The state should "back off" and allow charities and private organisations a bigger role in running public services, the Liberal Democrat leader has said.
Nick Clegg set out proposals for public service reform in his first keynote speech to party activists.
He advocated liberating schools from excessive state interference and guaranteeing patients hospital treatment within a set time.
Mr Clegg was addressing the party's grassroots at a conference in London.
He outlined plans for a new generation of non-selective, so-called "free schools".
These would be free from government interference with councils reduced to an overseeing role.
The schools would be created by "any suitable sponsor", including parents, charities or voluntary and private organisations.
Mr Clegg said the state should only intervene to allocate money fairly, ensure equal access and see standards are maintained.
He called for abolition of the two lowest GCSE pass grades - F and G - arguing that "it is time to call a fail a fail and raise expectations".
And he invited controversy by proposing that patients should be treated free in the private sector if the NHS could not provide treatment within a defined period.
Ahead of his speech, Mr Clegg told BBC Radio 4's Today programme: "Experience from the best, most progressive school systems around suggests central and local government needs to then step back and allow grassroots organisations, parent groups, community groups, voluntary groups and others to then innovate in providing schools to the pupils in the area."
"That mix between circumscribed state innovation and local bottom-up innovation is the mix I think we should be aiming for."
Mr Clegg also called for minimum education standards monitored by a new educational standards authority, formed of Ofsted and the exams watchdog, the QCA.
"The government reports as 'passes' some grades which we know are in reality of no value in today's labour market," he told the party faithful.
"What value exactly should an employer place on a G or F grade? You can get a G, in some cases, for a mark of about 20%."
On the NHS, Mr Clegg insisted giving patients a guarantee of treatment within a specified period would not encourage "flight" to the private sector, but rather act as an incentive for the NHS.
And he said patients should be given their own health budgets to spend on treatment for long-term and chronic conditions, particularly mental health problems.
Urging a "progressive" agenda, Mr Clegg made it plain he had no intention of raising taxes, telling supporters: "The big questions now are these - how do we make Britain a fairer place without raising the overall tax burden?
"How do we promote real social mobility without relying on the discredited politics of big government?
"In seeking to make Britain fairer, we need to stop just asking, 'How much?', and to start thinking hard about, 'How?'.
"Marrying our proud traditions of economic and social liberalism, refusing to accept that one comes at the cost of the other. On that point, if not all others, the controversial Orange Book in 2004 was surely right."
Mr Clegg was a co-author of the book, which called for the party to shift to a more pro-market, less regulative agenda.
Its call for choice and private sector innovation in public services was seen by some as a bid to attract Tory voters.