Britain's first coalition government since World War Two has managed to reassure markets and maintain public support with initial steps to tackle a huge budget deficit, but the true tests are still to come. The Conservative-Liberal Democrat coalition took office in May after a general election which broke the center-left Labour Party's 13-year hold on power. Coalitions are rare in British politics and the combination of the center-right Conservatives and left-leaning Lib Dems seemed an unlikely one, but the government has impressed with its commitment to eliminating a record peacetime deficit. “I think it's certainly surprised on the upside in terms of market sentiment and broad sentiment,” said Alastair Newton, senior political analyst at investment bank Nomura. “The coalition partners did extremely well to get out a framework agreement quickly and set an election date for 2015, showing a real determination to stay in power,” he added. The coalition said that immediate spending cuts were needed to rein in a deficit running at 11 percent of GDP and trimmed 6.2 billion pounds from this year's expenditure. Tougher measures followed in an emergency budget in June which set out plans to eliminate the structural deficit over the lifetime of parliament. The action has bought the government some respite with markets. The gap between yields on benchmark 10-year gilts and German Bunds has closed to just over 70 points, compared with more than 100 points when markets were jittery in early May after the election gave no party overall control. “Markets will remain in wait and see mode, we felt that a hung parliament could be bad news for bond markets but it's not proven so yet,” added Newton. “The government has some tough tasks to do and the markets will judge them on their ability to deliver on the tasks,” he added. Reality bites Government departments have been asked to come up with two scenarios ahead of a comprehensive spending review to be published on October 20 which will set out spending plans for the lifetime of parliament. The first is for eye-watering cuts of 25 percent and the second would be for a staggering 40 percent reduction in budgets. The cuts are unprecedented in recent British politics and will test coalition unity to the hilt. So far, Prime Minister David Cameron and his Lib Dem deputy Nick Clegg have done a convincing job of saying that Labour's past profligacy made the cuts unavoidable. Their case is strengthened by examples in the neighbouring eurozone where debt-laden countries like Greece and Ireland have been punished by markets and forced to bring in austerity. “Nick Clegg is also telling the same story that Labour was being irresponsible and they have a clear, strong story that seems to have taken along the British public,” said Steven Fielding, professor of political history at Nottingham University in central England. “They've framed things really well and done just about as much as they could do. It's all about tone, it's all about rhetoric, reality kicks in come the autumn,” he added. The government had a foretaste of protests to come after it said it would end a 55 billion pound school building and refurbishment program which Labour had been pursuing, prompting a demonstration by teachers and pupils outside parliament last week. Trade unions, traditionally hostile to the Conservatives, have been warning of protests if the government pushes ahead with plans to shed hundreds of thousands of public sector jobs and to curb pensions and pay-offs for state workers. The “winter of discontent” is a favourite phrase of political journalists and they are likely to have plenty of opportunities to use it over the coming months. Political pressures Even if the government gets through the winter unscathed, coalition strains are likely to emerge next May when a referendum is planned on changes to the voting system. The vote on a move away from the first-past-the-post system to one more favorable to smaller parties is a minimum demand for Lib Dems. Their Conservative allies have agreed to allow the referendum but oppose the change. Seeing prime minister Cameron and his deputy Clegg on different sides of the debate will make for an odd spectacle. Some Lib Dems are already concerned over a slump in their poll ratings since they joined the coalition, and a failure to win the referendum would prompt more to question whether they are getting a raw deal. The coalition will also face a stronger opposition once Labour elects a new leader at its party conference in September. However, Nomura's Newton believes that the coalition could hold together because any party that brings it down prematurely risks being punished at the ballot box. “No one should think that the UK public will stand idly by and not punish the party that topples a government at the time of economic crisis,” he said. “I would say the coalition has at least a 50/50 chance of making it through the five years.”
