Politics - John Kampfner

Lib Dem traditionalists fear that a Blair-style coup could make the party pull back from its commitm

Which party advocates a cap on state spending? Which party is calling for a more cautious approach to Europe? Which party wants a new insurance scheme incorporating the National Health Service and private providers? A small group of ambitious Liberal Democrats is seeking to transform the party's policies and its pitch, leaving some in the leadership seriously aggrieved.

A new collection of essays shows how far Britain's third party has already moved in recent months - and how much further its new generation of frontbenchers would like to move it, given half a chance. The Orange Book: reclaiming liberalism is causing quite a stir, so much so that Charles Kennedy, the party leader, sent a pager message to his MPs just before its publication on 2 September, urging them not to comment on it. The traditionalists fear that the coup carried out by Tony Blair, Peter Mandelson et al on Labour in the 1990s is being replicated in the Lib Dems.

The group, led by the MPs David Laws, Mark Oaten and Vincent Cable - two young Turks and one not so young - talk of reinventing the concept of liberalism. They could as easily have called it traditional values in a modern setting. At the heart of the make-over is an emphasis on the "liberal" in economics. Cable, a former chief economist at Shell, has worked hard in his year as Treasury spokesman at shedding the party's image as the "last of the big spenders".

He talks of public expenditure not being inherently desirable. In his contribution, he suggests two "golden rules" for future chancellors: that the state should not take more than 40 per cent of gross national product in tax (the current rate is 37 per cent) and that marginal rates of direct taxation should not exceed 50 per cent.

The first proposal goes further than the Conservatives, who have toyed with the idea of a spending target, but failed to fix one. Cable's second rule marks a subtle shift in thinking. Until now, it was understood that the Lib Dems advocated a 50 per cent tax rate on earnings above £100,000 - that was generally taken to mean income tax alone. Cable says the policy has since been "clarified". The 50 per cent figure is now to incorporate National Insurance contributions and the local income tax that the party would introduce instead of the council tax. Once these are taken into account, the Lib Dems' figure for national income tax is just under 45 per cent. Cable insists that the old policy would have led to marginal tax rates that were politically and fiscally counter-productive. The trouble, it seems, is that many in his party, including a number of MPs, have yet to appreciate the change. No one can point to an actual announcement.

The repositioning could cause ructions when the party gathers in Bournemouth this month. "The last thing we need in our last conference before the election is a debate about positioning," said one senior party figure who further says that the first he heard of The Orange Book

was when it was sent out by the publishers.

Kennedy has provided an endorsement, of sorts, in a foreword that manages to be both encouraging and cautious. Sir Menzies Campbell, who has entered the ranks of best-leader-the-party-never-had, has been more circumspect. The Lib Dems, he has said, should be open to

fresh thinking, but he noted: "The fact that they have set out a stall will not mean that what they say is automatically accepted."

Nevertheless, the thinking is permeating official policy. Part of it is tactical. Kennedy has backed a shift in tax-and-spend policy after being persuaded that the party is vulnerable to charges of profligacy. Similarly, on Europe, he is reluctantly allowing a shift in language. In his essay, Nick Clegg, a former MEP often tipped to be a future leader, calls for a more sceptical approach to the EU and for the transfer of certain powers from Brussels to nation states.

On criminal justice, the shift is equally marked. Mark Oaten, the home affairs spokesman whose hawkish note on anti-terrorism laws has caused consternation in the party's civil-rights lobby, has been advocating a tougher approach to crime and asylum issues. Oaten recently said that the party had "allowed the term liberal to be associated with a weak set of values".

Kennedy's people argue that the labels "left" and "right" are redundant. They insist that his criticism of the war in Iraq appealed as much to disgruntled Tory supporters as Labour, and that the "left-of-Labour" tag was inaccurate. Supporters of the realignment say it demonstrates a new realism that is vital in fighting the Conservatives in the south-west and Home Counties and Labour in urban constituencies, particularly in the north. The closer the prospect of unseating the Conservatives as the official opposition, the more the Lib Dems will avoid causing offence. The aim is to make it easier for disillusioned Middle England to opt for an unthreatening alternative. Now where have we heard that before?