Nick Clegg yesterday abandoned the Liberal Democrats' short-lived pledge to go into the next election promising net tax cuts, urging his party to confront the painful reality that the state will have to shrink.

The Liberal Democrat leader finally persuaded his party to back a strategy of cutting the burden of taxation last September, in a symbolic victory over activists who have long favoured higher taxes and more public spending. But Mr Clegg's triumph came on the day Lehman Brothers collapsed and yesterday he admitted that the drastic deterioration in the public finances since then meant that overall tax cuts in the short term were "implausible".