Andrew Grice: Osborne's Budget is shaping up to be a battle for the soul of the Coalition

Inside Westminster

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The Independent Online

Normally, politicians make their Budget TV broadcast in the few days after the event.

But something odd happened on Wednesday. Nick Clegg made a party political broadcast about the Budget a month before George Osborne will actually deliver it.

OK, I doubt the entire nation was glued to the Deputy Prime Minister's five-minute, tea-time pitch; many people probably launched an immediate search for the remote or put the kettle on. Not everyone would have heard him admit that pressure on family finances is reaching "boiling point" and say the Liberal Democrats want "faster tax cuts funded by increasing the amount paid by the richest" so that the first £10,000 of income is tax-free.

But his very public Budget submission was part of a wider message which the Lib Dems hope will eventually reach the voters. Their strategy since the turn of the year, as Team Clegg describes it, has been to "dial up" the differences between them and the Conservatives – even if that means "dialling down" the unity which the Lib Dems judged essential to give the Coalition firm foundations. They insist they could not have done this the other way round, as a divided Coalition from the start would have been a shambles.

There is no immediate sign that the new "differentiation" is paying dividends in the opinion polls. But it is early days and Clegg & Co will need to keep hammering home the message if the public are to find out what they stand for and are delivering inside the Coalition. Their Budget strategy is aimed at getting a share of the credit if the Chancellor, below, raises the personal tax allowance, which he was likely to do all along as this is part of the Coalition Agreement struck in 2010. The Lib Dems are making a noise about it, calling for the Coalition's goal of a £10,000 tax threshold to be brought forward from 2015 in the hope that more voters realise it is their signature policy.

Their more aggressive approach means the Coalition has entered a new phase. The Lib Dems are enjoying their new freedom to remind us they are not Tories. But senior Tories are most definitely not enjoying it. They would prefer the Budget negotiations to be conducted behind closed doors at meetings of the "quad", where the Government's crucial decisions are taken by David Cameron, Mr Osborne, pictured, Mr Clegg and Danny Alexander, the Lib Dem Chief Treasury Secretary.

The Tories are also irritated that the quad's rule of omertà has started to break down, and accuse the "pesky Lib Dems" of spinning its deliberations as part of their new strategy. "They are playing games," said one close ally of Mr Cameron. "We have told them to shut up."

It is not just over the Budget, according to Tory sources. At a dinner of the quad almost two weeks ago, Mr Clegg promised he would not pull the rug from under the Government's NHS reforms. But the Lib Dem leader has since become equivocal about the ill-fated Health and Social Care Bill. He did not want to be left supporting a measure that some Tory Cabinet ministers were reportedly starting to doubt.

"The Lib Dems drive a hard bargain," one Tory insider complained. "They treat everything as a 50-50 decision, even though they have 50 MPs and we have 300. If we agree something with them in principle and come back with a tweak, they demand something else in return."

So the two parties are diverging earlier in the parliament than originally expected. That doesn't mean the Coalition is going to break up anytime soon. But it could have implications for whether it will last the course to the 2015 scheduled finishing line and the next election. Minds in both parties are turning to how they would handle a separation, perhaps with the Lib Dems supporting the Tories in key votes (and sticking to the deficit-reduction programme) but having the freedom to go their own way on other issues.

There would be risks as well as opportunities for Mr Clegg's party. Some Lib Dem ministers fear their party would get no credit at all for clearing Labour's deficit if the Tories were seen as governing alone for a long period before the next election.

More immediately, Mr Osborne is not short of advice from his own side or the Lib Dems as he draws up his Budget. He has two long shopping lists to try to accommodate instead of one and it will be difficult to keep everyone happy. Although borrowing may come in slightly lower than expected last November, the Chancellor will have little scope for giveaways.

While wanting to beef up what has been a rather feeble growth strategy to date, he will also want to stick firm to his deficit-reduction plan. Despite the evidence that the cuts are stalling growth, as Labour has warned all along, the Lib Dems are not challenging them. They are in for a penny, in for a pound, and changing course on the cuts really would spell the end of the Coalition.

The partners may be having more rows and the marriage has entered a more turbulent phase, but it is not over yet. They still need each other – for now.

Osborne's budget: Where the war is being fought

Tax cuts for individuals

The Liberal Democrats want the Chancellor to go "further and faster" towards raising the personal tax allowance to £10,000. With little money at his disposal, the £8bn cost means it won't happen in one go. It will rise to £8,105 in April and he may announce a slightly higher-than-expected figure for April next year.

Likelihood: 4 (out of 5)

Wealth Tax

The Lib Dems have revived their demand for a mansion tax on homes worth more than £2m to raise £1.7bn. The Tories are not keen but there could be a trade-off under which the Lib Dems agree to the eventual abolition of the 50p top tax rate on incomes over £150,000. More likely is a crackdown to stop people with expensive homes avoiding stamp duty.

Likelihood: 1/5

Boosts to business lending

Any meaningful recovery will require companies to be able to borrow more than the banks are currently prepared to lend them. The Chancellor announced plans for a "credit-easing" scheme last October but the details have been slow to emerge. They should do so on 21 March.

Likelihood: 5/5

Tax cuts for business

Conservative MPs want strong "pro-growth" measures, with any spare resources devoted to cutting business costs such as national insurance payments. The CBI has proposed a modest £540m package of tax cuts. The Chancellor is already cutting corporation tax and may announce limited sweeteners.


Child benefit rethink

Plans to withdraw child benefit from families with a higher rate taxpayer next January could be a vote-loser, Tories fear. They say it would be unfair on families with one earner just above the £43,000 threshold. A slight change is possible but a significant one would be expensive.


Green taxes cut back

Mr Osborne has already toned down the Government's green rhetoric and many Tory MPs want him to act – for example, by reducing carbon taxes on business. But his room for manoeuvre will be limited by the Lib Dems.


Cutting pensions tax relief

The Lib Dems want to raise £7bn for their tax cuts by halving the 40 per cent tax relief on pension contributions enjoyed by higher rate taxpayers. This is seen as "toxic" by many Tories. But the Chancellor might opt for more limited reform – such as cutting the £50,000 maximum annual contribution.


Curbs on workplace rights

Tory MPs claim that companies would be more willing to hire if it was easier to fire. They want firms with fewer than 10 workers to be able to sack under-performers without them being able to claim unfair dismissal. But Vince Cable, the Business Secretary, is opposed. A tweak is more likely than a big bang.