Britain's political parties should avoid waging an "arms race" on how much money they spend, the lord chancellor has told MPs.
Lord Falconer is refusing to reveal his views on future funding caps
Lord Falconer is being questioned by MPs about how political parties are funded as the fallout from the "cash for honours" row continues.
As the hearing began, he refused to say whether he backed calls for a lower limit on party spending at elections.
The government has asked a retired civil servant to report on the issue.
Sir Hayden Phillips is talking to all the political parties about future funding arrangements.
The committee of MPs is examining the wider issue of state funding rather than the specific allegations of peerages being sold, which is being investigated by police.
Instead, the committee would look at whether funding for parties should be capped, at calls for more state funding of parties and the idea of giving tax relief on smaller donations, he said.
Lord Falconer said it would not be right for the government to give its conclusions before Sir Hayden published his report in December.
He said he expected the Labour Party to publish its proposals for change within the next month.
And he insisted it was not intended to have an "insiders' fix" on future funding rules.
A civil servant was the best person to conduct the inquiry because he was independent of government and the political parties, he argued.
"One wants to avoid an arms race," said Lord Falconer.
"One wants to ensure that the money is spent in a way that does actually informs the electorate and help the resolution of issues."
19th century comparison
The main parties spent £40m at the last election. The Electoral Commission wants the £20m cap on party spending in elections reduced to £15m.
Lord Falconer said contrary to public assumptions, election spending had declined, particularly since limits were put on party spending in 2000.
Historically, spending now was lower compared with 1880, when £94m was spent at today's prices, he argued.
Committee chairman Alan Beith pointed out that votes were bought at that time.
The questions session saw Lord Falconer defend Labour minister Lord Sainsbury over questions about whether it was right for a major donor and lender to be in the government.
"It is so clear that he [Lord Sainsbury] is obviously there on his merits," he said.
Downing Street says Lord Sainsbury has been cleared of breaching the ministerial code after failing to disclose a £2m party loan.
Lord Sainsbury had apologised for unintentionally misleading the public, saying he had confused the loan with a £2m declared donation he had made.
Lord Falconer rejected calls for donors or existing lenders to be banned from being ministers. Transparency was enough to prevent any potential problems, he said.
He said he would not describe the controversy over party funding as a "crisis".
But public fears that big party donors could have undue influence on policy was a "very, very real issue" which had to be addressed in a "measured way", he argued.
If more state funding was to be used to ensure parties were not dependent on a few large donors, there would also be a cap on donations, he suggested.
Conservative MP Andrew Tyrie said it appeared the Labour Party would not seriously address the issue of trade union funding.
He said independent commentators suggested half of Labour's money came from the unions, but Lord Falconer said the figure was 26%.
Lord Falconer said the unions were part of the Labour Party's constitution and Sir Hayden would examine that relationship in terms of donations.