The effect of 11 September on world economic confidence, not to say on airline and tourist industries, is there for all to see. And we know they would commit further atrocities if they could. So winning the battle against international terrorism is to win for the economy too. Jobs, living standards, business and trade need us to defeat this terrorist menace. Each step towards our goal is a step of reassurance for our own way of life. Restoring stability to international relations is vital not just for foreign policy and national security; but also for economic confidence and prosperity.
However, even before 11 September, the world faced a more difficult economic climate. The US, Japanese and European economies were already slowing.
Britain is not immune from such changes in the world economy but is better placed than any other G7 country to weather them. The fundamentals of our economy are the strongest they have been in a generation:
Public finances are strong.
Inflation is low - the lowest across the EU, and the longest sustained period of low inflation since the 1960s.
As a result, interest rates are low - their lowest for almost 40 years.
Unemployment is low - the lowest level for 25 years.
And employment is high - the highest of any major EU nation.
It is important to understand how we got this strong position.
In the 1980s under the previous government, there were fundamental labour market reforms, which we have built on through the New Deal and the programme of welfare reform designed to make work pay. As a result we have one of the most flexible labour markets of any major economy.
Then there were the macro-economic reforms of the late 1990s under this Government. We have built a strong base for business through independence for the Bank of England; tight financial discipline, reducing the deficit; and cutting the costs of economic failure; with real terms social security spending falling for the first time in decades.
Our task now is to keep all these reforms in place and then to correct the remaining structural weaknesses of the UK economy.
So on issues of employment and regulation, we have a minimum wage and fair rights at work. But there will be no dilution of our essentially flexible labour market.
According to the OECD, the UK has among the least regulated product and labour markets of any major industrialised country. It will stay that way.
It is one continuing reason why last year the UK was the third largest recipient of inward investment - over $130 billion - in the world and the leading location in Europe.
To answer directly the concerns your Director-General stated last week: yes, there may be areas - for example when employees are transferred to the private sector and may lose pension rights - where we will look to improve employees' rights.
But there will be no new ramp of employment legislation taking us backwards to the 1970s. The basic settlement in the last Parliament will remain.
Likewise, we will not take risks with macro-economic stability. Those fiscal reforms will stay. They are not just right in themselves, but vital to encourage long-term investment. If we can succeed in flattening as far as possible the swings of the economic cycle, then business has greater confidence in its ability to plan and invest.
So let me turn to the weaknesses in the UK economy that remain.
First, productivity. The gap between us and our competitors remains worryingly large in key areas. It can only be filled by investment, notably in education, skills and technology; by adding value to the goods and services we produce.
This is the case for the extra investment in schools. Education spending is rising now every year as a proportion of national income. Over 17,000 schools have seen substantial capital improvements. Teacher recruitment is rising - there are 11,000 more teachers, and 44,000 more classroom assistants, than in 1997. The development of specialist schools, City Academies, new vocational education and far greater flexibility in teacher employment is all part of a programme designed to move on beyond the old comprehensive versus selective debate and give our education system the diversity it needs.
We have set bold targets: three-quarters of 14 year-olds up to standard in the basics of English, maths and ICT by 2005, and 50 per cent of young people progressing to higher education by 2010.
We have also made adult basic skills a key national priority - with a target of reducing the number of adults without basic literacy and numeracy by at least 750,000 within three years.
Numbers at universities are rising, though there are still critical questions of funding to resolve.
Investment in science is increasing by over ??1 billion.
We are seeking to encourage innovation with the R&D tax credit, initially for small firms, which we are now consulting on extending. In particular fields like renewable energy, with potential for the future, we are funding new programmes of research.
The UK is already one of the most connected economies in the world. Internet use is higher than in any other European country.
The new challenge is broadband. We are in the early days of broadband but it has the potential to revolutionise many aspects of our lives. It has the potential to increase productivity, enhance competitiveness and enable new markets to be reached. It could radically improve public services. And it can help rural and remote economies - geographical location will no longer be a restriction to competing with urban rivals.
We are already taking the action necessary to advance broadband in Britain:
* more competition by driving forward local loop unbundling and new wireless and satellite services. * more effective regulation where competition is absent to ensure prices are internationally competitive. * promoting exciting content to attract users to broadband services.
We spend millions every year on IT and communications. It is clear that if we can manage our role as purchaser better we can both improve value for money and have a significant impact on the availability of broadband.
So we are asking the Office of Government Commerce to look at whether there is more that can be done to help Government departments and others buy broadband more effectively.
In Digital Television we lead not only Europe but the world, with nearly 40% of people in digital households. We have a target to switch off analogue TV between 2006 and 2010. Despite the turbulence in the markets that objective remains achievable. Our Digital TV action plan will ensure Government plays its part. For its part, industry needs to continue to encourage more and more households to recognise the attractions of Digital - a better quality of picture, far more choice for consumers, and the scarcely tapped potential of interactive TV.
Increasingly the lines between traditional manufacturing and service industries are being blurred. In reality, for all the talk of a 'new' economy, we have one economy, all of which is affected profoundly by developments in both technology and global markets.
I fully acknowledge that with the slow down in the world economy and the weakness of the Euro, life has been and is tough for manufacturing in the UK. This is one reason why the Euro could be of benefit to manufacturers. But, apart from currency stability, there is no realistic alternative to the policy of maintaining economic discipline and improving productivity.
And despite this vulnerablity, the sector has increased exports by almost a quarter since 1997 and improved productivity by 13 per cent over the same period. The UK has world-leading firms and plants across manufacturing from pharmaceuticals to aerospace and chemicals.
We know Government has a role to play in setting the right framework. Again, whether it is in tax incentives or the work of the DTI, we want a close relationship with the CBI on how we take this forward.
Secondly, there is the chronic weakness of our infrastructure. You know the crucial importance of an efficient transport system. We all know we don't have one. Decades of under-investment have left their mark.
The only solution is to reverse that trend. And that is the central goal of our Ten Year Transport Plan, which foresees ??180 billion of investment.
As for Railtrack, the simple truth is that we could not justify pouring ever more public money into a business that was going bust and failing to deliver.
Shareholders will receive what they are entitled to. We have secured the position of lenders, creditors, and employees.
And our new structure for the railways, including simplified regulation, will be resolutely focused on improved service quality for passengers and freight users. The investment is there. Investment in the tube is there too. We now need a structure that delivers.
Between this year and 2003-04, Government investment in infrastructure - excluding private finance - will increase by 16 per cent each year, to ??39 billion.
The investment programme is vital for future economic success. It is also a timely economic stimulus at a time of slowing growth. It has to be funded.
We will keep taxes as low as possible. But, as I have said before, long-term investment must come before short-term tax cuts.
Alongside the money, has to come the modernisation. There will be absolutely no going back on public service reform. The principles are clear:
* A national framework of minimum standards, inspection and accountability, with results published. * Within that framework, power devolved down to the front line of delivery, to encourage diversity and local creativity. * Changing staff conditions to allow much greater flexibility in employment. * Greater choice to consumers. Services need to be customer-focused, designed around their users, with alternative choice of provision.
Business has a key role to play, for example, in transport and other infrastructure investment through Public-Private Partnerships. PPPs do not substitute private for public investment. But in involving the private sector, they not only increase the quantity of total investment, but also the skill with which it is managed. We value the expertise you can bring to public projects in innovation, effective risk management, and increased efficiency - delivering projects on time and on budget. This partnership will proceed and where it makes sense, expand.
Thirdly, the way Government itself works must improve. On regulation, new processes including the Regulatory Reform Act give us powerful tools to help cut down unnecessary new regulation and strip out redundant existing regulation.
I have asked all Whitehall departments to identify by the end of this year areas of legislation that are ripe for reform under this new procedure. We will then publish a Government-wide action plan containing firm commitments to specific reforms and initiatives which will aid both business and the public sector. If you have views about the most useful areas to focus on, then we want to hear them.
The planning system also needs a radical overhaul. It will start with a Green Paper published in December. We cannot continue with a system that takes over 8 years to decide Terminal 5 and where major decisions in the interests of the country are delayed. The Civil Service has to adapt to a new world - as reform in both the DTI and elsewhere in Whitehall should prove. This is again a programme for the long-term, but there are a series of changes fundamental to the way Whitehall works that will, I believe, yield benefits over time.
Fourthly, we must always remember that today no economy stands alone. We are deeply affected by the global and European economic systems in which our businesses trade. Europe already accounts for 60 per cent of our trade.
Here our strategy is to push forward radical reform. We need further action at EU level to encourage enterprise and innovation, remove unnecessary regulations and develop a flexible and more highly skilled workforce. And we must remove the last obstacles to fair competition across Europe in energy, financial services, transport and other sectors. A single currency makes a single market essential.
At the Barcelona economic reform summit in March and beyond, we will try to build as broad a coalition as possible to deliver the reformed and strengthened European economy, we all want to see.
I ask business to be our ally in that task. We need to hear your voice loud and clear, telling us what works in Europe and what must change.
Despite whatever you read - warming up or cooling down - the policy on the Euro has not altered an iota. In principle, we are in favour, in practice the tests must be met. Provided that the assessment of the 5 economic tests for membership of the Euro - which is to be completed within 2 years of the start of the Parliament - is positive, we will make the case to the British people in a referendum.
As the Chancellor said to you yesterday, the benefits in terms of stability, trade and investment are plain to see. The technical work to complete the assessment is underway.
Of course, Europe is not the only arena where we will push for greater economic liberalisation and integration. Growth in world trade is essential both to our economy and those of the developing nations. Later this week, the world's Trade Ministers will meet in Doha to launch a new global round of trade negotiations. Again we must be pushing for as radical a round as possible.
These then are the challenges that lie ahead. I do not under-estimate them.
But sometimes we over-state our problems and under-state our achievements. We must remember the strength of our economy - especially in these uncertain times.
Britain is now the world's fourth largest economy. It has over a quarter of Europe's top 500 companies. It has the best record in Europe on jobs, inflation and small business growth of any major EU nation.
Of course, we need to do more to create an enterprise culture, where people feel success is admired, new business ideas flourish and the entrepreneurial spirit more widely spread.
But this is changing, albeit too slowly. And the weaknesses I have described in the UK economy are, at least, easily identifiable and measures are coming in place to deal with them.
The final point I want to make is in respect of our relations with business. We will not always agree. But there is a vast area on which we can agree. The partnership we have tried to build with you over these past four years, is one I am deeply committed to. It is a founding principle of New Labour and it will not change. In these challenging times, when in the aftermath of 11 September all problems are intensified, this partnership will be of fundamental importance to our ability to overcome them. It is that partnership which I re-affirm today. Working together, I am optimistic that the stronger more prosperous Britain we wish to see will become a reality.