Question: The Conservatives have lost two general elections in a row now. Why?

Peter Lilley: Mainly because we won four in a row - they'd had enough of us, and particularly in the last term with the collapse of the ERM experiment. Since then we've been 20 points behind and things haven't changed. It's also worth remembering that every government has been re-elected for a second term, unless there is an enormous crisis. So it's not surprising they've got a second term.

What is disappointing is that we didn't claw back more seats. And that was partly that our approach still seemed to be rather negative, rather punitive and not addressing the issues that people wanted to address, like health and education. We have to accept that the basic attitude was 'the government hasn't delivered in the first term, therefore they need another term. We don't look to the Tories because they didn't deliver the solution to these problems in four terms'. It was difficult to get round this view.

Question: So what do the Conservatives need to be saying now about, for instance, health and education?

Peter Lilley: We need to show (a) that we're genuinely committed to improving those services (b) that there's something distinctively Conservative that we can offer to improve them. I think that has to be based on greater choice for patients and parents in the health and education systems. And we can offer that because the Labour Party has actually been restricting choice, particularly in health - as of about 18 months ago you can no longer choose which hospital you go to - we should have made more of an issue about this. We should return that choice, give people the information to make informed choices and make sure the taxpayers' money follows patients choices. And that would be a big change to the health services.

Question: At present top of the political agenda is Labour's efforts to introduce greater private involvement in the public services. It's something you were talking about back in 1999. Why didn't the Conservatives make this one of their key policy pledges at the last election?

Peter Lilley: Well you'll have to ask other people in the Conservative Party rather than me. You'll recall after I made a speech on this subject, I left the shadow Front Bench and didn't really have direct influence thereafter.

Question: Is it a case of 'I told you so' in terms that it is now top of the government's political agenda?

Peter Lilley: Well not quite because I certainly wasn't advocating what I think the Labour Party are doing, which is partly just tinkering with the idea of bringing in some private management. Blair wants to leave the impression they've occupied that ground and then tempt the Conservatives to try and go too far beyond that and start introducing hugely complex and unnecessary changes like compulsory private insurance for everybody. I don't think we should go down that road.

Question: So what should the Conservatives be saying about private sector involvement in public services, which is unique and distinctive?

Peter Lilley: Well if we start by re-introducing choice for patients within the NHS it then becomes possible to give patients also the choice of using other suppliers including private hospitals as well, funded by tax payers' money and possibly topping it up themselves if they wish. But I think we should be cautious about imagining that there's a huge appetite among the public for anything that can be misrepresented as privatising the NHS. The Labour Party can get away with seeming to do things which, if we did them, would be grossly misrepresented. In practice Labour actually won't go very far, and rather than extending private provision may end up partly nationalising the private sector by stealth, I suspect. They would extend state control over the private sector operations rather than anything else. We have to be cautious in not going too far in an attempt to trump them.

Question: At the last election William Hague promised big tax cuts but it didn't really have any impact on the voters. Do you think that's because the days of big tax cutting agendas are over, or do you think voters simply didn't believe that you could deliver them?

Peter Lilley: I think they were quite modest tax cuts, but you're right: nonetheless, people didn't believe them. They didn't see how we could simultaneously cut taxes and increase spending on health and education. And we needed to do more to explain how that was perfectly achievable. In the first place most other major countries - the US, Germany, France, are all proposing to do just that. Nobody doubts their ability to do just that. If you have a growing economy, you get rising tax revenues. If simultaneously, as they are, you are reforming the biggest consumer of tax revenues, which is social security and welfare, you can cut taxes and focus extra resources on health and education. But you have to spell out that it requires a growing economy and reform of welfare and highlight the fact that other countries are doing it too, for it to be credible.

Peter Lilley: Well he'll have to start a great policy review.

Question: But you've had many of them already - William Hague had numerous ones, like Listening to Britain.

Peter Lilley: Well Listening to Britain wasn't primarily a policy review. I was in charge of that - I was trying to change the whole approach of the party to get us to go out and listen to identify the problems and concerns of people, and then come back and start producing new policies. We weren't going to people saying 'what should our policy be?' But instead we were asking 'what is the problem that has got to be tackled?' And it did identify all sorts of interesting big issues and little issues. One of the concerns which people repeatedly raised was about dirty wards in hospitals. The public were there before the hospital professionals were there. We should have been grasping that and proposing policies to do something about it.

The process of policy renewal should always take place after an election defeat. We need to make sure that we're addressing the concerns of the British people and not just coming out with soundbite policies, but serious, well thought out proposals.

Question: How long do you think this policy renewal process will take?

Peter Lilley: Overall, it should occupy most of the Parliament. Clearly it will go in phases and stages. Working papers will be produced and discussions will take place. By the end you will find what you can put into a manifesto.

Question: You called for a more inclusive form of Conservatism - a new caring Conservatism..

Peter Lilley: I never used the word inclusive, I'm quite sure - that's a jargon word - but I have called for a caring and compassionate conservatism. Most people do go into politics because they want to help people less well off than themselves. And that includes Conservatives. We unfortunately never wear our hearts on our sleeves. And consequently we've allowed ourselves to be caricatured as on the side of the fat cat rather than the little man and woman.

Question: Isn't that because sometimes you have been on the side of the fat cat?

Peter Lilley: Sometimes we perhaps have allowed ourselves to be seen to be helping just them. In practice most of the social reforms that have taken place in this country throughout the 19th century and including things like the sale of council houses in this century, which have helped millions of people who start with nothing in life, to get on the ladder of improvement - were introduced by Conservatives. But we ought to take more credit for those reforms, and we ought to make it a more conscious part of our policy renewal.

Question: You've called for a more liberal agenda. Isn't there a problem that by going towards a more liberal agenda, it means betraying the firm principles of Conservatism and some argue it's simply an attempt to grab good headlines and tell people what they want to hear?

Peter Lilley: I haven't called for a liberal agenda, I've called for a more libertarian and less authoritarian approach. I think the Conservative party is never happy unless it's setting people free rather than locking them up. And too many of our policy positions at the last election leant themselves to caricatures like locking people up for longer periods. Of course we have to lock up criminals, but the essence even in penal policy is on preventing crimes not on punishing criminals as an end in itself.

Actually we did have some good proposals to make more use of the time people were in prison through making them work and acquire skills. But that wasn't the bit that got over to the public. Similarly on asylum seekers, the emphasis seemed to be on locking them up which seemed punitive rather than effective. So we need to emphasise the libertarian aspect of Conservatism that has been a constant theme of our beliefs but hasn't been as prominent as I would have liked in recent years.

Question: What would you say to people who say a libertarian theme is very much a plea to a metropolitan agenda rather than a countryside agenda and that you risk losing your core vote?

Peter Lilley: If we just restrict ourselves to policies that narrowly appeal to core voters we will not get anywhere. But in any case, I think a lot of our core voters do believe in Conservative principles, including the basic principle that the state should not try to do things that it's not very good at, but should focus on things that it can do. It shouldn't bite off more than it can chew, and it shouldn't try and coerce the public into doing things which we may approve of but which cannot realistically be imposed by laws and taxes and punishments and fines.

Question: You've been criticised for calling for cannabis to be legalised. You said that the current rules are unenforceable and indefensible. Why indefensible - cannabis is dangerous and causes medical problems, so surely that's a strong case for making it illegal?

Peter Lilley: Well the most authoritative and thorough research of all the medical literature was carried out by the medical journal Lancet, and it concluded that there is no case on medical grounds for prohibiting cannabis. There is no evidence that cannabis will directly kill people. Tobacco kills. Eating fatty foods can kill people but we don't ban potato crisps.Question: Do you accept there is a strong link between soft drugs and moving onto hard drugs?

Peter Lilley: The only link that I could establish was created by the fact that cannabis has been criminalized alongside heroin and cocaine, so that cannabis users can only get it from the same illegal sources that are likely to push hard drugs - and we're forcing soft drugs users into the arms of hard drugs pushers, who then may encourage them to go on.

Question: Ann Widdecombe would then argue that legalising cannabis won't move away those hard drugs pushers - they'll move onto to harder drugs. Hasn't she got a point?

Peter Lilley: No. At the moment the drug gangs get their money from two sources - marijuana and hard drugs. If marijuana was legalised it would cease to be a source of artificially high profits to them and indeed any profits because they would be undercut by legal outlets. So they would be weakened as a result. When Prohibition ended in America, alcohol was eventually returned to legal channels and that ended the reign of the Al Capones. So there's every reason to suppose that we can take cannabis out of the hands of criminals.

Question: Ken Clarke says a relaxation of cannabis laws in Amsterdam and Kingston Jamaica - has led to a slightly druggie lifestyle - he says he doesn't want to repeat that here - how would you respond to that?

Peter Lilley: I have just returned from a trip to Amsterdam where I was making a programme for the BBC. There are some seedy red light areas in Amsterdam which are not particularly pleasant, more because of the prostitution than the drugs. Likewise, there are some seedy parts of London which could practically rival those of Amsterdam. I don't think that's a serious reason to put forward for criminalizing cannabis use and giving 80,000 people a criminal record. Ken Clarke visits Ronnie Scotts and other jazz venues around London, he must be aware that there are seedy areas of London already.

Question: Are you surprised by the reaction to your comments on cannabis?

Peter Lilley: I think I've broken the taboo on discussing this issue. We can now have a serious debate. Even the government has been forced to change from a hear no evil, see no evil, speak no evil position to accepting there must be a discussion on it. And that's progress.

Question: Are there any other libertarian issues on which you'll be looking to create a debate and maybe break some more taboos?

Peter Lilley: Not in terms of breaking a taboo. But I'm working on the whole issue of our legal liberties that are currently threatened by proposals to limit trial by jury, by measures that undermine the presumption that we are innocent until proved guilty, the double jeopardy rule and proposals for identity cards. These highly authoritarian measures will dispose of rights that have been established for over 800 years.