Budget: Osborne package will test coalition strength

Mr Osborne said the Budget is tough but the vulnerable will be protected

The chancellor says the coalition's cuts are tough - but fair.

The Treasury will be able to produce figures showing that pensioners are protected from the chill winds of deficit reduction and pensions will, in future, be linked to earnings or prices, whatever is the higher.

They will also be able to demonstrate that the lowest paid won't be expected to shoulder the heaviest burden.

By adopting the Lib Dems' proposals to raise the threshold at which income tax is paid, the poorly paid will see their tax burden cut, while the better off will have any benefit from this clawed back.

And with money for the Royal Family, the Civil List, frozen and a levy imposed on the banks too, the government will say that their mantra -'We are all in this together' - has substance, and is not mere political spin.

Though the overall effect of the budget on the poorest may not be entirely clear until spending cuts are apportioned department by department in the autumn.

Strategically, the calculation is that it is better to get the shock of any spending cuts out of the way quickly - and if the coalition really does last for five years then, as the economy recovers, voters will be feeling the pain less severely by the time of the next election.

Lib Dem discomfort

But there are serious challenges which the coalition faces between now and then, and - even though the chancellor says the budget was "necessary" and "unavoidable" - some have been of their own choosing.

They have decided not simply to eliminate the "bulk" of the budget deficit by 2015 - as promised before the election - but to aim to "balance the books".

So the spending cuts and tax rises are not only perhaps greater than anticipated, the opposition would argue they are greater than is necessary.

Overall, though, the bigger challenge is for the Lib Dem element of the coalition.

Before the election, they warned of a "VAT bombshell" which the Conservatives would explode after polling day.

There are pictures of the Lib Dem leader - now the Deputy Prime Minister - Nick Clegg standing beside his party's posters denouncing any such increase.

'Vat bombshell'

Now the Lib Dems have decided jointly to detonate the VAT bombshell in government - up from 17.5% to 20% - and will have to try to ensure this doesn't blow up in their faces.

The party's recently elected Deputy Leader Simon Hughes only last week said a VAT increase would be "regressive" and he wouldn't choose to do it.

Of course, the Lib Dems can blame the previous Labour government for bequeathing them a terrible fiscal legacy.

And they can point out that Labour refused to rule out a VAT increase in their manifesto - though the leadership challenger Ed Balls says this was a mistake, and they should have done so.

But whether there is any tension within the coalition might well be determined by how many Lib Dem MPs are told by supporters - or former supporters - in the days ahead that they didn't think they were voting for this.

But VAT is not the only source of potential discomfort in Lib Dem ranks, or possibly between Lib Dem ministers and their grassroots members.

The increase in capital gains tax - which the Lib Dems see as not only a sensible reform, but as fair - has been less spectacular than they advocated.

Support for low-paid

And they are currently still defending why, at election time, they thought that any cuts this year would harm the economy but now, in government, believe they are necessary.

They say it's all down to advice from the Governor of the Bank of England and by witnessing the debt crisis in Greece.

While they will point out that many lower-paid workers will be taken out of tax - a measure which would have been unlikely unless they had gone into coalition - Lib Dem activists will currently be calculating if their party has got enough in return for agreeing to much steeper spending cuts overall than they were suggesting before election day.

So there could be a collateral political challenge here for the Conservatives.

If the coalition were to collapse under the weight of cuts, then they could face an election just as the deepest spending reductions bite.

Labour see the Lib Dems as the weak link in the coalition and they will be applying as much pressure as possible to Nick Clegg's party by suggesting that the 'new politics' of partnership should not mean saying one thing in opposition and doing another in government.

Economic opinion

But it's likely that the partners will hang together rather than hang separately.

Assuming the coalition remains strong and determined under political fire, there are nonetheless collective risks for both partners from the Budget.

Economic opinion is divided. There are very credible voices who agree with the government's position - that the markets need to be reassured by signalling the scale of cuts the government expects to deliver over five years, and by beginning these cuts now.

But there are prominent naysayers too, notably David Blanchflower, a former member of the Monetary Policy Committee, and Lord Skidelsky - a former Conservative peer, now a cross bencher.

If they are right, and now is the wrong time for cuts, then there is a risk that the country faces a 'double dip' recession and economic recovery is far from guaranteed… possibly forcing the need for more cuts in later years as well as damaging their own economic credibility.

And while the government think that the Budget will "lift the cloud of uncertainty" from the country, there is a feeling amongst some in Conservative ranks that they haven't yet made the political weather - that voters still don't really understand why the scale of the proposed cuts are necessary.

Honeymoon over

They know they face a further storm in October when more detail will be provided on savings, government department by government department, as a result of the comprehensive spending review.

Already public service unions are preparing for a battle over pay and pensions.

And while protecting the poorest paid is all well and good, fairness - like beauty - can be in the eyes of the beholder.

A future election could be determined by what political insiders call those in the "squeezed middle" who won't necessarily think it's fair that they are losing their child tax credits while struggling to pay for child care, and whose pay - and child benefit - is frozen for the next few years.

But there are challenges here for Labour too.

They currently have only an interim leader and all five of their leadership contenders will be tested over the summer over what they would cut, or what taxes they would increase, as they all agree that the deficit has to come down - albeit at a slower pace than the government.

And the coalition narrative - that it's largely Labour's fault that the country is all but broke - may yet prevail, which would send the opposition' s moral high horse to the knacker's yard.

The only political certainty is that the coalition's honeymoon is now over.

While the Conservatives waved their order papers at the end of the budget statement, the Lib Dem reaction was far less demonstrative.

So, what's less certain is whether a happy partnership will prevail between the coalition parties.