This most fateful week in politics will determine the shape of our state, the future character of British politics and how this country chooses to make the massive economic adjustments that lie ahead. The debates and campaign should have measured up to the nature of these choices. They did not. A hesitant, cynical and concerned electorate is hedging its political bets. On this weekend's opinion poll evidence, we will wake up to a hung parliament on Friday, with the Conservatives the single biggest party but short of even 300 MPS. On the other hand, a coalition of Liberal Democrat and Labour MPs, perhaps including the Welsh and Scottish Nationalists, will be able to command a majority if they can find a way to agree.

Politicians can connive in the old system. Nick Clegg could permit a minority Tory government to form because it has won the most seats and the highest share of the popular vote. David Cameron may offer Clegg a few concessions to gain his consent, but he will go to the country again before the pain of his economic measures are felt and as soon as the Lib Dem surge fades. He will want to win a proper mandate for a fully fledged Conservative government and then refine the first-past-the-post voting system, reduce the number of constituencies by 10% but in so doing redraw their boundaries to be fairer to the Tories and disqualify Scottish and Welsh MPs from voting on English issues.

The state will become a Conservative fiefdom, with even local police forces directly run by Tory politicians in the name of "democratic accountability". The City of London will not be reformed. Wealth will become ever more concentrated in fewer hands. Scotland, Wales and many English regions will be devastated by swingeing public spending cuts – almost their sole economic prop for the last decade – and by ongoing de-industrialisation.

The management of an economy burdened by excessive private debt, fragile banks and a faltering economic recovery will be ideological. The prison population will grow even faster than under Labour as populist social repression intensifies.

There will be some worthwhile improvements – the scrapping of ID cards and aspects of the Big Society programme which has been too quickly dismissed by liberal critics – but in the round Britain will become a meaner, less generous and more unequal society despite David Cameron's declared intentions. This will be Murdoch's Britain, with the BBC to be cut back and Sky's influence extended. Government will be in thrall to the right of centre press. The sale of our companies to the highest foreign bidder will accelerate.

Or there is a second choice. Labour and the Lib Dems can form a time-limited coalition administration for two years with a negotiated programme of government. There will be three great aims. The first will be constitutional reform culminating in a referendum on introducing a proportional voting system and a promise to have a general election immediately afterwards. The second will be root-and-branch reform of British finance and putting in place a British innovation ecosystem to support wealth and job generation. And the third will be a deficit reduction programme that is managed not to damage recovery, an issue on which Gordon Brown is right.

Beyond those initiatives, the coalition could introduce the pupil premium to improve the conditions of disadvantaged working-class children. It will build on the advances of the NHS. It will not politicise the police service. It will suspend the introduction of ID cards. It will start building a less carbon-dependent civilisation. Above all, it will usher in a world of pluralist politics, coalition government and deliver progressive ideas from a broader strand of opinion than just whatever coterie is around the leadership of the Labour party.

A growing number of the outgoing cabinet would like this to happen. Lord Adonis, the transport secretary, has made the case in public. But none of them has yet made the paradigm shift from old politics. They think that Brown could remain prime minister, for example, arguing that he commands the majority of the MPs in the coalition; any other outcome would be "unstable". There might be an equal number of cabinet seats for the Lib Dems, but Number 10 would remain in Labour control.

The proportional voting system put to the country at the referendum would be the pale version offered by Labour in its manifesto and nothing more radical. They are desperate to avoid Labour coming third in the popular vote. They claim a vote for a Lib Dem is to give the election to the Tories. They want to sustain the Tory-Labour duopoly.

In the next five days, the Labour leadership has to transform its thinking. It has to prepare itself for the most astonishing 12 hours in its history. It must start by recognising that no era of new politics can be plausibly ushered in by Gordon Brown. He will have lost the general election – losing more than 100 seats while the Tories win 70 or 80 and the Lib Dems 20 or 30. The country will not accept that having kicked him out he is miraculously back. Only a monumentally unfair voting system will have given Labour three times the Lib Dems' parliamentary representation. Brown cannot be part of the future.

Who will lead the coalition? Here, Labour must, in British terms, learn lessons in far-sightedness and generosity from people such as Mandela. On Thursday evening, a group of senior Labour politicians from all wings of the party has to tell Brown to go and offer to deliver Labour to a Lib Dem-Labour coalition led by Clegg. The deputy leader of the party, Harriet Harman, should immediately open negotiations with the Lib Dems over the programme for government while Labour hammers out who will lead it into the general election of spring 2012.

Will Clegg accept? It is the best and possibly only opportunity his party will have to change the voting system. To refuse would be to shy away from an historical opportunity. Would the country accept? The two parties together will constitute more than 55% of the popular vote and a majority in the House of Commons. It was what the electorate voted for and there is deep wisdom in democracies. To have anyone else leading the coalition would be illegitimate. Will the markets worry about weak coalition government and sell the pound? Not if the new government is clear and fast in setting out which extra taxes it will raise and what spending it will cut, even if it decides to be measured about the timing of their introduction.

The near-insuperable obstacle is the Labour party. It has been a beneficiary of the old political duopoly for a long time. A moment of this type may be beyond it. Some of the key figures will find it very hard to swallow such a bitter pill or even accept the case for more radical proportional representation. After all, Labour will have more MPs. Why is its leader not the prime minister? It will worry that Clegg will not make a reliable coalition partner etc, etc. Labour pays lip service to pluralist politics and the "progressive consensus", but when the chips are down it believes in its heart that it is the sole progressive party.

These are understandable reactions. The Labour party, for all its recent history, is Britain's agent-in-chief of change. Our health service, our universities, our schools and the best parts of our welfare system bear its stamp. It carries a willingness to challenge private monopoly power, class privilege, unearned status. It exists to fight for ordinary and disadvantaged people.

But the lesson of the last 13 years, and the prospect for the next 13, are inescapable. The party needs allies, fresh energy and to find its courage again. There are other values that count – liberty, individual conscience, respect for the community , wariness about too much state – that Labour does not hold dear in the same way as the Lib Dems.

It is this coalition of values and interests that must underpin a great, reforming, transitional, coalition government – and what I believe the country now needs and demands. On Thursday, use your vote to get it. If the Labour party even now could change the state and our politics, it would be the greatest achievement in its history.