John Rentoul: Only Labour can save the coalition

The VAT rise is painful for Lib Dems, but welfare reform has much greater potential to rock the Government

This week I am going to write about welfare reform. This is unavoidable. I have listened to suggestions that I should, instead, write about Australia. But I wrote last week about whether the Liberal Democrats might emulate the fate of the Australian Democrats, a centre party that destroyed itself by supporting a right-wing government's GST, a sales tax like our VAT. This week I could explore the lessons for our Labour Party of its Australian sister party, facing defeat, changing leader at the last minute and reversing its fortunes. But it is a bit late for that.

So, welfare reform it is. Of the three areas that are likely to put the coalition under strain, this one has the greatest potential for trouble. The other two, since you ask, are electoral reform and the environment.

It might also be suggested that the Budget decision to raise VAT could be another cause of a breach between coalition partners. But, despite the current stuttering Liberal Democrat revolt over it, that does not seem likely. The grandstanding by Simon Hughes, the party's new deputy leader, was a demonstration of the rebels' weakness rather than their strength. He briefly suggested that the Budget might be amendable, before being required by Nick Clegg to issue a clarification accepting that it was not. Suggesting that the VAT rise is, at this stage, avoidable is not Government policy, and the responsibility of office binds both parties.

The VAT rise was avoidable, certainly, before George Osborne and Clegg agreed not to avoid it. Putting up VAT was a choice. The main alternative was Labour's policy of putting up National Insurance on middle and higher earnings. National Insurance is now essentially a euphemism for income tax, a rise in which was demanded by some honest but deluded grass-roots Lib Dems on Newsnight last week. Vince Cable was given a rough time by Ed Balls on Question Time last week, over his party's election poster accusing the Tories of secretly wanting to raise VAT. Cable's leader completes a remarkable U-turn in his article on the previous page, in which he argues for the principle of taxes on consumption rather than payroll taxes, as being in a "long liberal tradition, from John Stuart Mill to Jo Grimond".

Such arguments are unlikely to impress the four Lib Dem MPs who, as we report today, have tabled a symbolic amendment requiring the Government to carry out an "assessment" of its impact before enacting it. But Lib Dem backbenchers are not going to stop the VAT rise.

Right. I have striven to avoid it long enough. We have to deal with welfare reform. That is the issue that is likely to cause real trouble. The cuts to disability living allowance, housing benefit and lone parent benefits have the potential to wreck the coalition.

In fact, there was a mini-fuss last week over one benefit that is not going to be cut. Simon Hughes inveighed against Iain Duncan Smith, Secretary of State for Work and Pensions, for wanting to "look at" the winter fuel allowance for old people. In fact, the allowance cannot be touched because Gordon Brown ambushed Cameron during the televised debates and forced him to promise to keep the payments. It was a cynical way to exploit our sentimentality towards the elderly, most of whom do not need a universal payment of this kind. A retired police officer on the BBC's Face the Audience programme with Cameron and Clegg last week said he had donated his £200 to Unicef's clean water campaign in Africa.

If St Simon Hughes of the Church of the Bleeding Heart can wax so pious over a benefit cut that is not going to happen, imagine what he will do when the real cuts begin.

Still, all credit to Osborne and Clegg for tackling another universal (that is, not means-tested) benefit, the disability living allowance. Labour ministers knew for 13 years that this benefit ought to be more tightly aligned to genuine need, but have shied away out of cowardice. The Chancellor also made a modest but necessary start on cutting housing benefit, one of the most dysfunctional parts of the welfare state that does most to trap people in worklessness. Despite the modesty of the cuts, the Budget was attacked by people who should know better for increasing homelessness, when its main effect will be to cut the rental income of landlords.

That is why the coalition attempt at welfare reform is likely to end in tragedy. It would be the second act in a long-running play. The first act of the tragedy was Tony Blair's failure to "end welfare as we know it". Because the reality is probably that welfare can only be reformed by a Labour government in times of plenty. It will be much, much harder for a Conservative government to do it in times of stringency.

And very difficult for the Lib Dems to go along with it. The only thing that might save the coalition would be if the Labour Party follows the road to irrelevance set out by Ed Miliband last week. The younger Miliband seems to be running for the leadership on the basis that, as the minister in charge of drawing up the Labour manifesto, he failed to get into it an unfunded promise of free school meals for all (well, not adults in offices and banks, obviously). And that he will defend winter fuel payments, which are not under threat, in the last ditch alongside St Simon.

We have to remember the remarkable realignment that happened in British politics under Tony Blair, although it was reversed somewhat in the Three Wasted Years, 2007-10. The Lib Dems had moved to occupy a position to the left of New Labour. Ideologically, therefore, this coalition could be rendered intrinsically unstable, an alliance of left and right against the centre. But only so long as Labour holds to the centre. Once again, a test for the coalition turns out to be almost as much a test for the candidates for the Labour leadership.

John Rentoul blogs at: independent.co.uk/jrentoul