Setting out proposals for public service reform, he said that F and G grades are of no value to school-leavers and urged: "It's time to call a fail a fail."

In his first major speech to Lib Dem members since being elected leader last month, he also set out plans for a new generation of schools free of government interference.

The new "Free Schools" would be prevented from selecting pupils but otherwise allowed to innovate as they see fit. Local authorities would be reduced to an oversight role, the schools instead being set up by "any suitable sponsor", including parents, charities or voluntary and private organisations.

At a conference in London to discuss ideas for the party's manifesto, Mr Clegg said that the state should only intervene to allocate money fairly and ensure equal access and maintained standards.

"Once those building blocks are in place, the state must back off and allow the genius of grassroots innovation, diversity and experimentation to take off in providing an array of top class schools and hospitals," he said.

He also argued that Britain is the "sick man of Europe" in terms of its public services. "I don't think it should be acceptable for any school to have over half of young people leaving without five good grades," he continued.

"It shouldn't be acceptable that we have such low standards for GCSE pass scores that the Government reports as 'passes' some grades which we know are in reality of no value in today's labour market. You can get a G, in some cases, for a mark of about 20%. It's time to call a fail a fail, and raise expectations by abolishing the two lowest pass grades for GCSEs."

On the NHS, Mr Clegg said patients should be guaranteed treatment within a certain period, provided through the private sector if necessary. He also called for patients to be given their own health budgets to spend on treatment for long-term and chronic conditions.

Mr Clegg also made it plain he has no intention of raising taxes as he reinforced his credentials as one of the authors of the Lib Dem Orange Book, a rallying point for the right of the party.