Leading article: Innovative policies in search of a leader

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The Liberal Democrats meet this week at a potentially decisive point in their history as the third force in British politics. Their conference sets key tests, both for the party itself and - critically - for its new leader, Sir Menzies Campbell. How they fare will help to determine not only the party's fortunes at the next general election, but Sir Menzies' prospects of surviving politically to lead them into that fray.

Sir Menzies began yesterday by trying to draw a clear distinction between the Liberal Democrats and the two other parties - a necessary precaution at a time when all three are converging on similar centre ground. His theme, in a brief opening address, was internal democracy. Unlike the conferences of the other two parties, he said, which were "meaningless" in terms of making policy, the Liberal Democrats made real decisions.

A cheap shot this might be, but it conveniently underlined the strength and the weakness of the Liberal Democrats today. The party's democracy is a strength, because it gives it a strong local and regional presence. But it is also a weakness because - as could become all too apparent - major policies need the endorsement of conference, and a negative vote cannot but affect the stature of the leader.

Tomorrow's proceedings will thus constitute a double test for Sir Menzies. The key debate on taxation will be followed by Charles Kennedy's keenly awaited address. Rejection of the new tax policy, followed by a bout of rousing nostalgia for Mr Kennedy - whose removal eight months ago provided such an unedifying public spectacle - would be a serious blow to Sir Menzies.

It is understandable that the tax package should have aroused misgivings. But the now-abandoned proposals for a 50 per cent tax on high earners were as foolhardy as they were bold. Low tax rates on income are a prerequisite for any competitive economy in the modern world, and probably a condition for electability. The new scheme, which redistributes the tax burden by simplification and higher thresholds is paid for largely by a series of "green" taxes on consumption and pollution.

In directly linking its environmental concerns with taxation, the Liberal Democrats have gone further than any party towards a serious policy of "polluter pays". With most advanced economies now seeking sources of revenue other than personal and business income, the future may well lie with "green" taxes of some variety that help fill Treasury coffers, while fostering ecologically responsible behaviour. It would be regrettable if Liberal Democrat policy makers were penalised by their rank and file for their innovative thinking.

As the party's first conference under its new leader, this was always going to be a crucial week for party and leader alike. The wider political context, however, has contrived to make it even more so. The high-profile and energetic beginning made by the Conservatives' new leader, David Cameron - including his direct pitch for Liberal Democrat votes - contrasts with the stuttering start made by Sir Menzies in his first months. And Mr Cameron's star rises, even as Labour's falls over speculation about the leadership.

A hung Parliament next time around cannot be excluded, and the Liberal Democrats need to be in a position to reap their reward. Their creditable showing in recent by-elections has given the impression that, with their firm local base, their national leadership troubles may not be a great liability. At a general election, however, the increasingly presidential style of campaigning places a particular responsibility on the national leader. Sir Menzies has to show that he has got what it takes, not just in the backrooms, but as a motivating leader of people and a convincing performer on the national stage.