I think it is obvious that this is a moment when as a party we need to take a hard look at ourselves. We were given a bloody nose by the voters last week. We lost almost 750 council seats. And of course the AV referendum delivered a clear 'no' vote.So, a year into coalition government, some vital questions are being asked. In particular - what does this mean for the Liberal Democrats? And what does it mean for the Government? I am going to try and answer those questions today.

But let me be clear about a couple of points right away. Does this mean the end of the coalition? No. Does it mean the coalition is going to change? Yes.

Before looking forward, I think it's very important to look back. To remember the situation a year ago. A fragile economy. A looming financial crisis. European neighbours seeing economic sovereignty being torn away from them by the financial markets. Huge anger at politicians after the expenses scandals. And then, of course, a hung parliament.

The decision we took to enter full coalition with the Conservatives, a decision the Liberal Democrat party collectively took, was absolutely the right one. What the country needed in May 2010 was a strong government willing to tackle the shocking deficit left behind by the Brown Government.

But we also needed a Government willing to embark on the long-term changes necessary to fix the economy for the future. Short-term repair and long-term reform: that's the Liberal Democrat economic agenda in government.

I am proud that at a moment of national crisis, the Liberal Democrats showed ourselves to be a party of the people. A party that puts national interest ahead of partisan posturing. Given the possible alternatives, I have not doubted for a single moment that this was the right decision.

Roy Hattersley made a radio programme about coalitions last year. He suggested that there are three kinds in this country. Coalitions of convenience, which are not required by parliamentary arithmetic, but are simply easier to form for personal reasons. An example might be the Lloyd George coalition after 1918, when the Conservatives actually had a majority.

Then there are coalitions of conviction, where parties come together because of a strong ideological affinity, like the one formed in 1895 to resist Irish Home Rule. Thirdly, there are coalitions of necessity, formed in times of national emergency when no single party has the mandate to act alone.

The current government is a coalition of necessity. Of course the Liberal Democrats and Conservatives share strong convictions in many areas, such as civil liberties and the decentralisation of power away from Whitehall and Westminster. But the driving force behind the formation of the coalition was necessity: the need to act together in the national interest to sort out Labour's toxic economic legacy. It is not a 'national' government, but it is a government formed in the national interest.

So, the first big call was to enter into coalition government. It was the right one.

The second big call was to set out immediately to tackle the deficit, and to commit to clearing the structural deficit by 2015. Again I am certain this was the right decision. And it was made in equal part by Liberal Democrats and Conservatives in Government.

Deciding to tackle the deficit within a parliament was, I believe, vital for the credibility of the plan.

In a perilous financial climate, it simply wouldn't have been good enough to say that we'll do half the job - but leave the rest to the next administration. Imagine your house is on fire. You wouldn't expect one group of firemen to put out half of the fire, but say that the rest will have to wait for the next shift.

The two parties in the coalition are united on the central question of deficit reduction in this parliament. Labour left this mess. The Liberal Democrats and Conservatives are together cleaning it up.

I know that the cuts are extremely difficult. But remember that whoever was in government would have had to act in a similar fashion. Labour's plans would have meant £7 of cuts this year for every £8 that the coalition is cutting.

The real difference between the coalition's deficit reduction plans and Labour's is not the scale - it is that people think we will deliver on our plans, whereas nobody thought for a moment that Labour's plans were anything other than fantasy financing.

The UK has been kept out of the financial danger zone because of the decisive action we took last year. The cost of borrowing has been held down as confidence in the UK was restored.

It is too easy to forget how very different it could have been. Before the crisis, the cost of borrowing in the UK and Greece was almost the same. Now the cost of borrowing in Greece is almost five times as much as in the UK.

And it is essential to keep a sense of perspective about what we are doing. This is an economic plan to repair the public finances, not an ideological plan to shrink the size of the state.

At the end of the spending review period, public spending will account for 41% of GDP, three percentage points higher than in 1997.

And public sector employment will be half a million higher.

While the Liberal Democrats are wholly behind the deficit reduction plan, we are also determined to learn the mistakes of the past. Especially the lessons of the 1980s, when whole swathes of the north were, economically speaking, simply left for dead. And the lessons of the 1990s and since, when the economy became disastrously lopsided towards London and financial services.

I think one of the most important factors in the recent local elections was the deep, visceral memories of the 1980s in the northern cities and Scotland. These were also the places where the Liberal Democrats were the main face of the coalition government.

That fear is real, as I've heard very clearly on the doorsteps in cities like Hull, Newcastle and Sheffield in recent weeks. And fear is a powerful force in politics.

But the eighties won't happen again. We are not in government to turn back the clock, but to move forward to a better, stronger and more balanced economy.

In the Thatcher years, whole communities were uprooted. Because too many areas were dependent on just one industry, economic upheaval led to social upheaval. Industries went, and communities went with them. Never again.

The Liberal Democrats were in the lead in identifying what was wrong with the economy long before the last election. The dangers of the deficit, for one: in fact I remember being criticised for warning of the depth of the cuts that would be required.

But we have also been warning for years about the way in which the economy had become dangerously lopsided; too reliant on London and the South East; pumped up on private and public debt; at the mercy of an under-regulated banking sector; and struggling with a creaking infrastructure.

It is this Liberal Democrat analysis of what is wrong with the economy that underpins the Government's approach to putting it right.

Reform of the banking system. A Regional Growth Fund to support businesses across the nation. A Green Investment Bank to build the green infrastructure needed to cut carbon emissions.

In short, a rewiring of the economy to ensure sustainable, balanced growth.

So on the two big calls - forming the coalition, and reforming the economy - I think we got it absolutely right. But we are also ensuring that this government does not repeat the economic mistakes of the past.

Along the way, and largely unnoticed, we have demolished one of the most stubborn myths about coalitions - that they would be too divided and weak to take big decisions in the national interest. This prejudice has been killed stone dead.

Of course, there are other criticisms of coalition, which I'll come to in a minute.

But behind all the noise and smoke of political battle, we should not lose sight of this important achievement. After decades of scaremongering from the other parties, we've shown that coalitions are not somehow un-natural or un-British, but simply a different and in many ways better way of delivering in government.

Of course the other main attack on coalition politics is that parties will be unable to deliver the policies in their manifestoes, because of the necessary compromises that take place. This argument - the 'broken promises' charge - is one I want to tackle head on. Not least since it featured so prominently in the recent referendum campaign.

Let me be clear. It will not be possible to deliver the entire Liberal Democrat manifesto in this Government. This is because we didn't win the election. So we have had to compromise. We could not, for example, deliver our policy on tuition fees. Nor, it is important to remember, would we have been able to in coalition with Labour.

Labour was the party that introduced tuition fees, and then commissioned the Browne review which recommended no cap at all. On this issue, the other two parties agreed with each other, not with us. So we were isolated.

I know that there has been a lot of anger about this issue. But you can't be in favour of coalition politics, but against the compromises that coalition necessarily entails. You can't deliver 100% of your manifesto when you have 8% of the MPs.

I lead a party of 57 MPs out of 650. Much though I might often wish to, I can't act as if I won a landslide. To deliver on all our policies, we need a Liberal Democrat majority government. That didn't happen.

This is something the Liberal Democrats understand. It has in some ways been harder for our coalition partners, who are not, to put it politely, firm believers in plural politics.

The Conservatives promised to replace Trident in this parliament, cut inheritance tax for the most wealthy, renegotiate fundamental elements of the Lisbon Treaty on social affairs, build more prisons, and replace the Human Rights Act.

None of these things have happened. And there is no shame in this. They haven't happened because the Conservatives are not governing as a majority party. They are in a coalition, and a coalition requires compromise.

Of course, the prospect of coalition governments in the future poses interesting questions about the status of party manifestoes, and the way our democracy works.

I don't want to get into this in any detail today. But I think that here too, the Liberal Democrats were ahead of the curve. We put our four biggest priorities on the front of our manifesto and, more importantly, we made it clear before the election and during the days following that in any negotiations with another party these would be our principal demands.

And we've been as good as our word. We are now delivering on these four priorities in government.

So the coalition has shown itself to be a durable, stable government. But it is clear, not least from what we heard on the doorsteps in recent weeks, that people want the Liberal Democrats to be a louder voice in the government.

In part this means we need to do a better job of blowing our own trumpet on policies such as cutting income tax for ordinary taxpayers; ending child detention; increasing the state pension; introducing free nursery education for disadvantaged 2 year olds; adding a quarter of a million apprenticeships; increasing tax on capital gains; reining in the banks; creating a Green Investment Bank and a green deal; and getting more money into schools to help poorer pupils.

In terms of policy impact, we are punching well above our weight. A recent analysis by the BBC estimated that 75 per cent of our manifesto is being implemented through the coalition agreement, compared to 60 per cent of the Conservative manifesto.

We can also be more assertive about our different positions on certain issues, but without threatening the stability of the government. After all, nobody wants a return to the nightmarish coalition that existed between Tony Blair and Gordon Brown. Nobody wants tit-for-tat government.

In the next phase of the coalition, both partners will be able to be clearer in their identities, but equally clear about the need to support Government and government policy. We will stand together, but not so closely that we stand in each other's shadow. You will see a strong liberal identity in a strong coalition government.

You might even call it muscular liberalism.

Recent weeks have served as a healthy reminder of the separateness of the coalition parties. The campaign has also shown that tribalism is still the dominant force in the other two main parties.

The Conservative party closed ranks in Spartan fashion against AV. Meanwhile, Labour under Ed Miliband concentrated on damaging us, the Liberal Democrats, rather than seizing the chance for a historic political reform.

Of course, there are pluralists in both the other parties too, and we will always be open to working with them. But the pluralists are not, it is clear, in the ascendancy. What the other parties want above all is to govern alone. We as Liberal Democrats must never forget that.

In terms of our own identity, I have always thought it a mistake to allow ourselves to be defined in relation to the other parties, or to use and adapt their labels.

We are not an anti-Conservative party or an anti-Labour party. Or at least only to the extent that we are different to them both. We are a liberal, democratic party - and we judge the other parties by their liberalism, rather than judging ourselves according to their ideological fixings.

Nor do I like Westminster village discussions of 'realignment' on either the 'centre-left' or the 'centre-right'. There was a lot of 'realignment' talk by Labour in the run up to the 1997 election, when Tony Blair was afraid he might fall short of an overall majority. There are still those who dream of a so-called 'progressive alliance', forgetting that Labour had 13 years to make some moves in that direction and never quite seemed to get around to it until, in desperation, they tried to cling to power last year.

There has also been some talk of a so-called 'centre-right realignment' since the formation of the current coalition. This is just nonsensical and naive. As I said earlier, this is a coalition of necessity, not of conviction.

Realignment is a polite euphemism used by one party that wants to gang up on the other gang - with us as a temporary recruit.

I didn't come into politics to simply replicate the two-party system under the guise of realignment. That's not my definition of pluralism.

We must not define ourselves in relation to the other parties. We are defined by a century and a half of liberal politics. It is not left. It is not right. It is liberal.

If it requires a position on a spectrum, it is the radical centre. We are camped on the liberal centre-ground of British politics. And we're not moving.

As a liberal party, we are unique in being equally committed to a dynamic economy and a fair society.

We know that only a successful economy can create the jobs and opportunities for real fairness.

But we also know that free economies do not magically produce fair societies. The Government has a moral responsibility to create the conditions for real fairness - real opportunities for ordinary people.

Labour has historically and instinctively been a party of fairness, but has all too often defined fairness in snapshot terms on a single measure.

More importantly, Labour has usually failed to win the trust of the people on the economy. For a period, under Tony Blair, the Labour Party seemed to combine economic competence with a social conscience. But it didn't last long.

And today, in terms of the economy, Labour is not even at the races. Silent on their own plans for tackling the deficit. Unable to take any responsibility for what happened. Trapped between new Labour's naive faith in the market and old Labour's suspicion of enterprise.

The Conservatives, by contrast, have historically monopolised the political attribute of economic competence. That is why Black Wednesday and the sudden shattering of that faith was so traumatic. And why it has taken so long to get close to regaining that historic mantle.

But the danger for the Conservatives is that they have been seen as the 'economics party', concerned solely with getting the wheels of the market economy moving, and paying no more than passing attention to the structural inequalities and lack of opportunity in society.

What I am about to say may seem optimistic or even utopian in the wake of last week's awful election results. But it was always clear that we would face some sharp questions about our identity when we entered national government after 65 years in opposition. Yet I think we have exactly the right answer.

We have an opportunity to show ourselves to be a party that combines financial hard-headedness with a passion for fairness. To occupy, as our own freehold property, the ground vacated by the Conservatives in the eighties and by Labour in the last decade.

To be open to working with other parties, open to a more grown-up, plural way of doing politics - but to do so from our own strong, liberal ground.

There is a reason neither of the two bigger parties won last May. Neither of them were really trusted to deliver both a strong, dynamic economy and a fair society. We can be trusted on both counts.

At the next election, we will say that we are demonstrably more credible on the economy than Labour, and more committed at heart to fairness than the Conservatives. I am confident that by showing we can combine economic soundness with social justice - competence with a conscience - we will be an even more formidable political force in the future.

I am convinced that there are millions of people who want a liberal politics of the centre.

So, our report card a year in. We've normalised the idea of a coalition government, of two separate parties working together. Maybe we've done too good a job of that - after all, we are now accused of being too strong rather than too weak as a government. But putting the country's finances back on course was the priority.

Having created a strong, stable government and set out credible plans to cut the deficit, I relish the opportunity to provide a louder Liberal Democrat voice. To make the Liberal Democrat imprint and influence on government more visible.

We are showing we have the mettle to take tough economic decisions, and the determination to break down the barriers to a fairer society.

Let me be candid - we have a lot of work to do. We took a hard knock last week. But even in these difficult times, millions of people gave us their vote - and they want us to get on with the job. We will ensure that this is a more liberal nation by 2015.

And we will stand our ground in the liberal centre of British politics. Not the anti-Tory party, or the anti-Labour party, or the anti-politics party. A party of enterprise and fairness. A party that thinks we can do more together than we can alone.

A party with an unquenchable faith in the British people. The Liberal Democrat party. Our party.

Thank you