John Rentoul: Don't look Down Under, Nick

Not long ago, in a country far, far away, there was a party called the Liberal Democrats. They were a party of the centre, concerned about social justice and with the best green credentials of any in parliament. They did quite well in a general election, although they came third behind the two big parties. During the campaign they opposed the Tory policy on tax, but after the election they voted to support it. They never recovered. Eleven years later, they were down to 1 per cent of the vote and lost all their seats.

Welcome to Australia, where I have changed only one detail in this fairytale horror story of Nick Clegg's future. The party that now barely exists after its leaders betrayed its principles is called the Australian Democrats. In the election of 1996, it won 11 per cent of the vote. After the election, it held the balance of power in the Australian upper house, the Senate. Its senators provided the key votes needed by John Howard, the conservative prime minister, to get his Goods and Services Tax through. The GST, equivalent to our VAT, was a hugely divisive issue in Australian politics. Although the party leaders felt they should take a pragmatic position, making changes to the coverage of the tax, the party's members and voters saw it as an issue of principle, and they hated it.

Now that Clegg has emerged as a Thatcher-lite, a "crypto-Tory" as Ed Miliband calls him in his interview with our political editor today, the fate of the Australian Democrats holds a warning for him. Last week, the Liberal Democrat leader said it was "madness" to pay child tax credits to those on middle incomes. In "my city of Sheffield", the radio phone-ins buzzed with fury over the coalition's cutting the Sheffield Forgemasters expansion plan. The Budget on Tuesday will be a crunch day for Clegg.

Could someone just remind me what the Liberal Democrats get out of the coalition with the Conservatives? The personal allowance for income tax will be raised by a few hundred pounds, a cut that will be clawed back from other bits of the tax system. And the capital gains tax rise, which was Lib Dem policy, has been watered down so much in the pre-Budget haggling that there will be little left by the time George Osborne speaks. The lobby against CGT is one of the most inexplicably powerful in British politics, able to generate so-called news stories in the Daily Mail and The Daily Telegraph, which suggest that any tax on property or the sale of businesses is a Marxist plot to suffocate the entrepreneurial spirit of the second-home owner.

Beyond that, Nick Clegg has secured ministerial jobs for himself and 16 of his fellow MPs. And he has the promise of a referendum on a change to the voting system designed to favour his party (of which more in a moment). So that's self-interest and self-interest. What policies have the Lib Dems secured in return for their support? There is a long pause here while Lib Dem apologists mutter about forcing the Conservatives to give up inheritance tax cuts, and other policies that David Cameron gratefully ditched using the coalition as an excuse. The truth is that there weren't that many differences between the Tories and the Lib Dems before the election. The one important one was on the timing of public spending cuts, on which the Lib Dem leadership changed its mind the moment the votes were counted. As it happens, Clegg and Vince Cable were probably right, and the simultaneous meltdown of the Greek public finances may well have changed the balance of risk, but that may not convince Lib Dem members and voters when the axe falls. Just as GST was probably a sensible and necessary reform in Australia, but that did not help save the Democrats.

Of course, there are other important differences with Australia. One is that the Australian Democrats were never part of a coalition government. The reason for that is highly instructive: the party never won any seats in the House of Representatives, the equivalent of our House of Commons. That seems strange, given that it is elected by the Alternative Vote system, which the Liberal Democrats want to bring in here. The system, by which voters use numbers to rank candidates in order of preference, is generally expected to produce a slightly more proportional outcome that would give the Lib Dems more seats than the existing set-up. The Australian experience suggests otherwise, certainly over the long term. Admittedly, the Lib Dem share of the vote last month, 24 per cent, was twice as much as the Australian Democrats achieved at their peak. But the Alternative Vote certainly makes it no easier for a third party to break through. In the Australian lower house, only two of its 150 MPs are members of neither of the two main parties (the Liberal-National opposition is a coalition that has been, in effect, a single party since the 1940s).

The only reason the Democrats were able to exert any influence on the Australian government was because of the system of proportional representation used to elect the Senate. Paradoxically, Britain, the mother of parliaments that gave Australia its constitution more than a century ago, may now in a referendum adopt the same arrangement – Alternative Vote for the lower house and a proportional system for the upper.

It would be a double paradox if changing the electoral system failed to save Nick Clegg from a voter backlash against the coalition's spending cuts. Our ComRes poll today suggests that the public are braced for stringent times. They do not believe that the Government is crying wolf in order to justify harsher measures than are necessary, and Liberal Democrat support is holding up. But the war against the deficit is still very much a phoney one. When the cuts bite, the mood may change. If it does, the history lesson from down under offers Nick Clegg little comfort.

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