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'First, how do we create a fairer Britain not scarred with persistent and high levels of poverty?

'Tax is at the heart of this.

'I want to redefine our approach to tax to reflect the growing sense in many low income and middle class households that taxes are unfair, over-complicated and penalise hard work. My aim is to cut the burden of direct taxes on the low paid and Middle Britain and pay for it by raising taxes on those who pollute the environment and on the very wealthy.

'Specifically I envisage a 2p cut in the national rate of income tax to 20p and lifting around two million low paid workers and one million pensioners out of income tax.

'We are the one major party which takes the environment seriously and that does mean that environmental taxes will rise. We are the one major party which believes in redistribution: the very wealthy should pay more; but not in the form of 50p marginal rates on high incomes.

'The 50p rate was an important symbol that we are a redistributive party. But the substance of the tax commission proposals shows that we can be both redistributive and innovative.

'But I am quite clear that we are in a new political environment in which the era of big increases in central government spending is over.

'The Liberal Democrats will not propose any spending increases without identifying savings. We will move from tax and spend to save and spend. I see no reason for any increase in the overall tax burden.

'What we need is smaller government and an end to bloated Westminster and Whitehall. Fewer ministers, fewer MPs, fewer special advisers, fewer civil servants, fewer departments, fewer quangos - electoral reform for the House of Commons and local government and at long long last an elected second chamber.

'Bluntly, if the Liberal Democrats want to show the country that we are serious about power - we must reform our party.

'Our party has remained largely unchanged since we came together in 1988. Change is overdue, necessary and urgent.

'In these last three months I have begun the task of implementing that change. Every decision taken now must advance our cause at the next general election and put us at the centre of events.

'Ed Davey, my choice to replace Tim Razzall as Chairman of the Campaigns and Communications Committee, is working to ensure that we run a powerful, modern national campaign. He has recently visited Canada and the US. We will be applying best practice. We will utilise the unlimited potential of the internet: two thirds of Britons have the internet but only 60% of them vote. We will build up a supporters' network from the millions who vote for us. They will be consulted on policy, brought into campaigns and asked to contribute their ideas. We will connect our Party directly with those who vote for us.

'I have today written to the chairs of all our local parties emphasising the priority I attach to diversity in candidate selection and made it clear that diversity will be a significant factor in determining how much central support is made available to local parties.

'We must above all be credible on policy. We must streamline our policy-making process to make it more responsive and immediate. Our party conference will always be the most important voice in determining our policies. But the conference committee is already looking at ways to professionalise the party conference and to make it more accessible to members of the public.

'Liberal Democrats supported the government's spending increases in health and education. It was necessary to correct the under-investment of the Tory years.

'But Labour has failed these great public services.

'Failed to ensure that the money has been well spent.

'Failed to allow the professionals to get on with the job they know best.

'And all the time inequality has continued to grow.

'Taxation is complex, stealthy and unfair.

'Government is wasteful, inefficient and authoritarian.

'Labour tramples on freedom at home and ignores international law abroad.

'Mr Cameron's words do not change the nature of his party.

'Who believes that 198 Tory MPs, elected on one of the most right wing manifestos ever seen in this country have changed their values? Mr Cameron's professed 'liberalism' has found no echo in his party.'

Sir Menzies' full speech is available here.

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