When George Osborne stood up to deliver his Budget a little over a week ago the Coalition government looked pretty steady and secure for a mid-term government. It seemed capable of weathering the storms surrounding its reforms of the National Health Service and even felt confident enough to propose a cut in the 50% Income Tax rate.

That seems a very long time ago now.

Today it is staring into an abyss. Just look at the collection of headlines Tim Montgomerie has gathered this morning on the Conservative Home website. These are the culmination of a week of political disasters for the government.
• Granny Tax
• Budget for the rich
• Selling access to the Prime Minister to big donors
• VAT on hot food
• Tanker drivers' strike

None of these needed to be such a major problem – apart from the donor scandal – but the government has made them into a problem and that is the issue and the real danger it faces. The electorate will tolerate a surprsingly broad range of policies it doesn't agree with if it feels the business of government is being well run. What it won't forgive is incompetence and that is precisely the swamp that the government has just steered into.

It needs to find a way out very quickly.

If it doesn't then the political landscape could change dramatically. Labour under Ed Miliband will suddenly look a much more attractive prospect, although I am surprised at the way it has allowed itself to be sucked so far into the Cornish Pasty nonsense when it has potentially better targets in the Budget and the donor scandal (although Labour too is vulnerable on the latter with the massive trade union funding it currently enjoys).

A boost to Labour is the obvious political consequence. Less obvious is the possibility that this will shorten the life of the Coalition. Nervous Liberal Democrats – and there are plenty of those at the moment – have been persuaded that the Coalition remains worthwhile for the good of the country as the government delivers sound economic management. That argument will sound rather hollow this morning as the government makes a mess of everything it touches. It will be much easier for anti-Coalition Lib Dems to put forward a case for detaching themselves from a failing, incompetent government.

The odds will be shortening on a break-up of the Coalition.

What is there not to like in George Osborne's third Budget? Just look at the tables of winners and losers in the newspapers this morning and there are many, many more categories of people benefiting from the measures he announced than losing out. Yet, the headlines are largely negative. Why?

The simple answer to this apparent contradiction is that the politics of the Budget were all wrong.

The Chancellor appeared more confident when he was at the dispatch box yesterday afternoon than when he delivered his previous Budgets and big public spending statements. This was clearly a Budget he believed in as he started to make some of the tax changes he obviously wanted to do in earlier years but felt constrained by both the politics of the coaltion and the dire economic background from doing. One of those was to attack the 50% income tax rate introduced by the last Labour government as a temporary measure in the depth of the crisis.

Mr Osborne made a good case in purely fiscal terms for reducing this rate but he ignored the politics. It was never going to play well in the current climate and made an easy target for Labour. Ed Miliband got it right when he asked what happened to the "we're all in this together" policy of the last two years. I thought he rather overdid it with his childish challenge to the government to put their hands up if they personally benefit, although judging by the newspapers this morning I seem to be in a minority on that. We know how much ministers earn so there was no need to undermine an otherwise sound repsonse with a descent into pantomime.

If it really is the case that so few people are paying the 50% as the Chancellor claimed then why bother reducing it when the political damage was always going to be potentially severe? It was a serious error of judgement on his part.

In making this mistake, he rather overshadowed the great strides this government is making in lifting the low paid out of Income Tax altogether. This is a policy that unites the coalition parties and is very hard for Labour to attack - indeed, I would expect them to support it. It should have been the centrepiece of the Budget and he wasted it.

I know that Mr Osborne will point to the new higher rates of Stamp Duty on properties over £2m and the raft of promised anti-avoidance measures as proof that it wasn't a Budget for the rich but I am not sure many people are going to be easily convinced on that point. His passage about clamping down on tax avoidance was the most emotion I have ever heard Mr Osborne rustle up in a speech so maybe there will be more to it than initially meets the eye.

Is there a 'Granny tax'?
There seems to be alot of nonsense flying around about the impact of phasing out the age related Income Tax allowances. One thing this isn't is a tax on grannies and most of the people I have heard interviewed on the topic haven't the faintest idea what it is about, who it will affect and how.

If we are moving towards having a core personal Income Tax allowance of £10,000 for everyone then having an age-related allowance a couple of hundred pounds higher than that for those in a narrow income band (it cuts off if you earn over £24,000 a year) is a pointless anomaly. I really can't see what the problem is with treating the income of older people in the same way as everybody else now we have a better starting point for paying Income Tax.

This whole fuss over a modest change highlights yet again the two big mistakes that have been made with regard to pensions and older people in recent generations.

The first is the enormous damage done to the incentives to save for retirement and to fund it properly, especially by Gordon Brown when he was Chancellor. We need to look very hard at ways of incentivising higher saving for old age.

The second is the unsustainable state retirement age. We are, at last, moving this in the right direction but we need to get it to 70 within the next 15 to 20 years. It was very encouraging to hear that the government now proposes to keep the state retirement age under review as longevity rises but we need to sort out the legacy of having ignored our longer, healthlier lives for generations.

The mistake Mr Osborne made was muttering about the equalisation of personal allowances being a minor techncial change when he should have presented them as a small part of building a new vision for a longer economically active and productive working life.

Economically it does little
There was a feeling that the Budget was rounded and self-contained, fiscally well balanced and techncially sound and it probably was all of those things. One thing it didn't do, however, was offer any new thinking in broader economic terms. There was, for instance, only a passing reference to the rebalancing of the economy so that it isn't so dependent on financial services. It also offered little in the way of ideas for replacing the huge number of public sector jobs that are going to be cut in the next couple of years. There was some rather fragmented help for one or two sectors, talk of enterprise zones and a threat that Michael Heseltine might dust down his bus and take another tour of economically depressed regions as he did in the late 1980s. This doesn't add up to a coherent economic strategy.

Perhaps underlying this weakness is just a sense of relief that we seem to be avoiding – narrowly – a double-dip recession, although not by quite the margin that some of the Chancellor's rather optimistic growth forecasts suggest. It did leave a feeling that the Budget was economically rather limp.

Political gamble
Overall, it seems that the Budget is a big political gamble. Mr Osborne was going to have to do something with the 50% Income Tax band at some stage because he couldn't ignore the Tory right for much longer. Maybe he has taken the view that he should do it now so that it can be ticked off as an issue, take the flak and hope that by the time he gets to his 2015 pre-election Budget the economy will have picked up so much that most people will feel better off and he may even have room for a modest giveaway.

The 'granny tax' nonsense could turn out to be quite hard to deal with. As I said, this shouldn't have been done apologetically and that has put the government on the back foot. If it doesn't regain the initiative on this it could prove very damaging with a demographic group that has the highest propensity to vote.

The next public expenditure statement and the 2013 Budget will also have to work alot harder to convince people that the government really does know what its underlying economic strategy is and can tell us what success – at least in its terms – is going to look like.

Ed Miliband's beleaguered leadership of the Labour Party may not survive much longer but his forthright honesty in facing up to the inevitably gloomy economic backdrop to the 2015 General Election campaign should be of lasting benefit to the Labour Party.

His attempts this morning to breathe fresh life into his leadership have already been roundly mocked and his Radio 4 interview did sound rather desperate as he talked about his "inner belief' and dipped into the banal lexicon of American politics, tossing around phrases such as "Bring it on". If you look beyond that to the substance of what he said you can see the battle lines being drawn up for the next election. I don't think anything he said will unduly worry the Conservatives but the Liberal Democrats could have a real problem on their hands if Labour sticks to the Miliband line under a new leader.

His analysis of the most likely economic scenario as we go into 2015 is in line with most forecasts and his response to it is actually quite astute.

The choice in 2015 will be a grim one, rather as it was in 2010. The hopes of the Coalition Government that by 2015 the worst of the deficit cutting would have been done and that we would be seeing the first signs of the spring of economic recovery have been dashed by the Eurozone crisis. This is a far bigger blow for the Liberal Democrats than the Tories. The Lib Dems pinned their most fervent hopes on being able to detach themselves from the Tories in 2015, enabling them to say that the nasty job of cutting the deficit and setting the country back onto the road to recovery had been done. This would have given them a platform to boast about their part in securing that recovery and to set out a manifesto for the future that would offer the country undiluted Liberal Democracy. That hope has now gone.

The trap waiting for Labour
The next election will be highly polarised with the Tories arguing that the austerity programme needs to continue unabated and that they are the party to deliver it, especially if liberated from the (only mildly) restrictive confines of the Coalition Government. The trap for Labour would be to pretend that it can make all manner of promises about new spending which could not be delivered and which would merely remind the electorate of the economic disaster area that surrounded the previous Labour government. Ed Miliband has started to steer Labour away from that trap. If Labour can develop a coherent set of policies around a "fair austerity" theme then it could have the potential to win over many disillusioned Liberal Democrat voters.

It is hard to see the Liberal Democrats being able to counter the painful squeeze on their vote that an austerity election fought on these lines would exert. There is no obvious locus for them in a debate between Labour and Tory on these lines. To most people they are not a party with a strong, distinctive economic vision and are not going to be able to develop one while they are tied into the Coalition. One of the cleverest things that David Cameron did when forming the government was to give the Lib Dems the Financial Secretary to the Treasury knowing that this post would require a Liberal Democrat minister to take the lead in proposing and defending the deep cuts in public expenditure. The Lib Dems didn't help themselves by appointing David Laws to this post. His enthusiasm for swinging the public expenditure axe made George Osborne look positively restrained. Laws replacement Danny Alexander hasn't done much better as he has failed to develop a distinctive Lib Dem approach to the task, leaving his party with no option but to defend the Tory cuts at the next election.

The Tories also out manoeuvred the Lib Dems on tuition fees where they managed to saddle poor Vince Cable with the job of proposing the massive U-turn in Liberal Democrat policy on tuition fees. There is no escaping from taking responsibility for that despite attempts by some leading Liberal Democrats to argue retrospectively that the higher fees and the new system that supports them is fairer: that isn't what they told people at the last election.

This wouldn't be so bad for them if they were achieving some of their other cherished objectives such as political reform or a closer relationship with the European Union but these have all blown up in their faces.

Nick Clegg's rash charge into a referendum on the Alternative Vote was a disaster as it enabled the electorate to punish him for the betrayal over tuition fees. I don't hold out much hope for genuine reform of the House of Lords being achieved in this Parliament either.

Eurosceptic stance has boosted Cameron
Then there is Europe where Cameron has seized the first real opportunity that came his way to play the Eurosceptic card - and with some significant effect. The right of the Tory party, restless over what they were starting to see as too many concessions to their coalition partners, are now suddenly held in the palm of his hand. The wider electorate has also warmed to his Eurosceptic approach as most people fear being dragged too deep into the Euro crisis while we are still struggling with severe economic problems of our own. It has also given Cameron and Osborne a very convenient fig leaf to use as they will be able to shift some of the blame for the consequences of their draconian economic policies onto Europe while saying they are fighting the UK's corner for all they are worth.

Today might not mark the rival of Ed Miliband's leadership but he has made a good start on positioning Labour well for the next election.       

I'm all for abit of clarity when it comes to the differences between the main political parties and often feel that the cosy language of recent years has blurred key policy disagreements. Look back over the history of British politics throughout the 19th and most of the 20th centuries and you will find a genre of political invective that makes your eyes water. So, perhaps we ought to thank Shadow Chancellor Ed Balls for donning the mantle of attack dog in Labour's otherwise rather tame and muted front bench team. He does, however, seem to be developing an unfortunate talent for going over the top in the rhetorical stakes.

I have often urged the wider insurance industry and financial services sector to do more to engage with Parliament and not leave all the lobbying to trade associations. This week is a sharp reminder of why that is necessary now as much as it has ever been.

Let's step back briefly and remind ourselves of what we are dealing with.

First, Parliament makes the laws that change the lives of people, the businesses they work in and depend on. It is no good trying to plead that what goes on in Westminster is not relevant to you or that you don't want anything to do with it because you don't like politicians. It is there, it is important and it isn't going to go away unless we lurch into dictatorship which we haven't done since the days of Oliver Cromwell.

Second, it is full of new people as around one third of MPs - the largest proportion since the end of the Second World War - were newly elected in May. This has both benefits and drawbacks. It brings fresh thinking into Parliament, new expertise and a renewed vigour. On the down side, it means that alot of knowledge and understanding of the insurance and financial services sectors (among others) has gone out of Parliament. This poses a challenge.

Third, there is one hell of alot going on at the moment that directly affects the industry and its customers. Take just the last few days for instance.

• The Transport Select Committee is enquiring into the rise in motor insurance premiums
• The Treasury Select Committee is looking at the proposed regulatory changes with Lloyd's appearing today
• Yesterday there was a debate and vote on compensation for Equitable Life policyholders
• Yesterday there was a meeting of the All Party Parliamentary Group on Insurance & Financial Services to discuss flood defence spending
• On Monday the Government announced that there will be a three hour debate on the Retail Distribution Review

As I said, that is just in the last few days. In the background the Finance Bill, which enacts the radical Budget proposals put forward by Chancellor George Osborne last month, has been rumbling along. There is lots more too.

The industry is quite well served at the moment by its various trade associations. The Association of British Insurers is at its most effective for some years, the British Insurance Brokers' Association has stepped up to the plate, Lloyd's is a polished performer in Parliament, the various IFA trade bodies are doing a good job and there are others contributing too. However, the national trade bodies can only do so much. MPs, especially those with slim majorities, have to pay attention to their constituencies and are usually keen to accept invitations from businesses to meet them and their staff. This is where everyone in the industry has a role to play, especially in hammering home the message that UK financial services is about alot more than just the City of London.

Don't forget too that MPs face an uncertain future. If the Bill to reduce the number of MPs to 600 goes through alot of them are going to face the next election with new boundaries and thousands of voters that they don't know and who don't know them. We will even see MP fighting MP in some areas. This means they are especially keen to make as many contacts as possible and listen to the concerns of businesses in their constituencies. Believe me, this sort of local lobbying makes a difference.

So, make it a priority to contact your MP, especially if they are new (and regardless of party), introduce them to your business and start to inform them about what the laws they are debating in Parliament right now will mean for your business, your staff and your customers.

Our first post-war coalition government has now lasted 100 days; not a great achievement in itself but a convenient moment at which to pause and consider its impact on the financial services sector.

I thought it would provide an interesting perspective to look at what has been done by considering impact that the Liberal Democrats have had on policy in this area. After all, the only real alternative to the Conservative/Liberal Democrat coalition following May's General Election was a minority Conservative administration. This would have been unstable and would have be looking to create a suitable opportunity to call a fresh election later this year or early in 2011 to drive for an overall majority. This would have made it rather more cautious in a couple of crucial areas.

The first would have been overall economic policy where I think it is inconceivable that a minority Tory government would have proposed such a drastic programme of public expenditure cuts, as much as it may have wanted to. It is only the security of the coalition's majority and the prospect of not having to face the electorate for five years that has instilled the confidence in George Osborne and the Treasury team to announce a high risk strategy of spending cuts. They are prepared to run the risk of a stalling recovery because they believe the economy will come out of the other side much stronger and know they have the time to wait for the hoped for benefits to become manifest.

The second policy area where I think we would have seen a more cautious approach applied is pensions. The backlash to the various announcements about raising the retirement age and abolishing barriers to working longer has been sadly predictable and is not something a government constantly looking over its shoulder at the opinion polls would have risked provoking.

Beyond that, most of the rest of what we have seen so far in the way of policies for the financial services sector would have been much the same.

The reform of the regulatory structure looked initially as if it might be strongly influenced by the Liberal Democrats but, after some debate within the coalition we have seen the Conservative manifesto proposals rolled out virtually unchanged. The Financial Services Authority is going and its responsibilities split between the Bank of England and a new Consumer Protection and Markets Agency, coupled with a clearer focus on financial crime. The Liberal Democrats were dismissive of calls to restructure the delivery of regulation, preferring to stress the need for more effective management if systemic risk within the existing structure. They would have retained the FSA.

Action to get the banks lending and to rein in remuneration has largely reflected the promises and rhetoric of the Conservative election campaign. They may not be as keen as their coalition partners on shaking up the banks but they know full well that they cannot afford to be seen to be soft on them. This is one area, however, where policy could take a more distinctively Liberal Democrat turn over the next few months. The Treasury is currently consulting on the proposal to impose a levy on the banks and Vince Cable's Department of Business, Innovation and Skills published a wide-ranging consultative document - Financing a Private Sector Recovery -  just before the recess containing some quite radical proposals to force banks to lend more to businesses. The more fundamental battle over the structure of the UK banking sector, with the possible separation of retail and investment banking (favoured by Cable and the Lib Dems), has been temporarily postponed with the creation of the Independent Commission on Banking to review this area but it will force its way back onto the policy agenda next year.

The final policy that merits a mention is the decision to press ahead with compensating the policyholders of the failed Equitable Life. In opposition both the Conservatives and Liberal Democrats were highly critical of the Labour government's steadfast refusal to bring this long running saga to a conclusion and both included pledges to act quickly in their manifestos. The recent proposals to set in train a process of compensation would have happened with or without the coalition.

 Apart from banking reform, there are relatively few significant policy differences between the Conservatives and Liberal Democrats in financial services so we are not likely to see many battles here which threaten the stability of the coalition. Those battles will be fought elsewhere as the full implications of the depth of the public expenditure cuts dawns and as the process of electoral and political reform begins to gain some real momentum.

Vince Cable's candid interview in today's Guardian confirms that the decision to abolish the Financial Services Authority and split its role between a beefed-up Bank of England and a new Consumer Protection and Markets Agency was a matter some some contention within the newly-formed Coalition government.

The original agreement between the Conservatives and Liberal Democrats was silent on the matter and it looked as if the FSA had won a reprieve - certainly this is how quite a few of us read the agreement. That turned out to be a premature judgement as Chancellor George Osborne seized the initiative and announced to a dinner of City grandees at Mansion House in  the middle of June that the reform of financial services regulation was going to proceed largely along the lines set out in the Conservative manifesto. He added some clarity over the split in responsibilitry between the Bank of England and the new CPMA, especially by adding the oversight of markets to the new body's role, but it was a Tory policy through and through.

Now Vince Cable has confirmed that this was more or less how it happened, trying hard to relegate it as an issue behind what he sees as the more pressing problem of getting the banks lending again. His dismissal of the debate about "how you organise the furniture, the quangos and so on, is to my mind a secondary problem" isn't entirely convincing given his thorough going pre-election condemnation of the collective global failure of regulation to prevent the slide into crisis from the middle of the last decade onwards which was especially well articulated in his book, The Storm: the World Economic Crisis and What it Means. It was, he argued, a broader problem of tackling of systemic risk on a multi-national level, rather than shuffling and re-shuffling regulatory responsibilities on a national level.
 

Already George Osborne's first Budget is being marked out as one of the more controversial and dramatic of modern times. This is not unusual for the first Budget of an incoming administration - just look back to Gordon Brown in 1997 or Geoffrey Howe in 1979, or even (I shudder at the memory of the economic disaster that followed) Anthony Barber in 1970. You have to remember that Budgets are as much political events as economic events and it is the twin political pressures of wanting to mark out the new government's territory and to set a course that delivers a hoped for prosperity nicely timed for the next General Election that does as much as anything to shape a Budget.
There is alot that is bold about Osborne's first Budget but, equally, there is alot that is cautious, giving him crucial room for manoeuvre later on in this Parliament. He has, for instance, left himself scope to push Capital Gains Tax rates higher if he needs more revenue in the next couple of years. Another area where he could potentially look for additional money is the bank levy now he has made the first steps by introducing it (alot there will depend on what other major financial centres such as Germany and the USA do). On the other hand, if it all comes right and the deficit falls as far and as fast as predicted over the next five years there looks to be enough room for cuts in personal taxation to be back on the agenda in 2015.
He has also shifted a little from his original intention to achieve deficit reduction through 80% expenditure cuts and 20% tax rises to a mix that is nearer 75:25, partially, I suspect, a nod towards his coalition partners.
The coalition has managed to present a united front over this self-styled "tough but fair" Budget although there seemed to be hints of unease from among the Liberal Democrats last night and this morning, especially over the 2.5% addition to the rate of Value Added Tax. This is hardly surprising given the vigour with which they campaigned against such a move in the General Election campaign just two months ago. I also think that alot of Lib Dem's will be shocked by the Treasury's own analysis which suggests a disproportionate burden falling on the poorest 10%, and that is before we see where the predictably savage public expenditure cuts really bite. The coalition won't fragment over the Budget but the strains might build up to breaking point by the time we get to the Autumn Statement on public spending.
Economically, Osborne is on a tightrope but then whoever ended up as Chancellor would have been in the same position. The challenge is clear: cut the deficit without pushing the UK economy back into recession. This isn't just a cold calculating game of numbers: it is as much about mood, especially in the financial markets that seem so nervous about any national debt that seems to them to be excessive and out of control. Osborne has won that first battle as the markets have given the Budget the thumbs up.
The economic effects are much more difficult to judge and are already dividing economists. Again, alot will depend on how the 25% cuts in some some departmental budgets are achieved. If they involve heavy jobs losses, then unemployment will soar (and the benefits bill with it despite yesterday's trimming of some benefits) and this will feed through into depressed demand just in time to coincide with the increase in VAT next January. This could dash hopes of a private sector-led recovery.
Are Osborne and the coalition still on the tightrope? At the moment, probably yes but the autumn and the first quarter of 2011 are going to be the key crunch times for the government's survival. Politically hard to swallow expenditure cuts followed by poor economic data could tip them off the tightrope.
History will be the judge of whether Osborne's first budget leads to a decade of economic recovery and relative prosperity as Geoffrey Howe's did at the start of the 1980s or a decade of high unemployment, increasing poverty and social dislocation as we had in the 1970s following the Heath government's ill-judged gambles on assuming office in 1970.