Shadow Chancellor Ed Balls has made an audacious appeal for senior Liberal Democrats to abandon the Tories and form a coalition with Labour.

While conceding that Nick Clegg was unlikely to join such a walkout, Mr Balls insisted senior Lib Dems were seriously unhappy about policies on the economy, NHS and Europe.

"I could serve in a Cabinet with Chris Huhne or Vince Cable tomorrow," he said in an interview with The Independent.

Mr Balls urged Labour supporters to "hold their nerve" amid poor opinion polls and criticism of leader Ed Miliband and also had a tough message for Labour, admitting the party needed to convince the public it would keep a lid on state spending.

"In the next year, we have to show we have got the strength, character, toughness and focus to say there is no free lunch, some tough decisions will have to be made in a way that gets the deficit down. Everybody in the Labour Party is going to be a bit frustrated," he said.

"The reality is after the financial crisis, people said 'it happened on Labour's watch. The deficit went up. Can we trust these people in future?' That is an argument we have to win."

Mr Balls signalled his desire to outflank the Government on welfare cuts by proposing tougher benefit sanctions for jobless people who do not try to find work.

And, inviting Lib Dems to form a coalition government with Labour, the shadow chancellor said: "I think it would be much better now and for the future of the country if they did.

"It would be in the national interest. I don't think they should wait until 2015. I don't think it's possible for Nick Clegg to lead that move... But I have known many of the senior Lib Dems well enough over 20 years... they know this isn't working, the economic consequences of carrying on with this are very dangerous for Britain."

He pointed out that legislation bringing in five-year fixed-term parliaments allowed for a new government being formed without a general election.

"Before or after the next election, if the parliamentary arithmetic throws up the need for a coalition of Labour and the Lib Dems, I would go into that with enthusiasm," he added.