A range of options for changes to the way political parties are funded has been published in an interim report.
All three of the main parties were given loans
Sir Hayden Phillips, who is running a government-backed inquiry, has put forward suggestions including more state funding and caps on donations.
He said there was "widespread disenchantment with politics".
Sir Hayden was asked to look at party funding following "cash for honours" allegations. He will publish a final report, with proposals, in December.
The former senior civil servant is trying to find a consensus between the political parties on the issue.
His report examines calls for the £20m limit on the amount each party can spend at elections to be reduced.
It sets out four scenarios for the future of public funding: minimal change, increased transparency, a cap on donations and greater levels of state funding.
Sir Hayden is not recommending any of the options, although he said more money from the state "should not be dismissed out of hand".
OPTIONS FOR REFORM
Minor changes to the current system
More transparency, such as more public information on large donors
Donations capped, causing parties to look more widely for funds and engage more with public
Public funding, such as subsidies or government matching donors' contributions
This could mean government matching donations from individuals - which would be capped - encouraging parties to recruit more members.
Or it could mean a subsidy, based on the amount of votes received.
Sir Hayden said: "For many people party politics is a turn-off. Party membership has substantially declined. There is widespread disenchantment with politicians.
"Yet everyone knows that parties are essential to democracy and there is no mature democracy anywhere in the world in which political parties do not play a vital role.
"People also know that party politics, and the abilities of those who choose to enter it, are of central importance to the quality of leadership, and the prosperity and the reputation of our country."
Sir Hayden stressed that "party politics costs".
"While parties can reduce the amount they spend, they will still need to get some money from somewhere, whether from donations or public funds, or a mixture (as now) of both," he said.
The Conservatives' chairman, Francis Maude, said his party supported a cap on donations.
He added: "It's clear that if public funding for political parties is to increase, political parties must tackle the perception that donations can buy influence or favours."
Labour chairman Hazel Blears said the party was "absolutely committed to increased transparency and accountability in political party funding".
For the Lib Dems, Norman Lamb added: "Transparency is the only way we will allay the public's mistrust and suspicion about how parties are funded."
Electoral Commission chairman Sam Younger said he hoped Sir Hayden's report would "provoke more debate on this important issue".
The review was ordered at the height of the "cash for honours" probe, initially prompted by the discovery that a number of people nominated for peerages had secretly loaned money to the Labour Party.
It then emerged that ahead of the last election Labour was secretly loaned nearly £14m and the Conservatives £16m. The Liberal Democrats said they borrowed £850,000 from three backers.
Until these revelations prompted a rule change, large loans on a commercial basis to political parties did not have to be publicly disclosed. Large donations already had to be declared.
Police are continuing to investigate whether peerages have been offered in exchange for cash. All concerned in the inquiry deny wrongdoing.