New UK leaders say coalition will rebuild economy

LONDON (Reuters) - Britain's new Prime Minister David Cameron said on Wednesday the country's first coalition government since 1945 would be strong enough to survive a full five-year term and tackle the worst economic crisis in decades.

Cracking jokes with his new deputy Nick Clegg, leader of the third-placed Liberal Democrats, Cameron hailed a "historic and seismic shift" in British politics as he sought to bury their old rivalry.

With Britain emerging from its worst recession since World War Two, the new coalition must find a way to cut a budget deficit running at more than 11 percent of GDP.

"No government in modern times has ever been left with such a terrible economic inheritance," Cameron told reporters in the garden of 10 Downing Street, the prime minister's official residence.

"We know there will be difficult decisions ahead. (The coalition) can be an historic and seismic shift in our political landscape."

At an open-air news conference, Cameron and Clegg stood side-by-side and forgot the animosity and insults of the close-fought election campaign, laughing at each others' jokes and using first names.

Hailing a new era of British politics, Clegg said: "We need to rebuild not only the public finances but we also need to rebuild the British economy on new sustainable foundations out of the rubble of the old economy."

The two sides agreed earlier on Wednesday to form a coalition after an inconclusive election last Thursday ended 13 years of rule by the center-left Labour Party under Tony Blair and his successor Gordon Brown.

NEW POLICY PROGRAMME

Despite big differences on policies as varied as tax, immigration and nuclear weapons, the parties said they had agreed a policy program that will be stable and lasting.

The coalition adopted Conservative plans to cut 6 billion pounds ($9 billion) of spending this financial year, earlier than the Liberal Democrats wanted.

"There is going to be a significant acceleration in the reduction of the structural budget deficit," new finance minister George Osborne told reporters.

Britain's financial markets had mixed fortunes as relief about the coalition deal was tempered by concerns about the harsh austerity measures that lie ahead.

The coalition has yet to convince skeptics that it will have the strength and longevity to overhaul the economy.

"I still don't think it will last," said David Lea, western Europe analyst at Control Risks, a consultancy. "The differences between the parties are just too great."

Former Conservative deputy leader William Hague is the new foreign secretary. He is expected to hold talks with U.S. Secretary of State Hillary Clinton in Washington on Friday.

Former finance minister Ken Clarke will run the justice department, while Lib Dem Vince Cable, a former economist, is the new business secretary in a cabinet that includes five positions for coalition's minor partner.

Cameron, a 43-year-old former public relations executive, is Britain's youngest prime minister in almost 200 years. He took over the position after Brown admitted defeat in efforts to broker a deal with the LibDems.

David Miliband, until Wednesday Britain's Foreign Secretary, became the first to declare himself a candidate to replace Brown as leader of the Labour party, now in opposition.

Legislation will be introduced to give parliaments five-year fixed terms. However, parliament could still be dissolved if 55 percent or more of the House votes in favor.

The coalition's plans also include:

- Introduction of a banking levy;

- A commission to investigate the possibility of separating retail and investment banking;

- Plans to give Bank of England a direct role in measures to tackle long-term threats to financial stability and a watching brief over day-to-day bank supervision

- Raising non-business capital gains tax to bring it close to income tax levels;

- A cap on immigration from outside the European Union.

(Additional reporting by Rhys Jones, Tim Castle, Peter Griffiths, Michael Holden and Adrian Croft; editing by Philippa Fletcher)