Leading article: The Liberal Democrats have reason for both optimism and doubt

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At one time, this Liberal Democrat party conference was expected to be a victory rally; a celebration of the party's return to power after decades in the wilderness. But delegates gather today in Liverpool full of doubts. The party's support in the opinion polls has fallen sharply since May. Discontent about certain Coalition policies is swelling. Some are even beginning to speak of an existential crisis for the party, wondering how it can ever escape the Conservative embrace.

The first job for the Liberal Democrat leader, Nick Clegg, is to persuade the party that he (and they) made the right decision in accepting David Cameron's offer to form a coalition administration. And the good news is that he has something to work with here. There are some solid and distinctive Liberal Democrat achievements from the past few months for Mr Clegg to cite. A halt has been called to Labour's steady erosion of civil liberties. June's Budget increased the tax allowances for the lowest earners and raised the rate on capital gains – both longstanding party commitments and reforms that the Chancellor, George Osborne, would not have enacted without Liberal Democrat influence.

And, most significantly, there is to be a referendum on electoral reform next May, a vote which could unlock a new era of influence for the Liberal Democrats (should it go their way). This is not an insignificant list; it is certainly much more than most Liberal Democrats would have anticipated before May. Mr Clegg can accurately claim that, after many years of merely talking about Liberal Democrat reform, he and his colleagues are now enacting it.

But the harder task for Mr Clegg will be to outline a vision of the future for his party. He gives a strong hint of his approach today in an interview with this newspaper in which he argues there is no future for his party as a "left-wing conscience of the Labour Party". This implies that Mr Clegg will be prepared to see those who defected to the Liberal Democrats from Labour in recent years because of the third party's stance on issues such as the Iraq war and tuition fees peel away by the next election. Mr Clegg presumably hopes that the Liberal Democrats will win new supporters to replace them. It is a bold strategy; and a risky one. For every left-wing voter that the Liberal Democrats lose over the coming years, they will need to attract another from the political centre.

The most serious challenge for Mr Clegg's strategy will come when the Treasury's spending squeeze begins in earnest next year. The consequences of the emergency Budget have already been labelled as regressive by the Institute for Fiscal Studies. Even Liberal Democrats on the right of the party will find the cuts difficult to support if they are seen to fall disproportionately on the less well-off. The great danger for Mr Clegg and his colleagues is that the scale of the planned fiscal correction will swamp Liberal Democrat progressive initiatives. The welfare reform agenda is a case in point. This week Mr Clegg outlined the moral case for benefits reform.

But though he was right to argue that there is nothing compassionate about consigning people to a life on welfare, reforming benefits properly (while protecting the most vulnerable) will require considerable up-front spending for training and earnings support. Such is the pace and scale of the cuts planned by the Treasury that it remains unlikely that these funds will be forthcoming.

Fiscal consolidation and progressive reform do not make for easy bedfellows. And, of course, there is the nightmare scenario for the Liberal Democrats that the Coalition's spending cuts end up aborting the recovery. They will not be able to wash their hands of responsibility for such a disaster.

Some of the gloom swirling around the Liberal Democrats is exaggerated. Their present polling numbers are not out of line with what normally happens to the third party between general elections. The party has managed to bounce back before polling day in the past. And the local council defections to Labour have actually been rather modest. Mr Clegg's argument that, in the longer run, the Liberal Democrats will benefit from this experience in power remains plausible (especially if they can bring home the cherished prize of electoral reform next year). But it is a dark road ahead. And there are many potholes.

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