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Why the Lib Dems' funding crisis could end the coalition early

Faced with mounting debts, the party may be forced to leave government in order to reclaim the "short money" provided to opposition parties.

Nick Clegg makes a speech at the G8 Open for Growth - Trade, Tax andTransparency conference at Lancaster House in central London on June 15, 2013. Photograph: Getty Images.

Whether or not Joan Edwards's £520,000 bequest was intended for the government of the day or whichever party formed the government, there's no doubt that the Lib Dems could have done with the money (they received £99,423 based on their share of MPs and ministers). The party ran a deficit of £410,951 last year (the only one of the three main parties to do so) largely due to a 13% fall in its membership to 42,501, a decline of 35% since 2010 (when it stood at 65,038) and the lowest annual figure in the party's 23-year history.

While the party insists that its Finance & Administration Committee "has taken steps to ensure that satisfactory surpluses will be achieved in 2013 and 2014" (having previously projected a surplus of £200,000 for 2012), this will likely mean cutting back on campaign spending, something the party can ill afford to do given the political obstacles it faces and the decimation of its councillor base (many of whom pay a tithe of 10% to their local parties). 

Lib Dem finances have also been hit by the loss of "short money", the state funding made available to assist opposition parties with their costs. The party received £1.7m from this source in 2009-10 and its removal forced it to make more than 20 staff redundant. Over the five year parliament, the loss amounts to nearly £9m. 

With an eye to this, one scenario put to me by several in Westminster is that the Lib Dems will ultimately be forced to return to opposition in advance of the 2015 general election in order to reclaim the short money they'll need to mount anything like an adequate campaign. 

It's worth noting that before the defeat of the boundary changes in January, there was talk of the Tories doing a "cash-for-seats" deal with the Lib Dems under which the party would receive millions in state funding in return for supporting the review. It didn't come to pass (would anything have looked more grubby?) but it shows that the issue hasn't escaped the attention of Conservative ministers. Rather than an epic tussle over policy, the coalition could yet fall based on the inescapable fact that the Lib Dems are running out money.