At least eight government departments should be abolished and 30 ministers culled in a huge shake-up of Whitehall, say the Liberal Democrats.
Kennedy is moving away from the Lib Dems' tax raising policies
The changes would be made by handing power direct to staff in schools, hospitals and local councils, Lib Dem leader Charles Kennedy says.
The "command and control" attitude adopted by governments of both Left and Right has failed, Mr Kennedy argues.
The reshaping of Whitehall is also designed to free up about £5bn in savings to spend on on priorities like schools, hospitals and tackling poverty.
The speech on Tuesday unveils the first hard details of the spending review conducted by the party's Treasury spokesman David Laws in recent months.
The Lib Dems are trying to make giving power back to local staff a distinctive policy for the next election, going much further than Conservative and Labour promises to decentralise decision-making.
In his speech to the Social Market Foundation think tank in London, Mr Kennedy suggests the "suffocating" growth of central government stops resources going to where they are most needed.
"This central command and control approach has failed Britain," he says.
"It has failed to promote efficiency and failed to foster fairness."
The man at the ministry does not know best, says Kennedy
The Lib Dems have now moved away from their plans for a 1p rise in income tax to fund schools.
They say Tony Blair's government has raised overall public spending enough, but the effects of the cash rises are not being felt.
Mr Kennedy pins the blame for lack of improvement on a failure to prioritise and on money being spent on "initiatives" instead of to frontline staff.
"The man in the ministry does not know best," he says.
The Lib Dem leader wants the most fundamental restructuring of government that there has been since the Second World War.
"If we're going to make a real difference in our hospitals and schools and police stations, we need radically to reshape and slim down central government.
"The plans that we're developing would lead to the abolition of at least eight government departments, with a net reduction in the number of Ministries from 19 to 14 and in the number of ministers from over 90 to around 60."
The moves could allow expensive central London buildings to be sold off, producing more money for public services without raising taxes.
Among the changes being considered are:
- The Scotland and Wales Offices, the Office of the Deputy Prime Minister and, once devolution is complete, the Northern Ireland Office should be merged into a new Department of the Regions.
The "corporatist relic" the Department of Trade and Industry would become the Department for Consumer Protection and Enterprise, taking in the industry parts of the Department for Culture, Media and Sport (DCMS).
- The rest of the DCMS's functions could be decentralised - as could happen too with the Department for Environment, Food and Rural Affairs
- A new Department for the Environment, Rural Affairs and Transport would be set up.
Decentralising health and education would also mean "substantial cuts" in bureaucracy from the centre.
The party is hoping to make savings of at least one per cent of total government spending to reallocate to priority areas - about £5bn in real terms.
He added: "Bitter experience has proved that grand schemes to save billions by cutting down the number of paper clips never get anywhere.
"We are talking about deep and fundamental change."
Advocates of the policy view it as a return to the kind of economic liberalism championed by 19th Century Prime Minister William Gladstone.
But sceptics would prefer the party's emphasis to be on raising tax rates for top earners.
Chief Secretary to the Treasury, Paul Boateng, said Mr Kennedy's sums did not add up.
"Charles Kennedy's speech is once again a menu without prices," said Mr Boateng.
"No one will trust what he says on the economy or public services because he has failed to provide any details of the savings they say they will find and no clear costings for their policies."