It is understandable that Charles Kennedy should insist that the accent at this week's Liberal Democrats' party conference will be on celebration, following what he described as the best general election performance in more than 80 years. But no amount of optimistic gloss can conceal that tough decisions lie ahead.

This has been said many times before of the Liberal Democrats. But the critics are right to point out that the gains on 5 May fell short of expectations and that the split between the party's economic liberals and tax-and-spend left-wingers has finally to be addressed. It is also no good drifting on under a gradualist philosophy, simply hoping that government will drop into Liberal Democrat laps as voters get progressively sicker of the other two parties.

Such an outcome looks increasingly implausible. Labour is likely to trade in Tony Blair for Gordon Brown at some point during this Parliament, while it is possible the Tories might finally ask Ken Clarke to lead them out of their electoral wilderness. The combined effect will be to put the Liberal Democrats under intense pressure to clarify their position in the political spectrum.

With all this potential movement on the left and right of the field, Mr Kennedy's troops cannot afford to sit still if they are to avoid being squeezed by much larger, reinvigorated, hostile forces. Mr Kennedy fought the last election clearly on the left, wisely aiming to capitalise on public opposition to the Iraq war and on a feeling that Mr Blair had pushed Labour to the right. That may have made sense at the time, but there is a danger now that it has restricted his room for manoeuvre.

The hope must be that this week's Blackpool conference will see the start of some genuinely fresh thinking on the party's future. There are signs that this may happen, especially during the debates on the Royal Mail and the health service, where talk of privatisation and choice - almost taboo themes at Liberal Democrat conferences - are expected to be heard.

But on the downside, Mr Kennedy's instinctive reaction to the reformist Young Turks in his ranks seems often to be to slap them down. His recent dismissal of the ideas floated by the so-called Orange Book caucus was a depressing instance of this.

Now is the time to show that Liberal Democrats are less knee-jerk in demanding Big Government solutions to every ill. Mr Kennedy has some talented lieutenants and he should encourage them to produce mould-breaking policies. The Liberal Democrats also cannot afford to rule out going into a government with the Tories, especially one led by, say, Clarke or David Cameron.

Many voters are fond of Mr Kennedy, seeing him as quirkier, less polished and more straightforward than most front-rank politicians. Until now he has been an asset to his party until his strengths outweighed his weaknesses. But it is vital he demonstrates that he still has the heart for a fight and the skills to meet the challenges ahead in a turbulent political landscape. He has to be much more coherent about the direction he wants his party to take. He has to say what the Liberal Democrats stands for, rather than what they oppose.

The alternative would be to "just trundle along the same tram lines", as Nick Clegg - one of the brightest new MPs on any side of the House - put it in his interview in today's Independent.

Mr Kennedy must seize the moment. He must use this conference to underline that he is a leader with the vision and strategy to take his party to new heights. Otherwise, this week might be remembered as the moment when the Liberal Democrats were too busy celebrating to notice they had passed their peak. And that would be a shame both for the party and the nation.