Liberal Democrat rebels have secretly agreed to co-operate with Labour MPs to try to tone down some of the more contested elements of George Osborne's first Budget.
A senior Lib Dem MP confirmed that a number of disgruntled colleagues had "talked tactics" with Labour opponents over the possibility of at least obstructing key measures, including the increase in the rate of VAT from 17.5 to 20 per cent.
The discussions over co-ordinated "surgical strikes" on the Finance Bill, which will pass the Budget proposals into law, increase the risk of political embarrassment as Mr Osborne's emergency proposals become bogged down in Parliament. Labour hopes the guerrilla warfare against the Budget will destabilise the coalition.
Details of the collaboration between rival MPs were revealed as it emerged that a number of Lib Dem MPs have defied their party leadership and gone public with their opposition to the "regressive" VAT hike.
In an article for The Independent on Sunday today, the Lib Dem leader, Nick Clegg, defends the Budget and claims that the VAT rise is "part of a long liberal tradition".
However, four Lib Dem MPs have put their names to an amendment to the Finance Bill, addressing concerns over the fairness of the VAT increase by demanding "an assessment of the impact of the increases it proposes upon business, charities and households across the income and age groups".
Two polls last night underlined concerns that the party was bearing the brunt of the public backlash against the coalition's austerity programme. An ICM survey for The Sunday Telegraph showed Lib Dem support slumping five points to 16 per cent. In contrast, the Tories were up two to 41 per cent and Labour up four on 35. A YouGov/Brand Democracy survey in The Observer suggested the VAT rise made almost half of Lib Dem supporters more likely to desert the party.
Andrew George, the Lib Dem MP for St Ives, who tabled the Budget amendment, has stressed to colleagues that he is not seeking to trigger "nuclear war" in the party, but believes the issue of fairness should be addressed. But his action conflicts with his party's attempts to hold the line in favour of the Budget.
Lib Dem MPs have resisted the temptation to make any official protests against the Budget – refusing to sign Labour motions opposing the VAT increase, for example – despite their deputy leader, Simon Hughes, suggesting in the Commons that the party could "come forward with amendments" to make the Budget fairer.
But Mr George's amendment could lead to more widespread dissent. Six Lib Dem MPs are understood to be unofficially met Labour counterparts late last week to discuss co-ordinating their opposition to contested Budget proposals. Two early day motions protesting about the rise have attracted the support of almost 70 Labour MPs.
"If you sincerely believe something is wrong, you should use all the forces available to prevent it," one said yesterday. "The feeling that this measure will hit the poorest more than anyone else is shared right across the party divide. I am not sure the Government will drop it, but we must at least try to make them rethink."
A Labour source denied the party had any official involvement in the cross-party activity, but confirmed that he knew that it had been going on. He added: "This sort of co-operation happens more than people think, but I think this demonstrates the degree of concern over what the Government is trying to do."
Labour has targeted the Lib Dems for special criticism since the Budget was laid out, with shadow ministers accusing Mr Clegg of giving the Tories "cover" to carry out their most dramatic spending cuts.
Colchester's Lib Dem MP, Bob Russell, cautioned that he was considering voting against the Budget, saying: "Less than 50 days ago, I was seeking re-election in Colchester opposed to a rise in the level of VAT. I need to discuss with colleagues how it is we have got into this situation. VAT is a tax which the low-paid disproportionately pay more."
In his IoS piece, Mr Clegg writes: "When it comes to taxing what people choose to buy and taxing work, it is liberal to come down on the side of consumption rather than payroll taxes."
Growing unease on the Government benches comes amid disturbing forecasts of the Budget's long-term impact on key departments.
The Royal United Services Institute (RUSI) cautions that the Budget could mean a 15 per cent cut in defence spending – and 30,000 fewer military personnel. in the longer term the two-year public sector pay freeze meant that "if real spending on personnel falls by around 13 per cent, personnel numbers would have to fall by around 15 per cent by 2014."
Health and Social Care
The King's Fund fears that promises to protect the NHS by ring-fencing the health budget will be undermined by the failure to tackle social care. Emergency admissions and delayed discharges caused by an "under-funded system" of social care already cost millions every year. Experts say this will get worse as social care budgets are axed to cope with the cut in grants this year.
Police and Home Affairs
Up to 35,000 police jobs and many stations are under threat amid fears that the Home Office's £9.5bn budget could be cut by a third. South Yorkshire Police is planning to "civilianise" more than 50 officer posts, while the Merseyside force may begin a recruitment freeze.