Labour party members and supporters will be asked to help pay back the $768,000 the party owes for improper spending at the last election.
The Auditor-General Kevin Brady ruled this afternoon that $1.17 million of taxpayer money had been spent unlawfully by political parties at the 2005 election - the majority by Labour.
Moments later, Prime Minister Helen Clark announced that, after weeks of standing firm on a refund, the party would now pay it back.
National leader Don Brash branded the announcement an "admission of guilt on an unprecedented scale".
"The debts of other parties pale by comparison. Labour has been caught red handed with its fingers in the till."
Asked by reporters this afternoon where Labour would get the money from, Ms Clark said "from party members and supporters".
"We would expect our party members and supporters to be contributing."
She said she would expect the money - most of it to pay for Labour's pledge cards in the 2005 election - would be paid back within the financial year.
Labour joined National, the Greens, ACT and the Maori Party in saying they would pay back the money received from Parliamentary Services that Mr Brady said was wrongly used for electioneering.
Ms Clark said Labour believed strongly that it spent the money within the rules as they were understood at the time.
But she said: "Refunding the money is one step in a series of responses which need to be taken to ensure public confidence in the political process.
"The Auditor-General's investigation has opened up a number of issues relating to how politics is conducted."
Before this afternoon's report was announced, Labour had repeatedly said it would not pay the money back.
The pressure is now on parties like New Zealand First, which the Auditor-General found had misspent $150,400.
Ms Wilson gave all parties one week to decide if they were willing to pay the money back. The Speaker also recommended passing a so-called validating law to allow the spending at the 2005 election on the grounds the rules were unclear.
Mr Brady's report found $1.17 million of taxpayer-funded parliamentary funding was misspent overall, across seven of the eight parliamentary parties.
* Labour spent $768,000 wrongly
* New Zealand First $150,400
* The Greens $80,900
* United Future $63,800
* Act $17,800
* National $11,300
* Maori Party $48
However, tonight there was still some confusion over Mr Brady's figures, because he added GST to the total amount of unlawful spending, but not to the amounts for individual parties.
It was not even certain whether GST should be applied, and some party officials were seeking clarification.
With GST added, Labour would be liable for $824,500, NZ First $157,934, the Greens $87,192, United Future $71,867, ACT $20,100, National $11,900 and the Maori Party $54.
New Zealand First leader Winston Peters said his party was "completely bewildered" by some of the Auditor-General's conclusions about election spending.
Mr Peters said he believed only "a few thousand" of that was valid, rather than the $150,000 cited by Mr Brady.
"We now need to sit down with our lawyers and go through the Auditor-General's very detailed report line by line to try to understand how he has come to the conclusion that the rest of our spending was wrong," he said.
"If the report shows us clearly where we went wrong, we can and will repay the money."
Mr Peters said his party had always been scrupulous about getting approval from the Parliamentary Service, which pays the bills, before it incurring any spending.
He said there would be no problem finding the money, and he had spent a lot more than $150,000 on court cases.
Mr Peters did not rule out legal action over Mr Brady's report, but he said all that could be done would be to seek a declaratory statement from the High Court on points of law.
He said most of the money identified by Mr Brady as wrongly spent was the cost of producing policy pamphlets which had been printed in early 2005.
National has already paid back $10,500 and the Maori Party $53 - $5 more than it owed.
ACT leader Rodney Hide wrote out a cheque for his party's share, and waved it around in Parliament, and the Greens said they would pay back theirs.
United Future agreed to pay only $5000 and said it was "considering the report".
In a statement Ms Wilson said she did not accept the Auditor-General's legal analysis and thought Mr Brady's warnings before the election were not as clear as he had believed. She also said that parties were not required to reimburse the money.
"I see the situation akin to accepting the decision of a court because you respect the authority of the court but beg to disagree with the reasoning of the court," she said.
"In this instance the matter must be considered seriously if public confidence in Parliament is to be maintained."
The Speaker, who received the report from the Auditor-General late last week and released it to Parliament today, said parties needed to study the findings urgently and report back to Parliament.
"I therefore require the parliamentary parties to consider the two reports and report back to me on whether they intend to reimburse the unlawful expenditure in time for me to report back to Parliament next Thursday," she said.
The Speaker said there appeared to have been "a genuine misunderstanding" of the interpretation of the rules which the Auditor-General expected to be applied by the parties and the Parliamentary Service, who are Parliament's bureaucrats and pay out on spending invoices.
The report by the Auditor-General and its subsequent report by the Speaker was immediately seized on by the Opposition in Parliament.
When National leader Don Brash rose to question Deputy Prime Minister Michael Cullen, the Speaker had to step in to quell the shouting across the House.
Mr Cullen said the Prime Minister and Labour had yet to study the report which had only just been tabled in Parliament. He said: "The Government will take whatever steps are appropriate when we have had the opportunity to properly consider the report."
Ms Wilson said in her statement that both a report by the Auditor-General and her own report found that there were big misunderstandings over what money could be spent under the heading "parliamentary purposes", including whether election advertising was permissible.
"The present position is so uncertain that it may be unworkable on a practical day to day basis," she said.
"Because of the uncertainty I am recommending that consideration should be given by Parliament to legislation to clarify the meaning of parliamentary purposes in the interim.
"MPs and the public need certainty that the resources used to fulfil responsibilities to the electorate are lawful. This can only be achieved by closer statutory direction."
The Speaker said that there were conflicting legal opinions on whether the election spending was unlawful or not.
She recommended that Parliament passes validating legislation, under the Public Finance Act 1989, to remedy the breaches.
"Although the unlawfulness in this instance is surrounded by much political controversy, it does not alter the fact that legislation is required to validate the unlawfulness," Ms Wilson said.
- NZHERALD STAFF / NZPA