The UK should follow in California’s footsteps and legalise cannabis, according to a new report into domestic drugs policy.

If cannabis were made legal and regulated by the Government, taxation from sales and savings on criminal justice costs could net the Treasury up to £1bn, claimed the report, which has been backed by MPs from all the major political parties.

Cannabis is the most widely used illegal drug in the UK, with 6.7 per cent of adults aged between 16 to 59 using it in the past year, according to the Home Office.

The report from liberal think-tank the Adam Smith Institute and Volteface accused the Government of failing in its current cannabis policies, which it called an “embarrassment”.

“The Government strategy is based around three main pillars: reducing demand, restricting supply and building recovery. All three are failing,” it said.

Instead, it proposes a regulated form of legalisation which it claims would ensure quality and purity and reduce crime.

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Former deputy prime minister Nick Clegg and former health minister Norman Lamb joined Labour and Tory figures to argue that the UK should follow the lead of the United States, where recreational cannabis use is already legal in a number of states including Washington and Colorado.

Four further states, including California, voted to legalise marijuana in this month's elections, while Germany is preparing to legalise cannabis for medical purposes and Canada makes plans for all-out decriminalisation.

The Netherlands effectively decriminalised cannabis decades ago while Portugal legalised it in 2001.

Mr Clegg said UK ministers should start planning for the possibility of a legal market for the drug so as not to fall behind other nations.

“British politicians need to open their eyes to what is happening in the rest of the world,” he said. “Cannabis prohibition is being swept away on a tide of popular opinion and replaced with responsible legal regulation.

“Now is the time for ministers to start writing the rules for this legal market, including age limits and health warnings, so that we can finally take back control from the criminal gangs.”

Mr Clegg also wrote a letter to the British Medical Journal last week in which he claimed cannabis is “much safer” than many other medicines in use and said continuing to criminalise it was “absurd”.

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The new report referred to the “last major campaign to legalise cannabis in this country” over six months by the Independent on Sunday in 1997, which culminated in a protest in central London attended by tens of thousands.

However, it said the march organised by the newspaper was a “high-water mark of the campaign rather than a stepping stone in the stream of progress towards regulation”.

The report argued that Britain's “dark ages” drugs policy has failed to stop drugs being manufactured and used, and to stop associated crime, corruption and killing.

It called for “root and branch” reform to legalise and regulate cannabis to ensure it meets acceptable standards, and to remove the market for criminal gangs.

A legal cannabis market could be worth £6.8bn to the economy annually, potentially netting between £750m and £1.05bn in tax revenues and reduced criminal justice costs, it said.

The report claimed the number of offenders in prison for cannabis-related offences in England and Wales would also probably drop from the current 1,363, who cost taxpayers £50m a year.

Mr Lamb said: “Prohibition is harmful and counter-productive, helping neither to reduce drug use nor the risks to public health.

“While other countries and US states are increasingly coming to adopt a more enlightened approach to drug policy, we are stuck in the dark ages, filling the pockets of criminals and perpetuating the stigma which prevents so many drug users from seeking help.”

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Conservative former cabinet minister Peter Lilley, Labour MP Paul Flynn and co-leader of the Green Party Caroline Lucas also backed the report.

“The UK's 45 years of harsh prohibition has multiplied use and harm,” said Mr Flynn.