Labour Party finances are on course to plunge into the red for the first time under Jeremy Corbyn, HuffPost UK can reveal.

A projected deficit in a new draft budget follows a major expansion of staff hires, the loss-making ‘LabourLive’ festival and a drop in membership.

Staff recruitment has had to be frozen at the party’s HQ, on top of separate plans for real terms pay cuts and pension changes, as the party desperately tries to cope with the shortfall.

London Mayor Sadiq Khan may end up with little central cash for his re-election campaign ahead of next year’s City Hall poll, and planned upgrades to data security systems are set to be cancelled.

Labour’s ruling National Executive Committee (NEC) was given a ‘financial presentation’ this week and informed that the party’s draft budget was in deficit.

Shocked NEC members were told that “difficult choices” would have to be made, although General Secretary Jennie Formby (pictured above) stressed that she wanted to put staff first.

Party treasurer Diana Holland said the party’s ‘business board’ would now look at ways to try to get it back in the black.

Party sources admitted that ‘bids for spending’ for the coming year have exceeded expected income, but claimed that was not unusual.

One key factor has been a dramatic increase in spending in the past two years, with more than 30 US-style ‘community organisers’ hired across the country and a doubling of staff in the Leader of the Opposition’s (Loto) office in parliament, compared to Ed Miliband era.

Losses have also been incurred by the ‘LabourLive’ festival last year, the so-called ‘JezFest’ in north London, as well as a drop in party membership income, insiders said.

The party finally moved into surplus in 2015 after years of losses, following a long-term restructuring plan that saw big loans and mortgages either paid off in instalments or converted into donations.

Debts of more than £25m, built up after Tony Blair’s 2005 election win, were cleared by former general secretary Iain McNicol as part of a plan set in train by his predecessor Ray Collins.

When McNicol announced the news in 2015, he was applauded by the NEC. The surplus meant that plans to abandon a central London HQ and move out to cheaper premises were shelved.

A record surge in members and registered supporters under Corbyn then further boosted the party coffers.

The party had ‘millions’ as recently as the autumn of 2017, but has since gone on a major spending spree that has wrecked its finances in just one year, one insider claimed.

“They’ve blown the lot on community organisers, LabourLive and extra Loto [Leader of the Opposition] staff.”

One senior MP told HuffPost UK: “For a party that wants to manage the nation’s finances, being in deficit is not a good look, is it?”

Much of the expansion of the leader’s office has been driven by Corbyn’s chief of staff Karie Murphy.

Steadfastly loyal, she has driven a revolution that has seen former Blair, Brown and Miliband staff at HQ replaced with leftwingers, seen as more in tune with the new membership who powered Corbyn to two landslide leadership election victories.

In an unprecedented move, Murphy has also been given ultimate responsibility for human resources, with Labour’s HR director reporting to her rather than directly to anyone at party HQ, sources said.

The hire of community organisers under new general secretary Formby is a key part of the Labour leader’s effort to reconnect the party with voters in key areas, and more than 30 have been taken on, with a target of over 40 set.

Defenders of the community organiser model say it’s in tune with Corbyn’s belief that elections are won over years not a few short weeks of a campaign, and also of the need to effect change locally beyond elections.

But critics claim that they are in effect a ‘shadow’ regional army for the leadership, bypassing existing regional directors and staff who are seen as part of the pre-Corbyn era.

One prospective parliamentary candidate said the community organiser model had already been shown to have failed under Ed Miliband, when he trialled some schemes in the hope of importing the model that led to the rise of Barack Obama.

“They’re either incredibly inexperienced or they duplicate what the PPC and the region are doing. It’s a total waste of money,” they said.  An MP added: “No-one really knows what these people do.”

Mansfield, where Labour hopes to take the council this May from local independents ahead of retaking the seat from the Tories, will be a key test. “Just imagine if we don’t win Mansfield,” said one shadow frontbencher.

Crucially, many of the new staff have been hired on contracts that extend until the next general election, rather than the rolling one-year contracts used in the past.  The decision to shift to longer contracts is defended by Corbyn’s allies, but carries a financial cost.

One NEC member said: “Community organisers can be a good thing, but we’ve way over-extended them. We need to focus on fighting the general election, when it comes. There’s a reason you hire extra staff then, rather than in ‘peacetime’. They cost a lot of money.”

Meanwhile, Corbyn’s office in parliament now has more than 40 staff. Ed Miliband had just under 20 staff in ‘peacetime’, and 27 even during the run up to the 2015 general election.

Some of the staff in the leader’s office are funded by so-called ‘Short Money’, a taxpayer-funded scheme to give opposition parties cash. But several are paid through party funds.

If Labour were to get into office, it would instantly lose ‘Short Money’ and as a result usually plans a surplus to ensure it can continue to keep staff at HQ. “If we win the election, the irony is the party’s finances will be destroyed even more,” one party figure said.

But a party source defended the need for more staff in Corbyn’s office. “We are engaged in the serious process of preparing for a general election, which could be called at any time,” they said.

The party’s audit and risk committee, which has independent oversight, has separately warned for some time that Labour is overly reliant on membership income.

The NEC was told current membership is just over 500,000. The figure includes those currently in arrears who have not renewed direct debits.

Formby told the NEC that one recent drive for small donations from members had yielded an impressive sum of around £100,000, but some of her colleagues say such efforts are unsustainable.

The NEC heard that the party had 589 members more than it had budgeted for, out of the half a million total. Critics say that once members lapse the figure will in reality be 460,000, although this is hotly disputed by the party.

Others claim a big drop off in members disillusioned with Labour’s failure to listen to members demands for a second Brexit referendum. “Next year’s figure is the one to watch. It will go off a cliff,” said one ex-staffer.

The membership figures are seen as so sensitive that the usual weekly updates are now very tightly controlled. The next time Labour will formally publish its figures will be this summer, when it will post the December 2018 total.

A party spokesperson told HuffPost: “We are proud to be one of the largest political parties in Europe, made up of over half a million members. 

“Our party is financially secure, funded by ordinary members, trade unionists and small donations.”

The party struggled to sell tickets at its original price for the LabourLive festival last summer, but in the end 13,000 people turned up. Trade unions helped subsidise the event.

At last year’s party conference, Holland admitted: “LabourLive did not make a profit. I don’t think that was why it was organised. However, there was a net cost. It’ll be included in next year’s financial report.

“But this was met by part of the reserve fund we have established in addition to the general election fund, so absolutely none of that was touched, but we did use some of our reserves in order to fund that.”

It is understood that the party has not included the loss as part of this year’s budget.

UPDATE: In response to HuffPost’s report, NEC member Jon Lansman tweeted that “the balance sheet is very healthy”, while stating the party needed to cut costs.

“We’re on an election footing without an election or the income that comes with it. Now an election looks unlikely anytime soon, we need to cut costs to build the war chest.”

Another NEC source said the budget would not be approved “until the deficit is resolved”.

The party has separately built up a “very healthy” fund to fight a general election, they added.

One senior figure said that party treasurer Holland had made clear the need to keep a grip on costs.  “She was extremely firm about the need to maintain the prudence that has led to the turnaround in our finances in recent years, but she was not sounding an alarm bell that there was some kind of crisis.”

But Tory party chairman Brandon Lewis said: “If ever we needed proof of Jeremy Corbyn and John McDonnell’s economic incompetence this is it.

“If this is what Jeremy Corbyn can do to his party, imagine what he would do to the country?”