Ahead of this week's Lib Dem conference, George Parker analyses the key issues facing Charles Kennedy's troops in Brighton

The Liberal Democrats must be starting to ask themselves why they bother coming up with new policies. After all they fought the 2001 election on a manifesto which was a virtual reprint of the 1997 manifesto - and did remarkably well.

Under Charles Kennedy's laid-back leadership policy new initiatives have been few and far between - yet the party is hovering around 20 per cent in the polls and Mr Kennedy's personal ratings remain high.

But a party which prides itself on its radical thinking knows that it has been static for too long, and that the political ground is starting to shift under its feet. Without a substantial clean-out of the policy cupboard, the Lib Dems risk looking irrelevant, outmanoeuvred.

So this year's annual conference in Brighton is the moment when the party unveils its new "big idea", the grand theme which it believes will sustain it over the next decade or so. For once delegates will have some meaty new policies to debate.

And the big idea is...decentralisation. Cynics might argue that decentralisation has been a Liberal "big idea" for over a half a century, but Mr Kennedy believes it is more resonant now, in an era when effective delivery of public services is key, and when voters are growing increasingly weary of the "control freaks" in Whitehall.

But before looking at the policy itself, it is worth asking why the Liberal Democrats need a new set of policies and a break from those which have served them well over the last three elections.

The answer is Gordon Brown's 2002 spending review. For the last decade the Lib Dems "big idea" was simply to promise to outspend whoever was in power at the time, arguing that Britain's public services needed investment to make up for years of neglect.

The promise to levy a penny on income tax to fund education was memorable and highly effective, but was starting to look a bit whiskery. By the time the chancellor finally opened his coffers to pour billions into schools, hospitals and transport, the Lib Dems big idea was washed away in a tide of cash.

The Lib Dems might have won the argument, but fighting Labour on the question of funding was no longer a viable option in the short term. "Am I quaking? Are we rumbled?" asked Mr Kennedy in an interview with the Times. "No I don't think so, but I do believe this is a defining moment in this parliament."

Mr Kennedy said the new focus would be on delivery - both the Lib Dems and the Tories believe that if Gordon Brown's spending spree fails to bring noticeable improvements to the public services, then Labour will pay a heavy price at the next election.

"If micro-management from Whitehall is a nightmare world of targets which distort priorities and red tape which inhibits delivery, then what is the right mechanism?" he went on. "Surely, it is more radical redistribution of decision making."

The Lib Dem leader had anticipated a Treasury splurge in a second Labour term, and before the 2001 election asked Chris Huhne, former Independent journalist, economist and now an MEP, to lead a review team to move the Lib Dem strategy on public services on to new terrain.

That work was published this month ahead of the conference. While Gordon Brown may have forced the pace, the Liberal Democrats were keen to publish the Huhne report at the earliest opportunity before Iain Duncan Smith sets out Conservative thinking on the public services.

Lord Newby, Mr Kennedy's chief of staff, said it was vital for the Lib Dems to get in first. "The Tories are opportunistically talking about decentralisation, but they don't really mean it," he said. "It would have been damaging to us if they had stolen the slogan."

The Lib Dems claim the Conservatives mean privatisation when they say decentralisation. But considering Mr Duncan Smith's shadow team, like Mr Huhne, has been touring the Continent to see how it is done there, it is likely they have come up with similar conclusions in some areas.

Mr Huhne's paper on the public services, already approved by the Lib Dem federal policy committee, is likely to underpin the party's strategy for the next decade or so, and party chiefs expect few serious disagreements on the conference floor.

It has four main points. The first, extending personal choice in hospitals and schools, sounds very much like common ground with the Tories, although the Lib Dems say they would invest in "spare capacity" in hospitals and schools to make choice a reality.

The second is to guarantee health funding in the long-term by designating National Insurance contributions as an NHS tax - this earmarking, Mr Huhne believes, will make it less vulnerable to cuts in future years.

The third, and most radical area, is in decentralisation. English regions would be given the power to vary the rate of the NHS tax, according to local demands, and to meet regional pay variations - an issue which could be divisive at conference.

A local income tax would be introduced, to restore real power to local councils and local education authorities. "The point is to have people making decisions over services at a level close to the people who are using them," Mr Huhne says.

The fourth idea - building on one of Paddy Ashdown's passions - is setting up new public benefit organisations, building on the idea of mutualisation, to run things like schools, hospitals and leisure centres.

Mr Huhne, whose commission drew on the experience of many Lib Dem council leaders and other experts, said: "We have put together something which I think the party will be very pleased with.

"I think this is something the party can unite around. There's not a lot of mileage in arguing that it is all just down to money - after the sort of increase Brown has announced, the debate has shifted."

Devolving power to the local level - where the Lib Dems are strong - and away from Westminster - where they are not - was never going to be a hard proposition to sell to a party conference.

But some senior figures in the party question whether decentralisation is a big enough "big idea". "I'm all for the idea, but it's been in every manifesto since 1945," said one MP.

"I just wonder whether it is something which will hold the voters' attention through a three week campaign. Do they care strongly enough about it?"

But most Lib Dems are enthusiastic about the new emphasis on decentralisation, and the dusting down of an old party favourite for a new era. "Traditional values in a modern setting," as John Prescott would probably have it.

George Parker is the Brussels Bureau Chief, and previously a political correspondent from 1995-99, at the Financial Times