FACTBOX-Key political risks to watch in Britain

LONDON Nov 1 (Reuters) - Britain's Conservative-Liberal Democrat coalition government has outlined spending cuts worth 81 billion pounds ($129 billion) as it tackles a record budget deficit.

The departmental cuts of about 20 percent over four years reinforced investor confidence in the austerity drive and helped depress government bond yields to record lows.

But implementing the savings will test the strength of the coalition, in power since May, and could threaten a fledgling economic recovery which is expected to slow sharply next year.

Firm growth so far has aided the government's argument that the economy can cope, but many measures have yet to kick in.

The first signs of discontent in the coalition, in power since May, have emerged over welfare and education cuts and Europe. The centre-left Lib Dems have seen their popularity ratings sink since the election.

A new Labour leader has stabilised a party which analysts have expected to struggle in opposition after 13 years in power.

THE DEFICIT AND THE ECONOMY

With European-focused investors still worried about high levels of sovereign debt and the ability of governments to force through austerity measures, October's four-year spending review can be viewed as a broad success for the coalition.

Credit ratings agency Standard and Poor's reacted to the detailed cuts by removing the threat of a downgrade to Britain's triple-A debt rating and gilt yields fell.

But doubts remain. Can departments deliver 81 billion pounds of cuts by the time of the next election in 2015? Will the economy grow quickly enough to keep the austerity plan on track?

Several billion pounds have been allocated to the grey area of "efficiency savings" and clamping down on tax evasion. Big cuts to welfare could prove tricky, given forecasts for heavy public and private sector job losses from the austerity drive.

The government's plan to all but eliminate a budget deficit of around 10 percent of national output by 2015 also relies on what are widely seen as optimistic growth forecasts.

The independent Office for Budget Responsibility, which on Nov. 29 will update forecasts that feed into the goverment's fiscal planning, said in June it expected the economy to expand by 2.3 percent next year, rising to 2.9 percent growth in 2013.

Any forecast downgrade will hamper the coalition's ability to achieve its deficit reduction goals.

The economy has rebounded surprisingly well this year after an 18-month recession, posting the strongest six months of growth in 10 years between the second and third quarters, but there is every reason to expect meagre growth next year when spending cuts and tax hikes bite.

It is hard to say if the Bank of England will act to support the economy given concerns about inflation, but there are signs the BoE has edged towards a move dovish stance in recent months.

What to watch for:

- Signs that Britain's economic recovery is slowing more than expected, or surprising on the upside.

- OBR growth forecasts, which are likely to be lowered and could spell bad news for the credibility of the austerity drive.

- Signs of slippage in the spending cut programme.

THE COALITION

The spending review has sparked the first open disagreements in the coalition -- Britain's first since World War Two.

The Lib Dems, who want to make sure cuts don't hit the poor too hard, fought the election arguing for a slower pace of deficit reduction than they have since signed up to -- just one area where the party has given ground in government.

They pledged to abolish university tuition fees, but the government has since backed a plan to lift a cap on the fees, paving the way for increases.

Cuts to child and housing benefits have sparked anger across the coalition, with Conservative London mayor Boris Johnson warning against driving people out of their homes to save money.

The Lib Dems have succeeded in their demand for a referendum on changing Britain's voting system. But the centre-right Conservatives will campaign strongly against any change in May.

Unions are also mobilising and could fuel a surge in public anger when the deficit reduction starts to bite next year.

While these rumblings are not going to threaten the viability of the coalition just yet, they will make life harder for its leadership.

Labour has chosen a young leader in former energy minister Ed Miliband, which has bolstered its poll ratings. The opposition will target Lib Dems over the fairness of specific cuts and on the compromises they are making in government.

The coalition looks safe for now, and the leadership has managed to deal with dissent, but the honeymoon period is over.

What to watch for:

- Signs that the Lib Dems could walk away from government. An election would unsettle financial markets and put the current deficit reduction plan in jeopardy.

- Signs that any controversial spending cuts may be shelved.

THE BANKS

The government has sponsored a study of banking to look at the merits of splitting retail and investment activities at banks among other changes which could shore up the industry after a financial crisis which ravaged the British economy.

The coalition has talked tough on bank bonuses and introduced a tax on balance sheets. A further tax on transactions could be on the cards if agreed internationally.

The key problem remains trying to get banks lending to small companies so that the private sector can drive the recovery and create jobs to fill the gap left by public sector cuts.

The government has big stakes in RBS (RBS.L) and Lloyds (LLOY.L), having bailed them out during the credit crunch, and has indicated it will use its influence to boost lending.

What to watch for:

- Indications that a further bank tax is on the way. - The success of efforts to persuade banks to lend more.

INTERNAL AND EXTERNAL STRAINS

Some Conservative politicians are frustrated with Prime Minister David Cameron for failing to get the European Union's budget frozen and for retreating on a referendum over the Lisbon Treaty. The centre-right party has eurosceptic roots and wants to stop more powers being transferred from London to Brussels.

The Lib Dems are Europe-friendly -- Deputy Prime Minister Nick Clegg was once a legislator in Brussels -- and any sign that the centre-left party is influencing Britain's relationship with the EU could further anger Conservatives.

Cameron wants British combat troops out of Afghanistan within five years and the Afghan army to take care of security.

Analysts are sceptical that this can be achieved and the war is growing increasingly unpopular at home.

The coalition might also face an upsurge in republican violence in Northern Ireland.

Some form of social unrest in Britain is possible as unionised workers in the public sector protest against big spending cuts.

What to watch:

-- Cameron giving too much ground to Brussels could anger eurosceptic Conservatives.

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