especially well

"The problem is not as bad as the accounts suggest," he said. "It is serious, nevertheless."

Mr Dromey, husband of minister Harriet Harman and deputy leader of the Transport and General Workers' Union, said Labour had endured a "dramatic year".

All parties had been forced to face up to the fact they had "spent more, engaged less and ultimately lost the confidence of the public", added Mr Dromey.

Lords reform push

Mr Straw rejected calls for caps on donations, telling the Tories to "lay off" trade union members whose money went to Labour.

"Don't be taken in by what the Tories tell you. For there's a shocking secret about the trade unions and Labour's funding," he said.

"The 17 trade unions affiliated to our party have not given us a penny; it's their members who have - two and a half million of them - who voluntarily choose to pay the political levy."

Mr Straw said union members had voted to keep funding Labour through the levy - a kind of subscription fee from unions to Labour.

He also defended party donations from both small and big donors.

"Giving money to political parties is not dodgy but honourable," he said.

Mr Straw also pressed for Labour not to pass up the chance to rid the House of the Lords of the last remaining hereditary peers.

A previous attempt at a new stage of reform foundered when MPs and peers failed to agree on the mix between elected or appointed reform.

Mr Straw: "Please, let us not again make the best the enemy of the good. Deadlock again will be easy, whilst reform will require compromise on all sides."