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"The greatest danger is that we fail to face up to the nature of the threat we are dealing with.

What we witnessed in London last Thursday week was not an aberrant act. It was not random. It was not a product of particular local circumstances in West Yorkshire.

Senseless though any such horrible murder is, it was not without sense for its organisers. It had a purpose. It was done according to a plan. It was meant.

What we are confronting here is an evil ideology.

It is not a clash of civilisations: all civilised people, Muslim or other, feel revulsion at it.

But it is a global struggle and it is a battle of ideas, hearts and minds, both within Islam and outside it.

This is the battle that must be won, a battle not just about the terrorist methods but their views. Not just their barbaric acts, but their barbaric ideas.

Not only what they do but what they think and the thinking they would impose on others.

This ideology and the violence that is inherent in it did not start a few years ago in response to a particular policy.

Over the past 12 years, Al Qaeda and its associates have attacked 26 countries, killed thousands of people, many of them Muslims.

They have networks in virtually every major country and thousands of fellow travellers. They are well-financed. Look at their web-sites.

They aren't unsophisticated in their propaganda. They recruit however and whoever they can and with success.

Neither is it true that they have no demands. They do. It is just that no sane person would negotiate on them.

They demand the elimination of Israel; the withdrawal of all westerners from Muslim countries, irrespective of the wishes of people and government; the establishment of effectively Taliban states and Sharia law in the Arab world en route to one Caliphate of all Muslim nations.

We don't have to wonder what type of country those states would be. Afghanistan was such a state. Girls put out of school. Women denied even rudimentary rights. People living in abject poverty and oppression. All of it justified by reference to religious faith.

The 20th century showed how powerful political ideologies could be.

This is a religious ideology, a strain within the world-wide religion of Islam, as far removed from its essential decency and truth as Protestant gunmen who kill Catholics or vice versa, are from Christianity.

But do not let us underestimate it or dismiss it. Those who kill in its name believe genuinely that in doing it, they do God's work; they go to paradise.

From the mid 1990s onwards, statements from al Qaeda, gave very clear expression to this ideology.

Every Muslim, the minute he can start differentiating, carries hatred towards the Americans, Jews and Christians. This is part of our ideology.

The creation of Israel is a crime and it has to be erased.

You should know that targeting Americans and Jews and killing them anywhere you find them on the earth is one of the greatest duties and one of the best acts of piety you can offer to God Almighty.

Just as great is their hatred for so-called apostate governments in Muslim countries. This is why mainstream Muslims are also regarded as legitimate targets.

At last year's party conference I talked about this ideology in these terms:

Its roots are not superficial but deep, in the madrassehs of Pakistan, in the extreme forms of Wahabi doctrine in Saudi Arabia, in the former training camps of Al Qaeda in Afghanistan; in the cauldron of Chechnya; in parts of the politics of most countries of the Middle East and many in Asia; in the extremist minority that now in every European city preach hatred of the West and our way of life.

This is what we are up against. It cannot be beaten except by confronting it, symptoms and causes, head-on. Without compromise and without delusion.

The extremist propaganda is cleverly aimed at their target audience. It plays on our tolerance and good nature; it exploits the tendency to guilt of the developed world; as if it is our behaviour that should change; that if we only tried to work out and act on their grievances, we could lift this evil; that if we changed our behaviour, they would change theirs.

This is a misunderstanding of a catastrophic order.

Their cause is not founded on an injustice. It is founded on a belief, one whose fanaticism is such it can't be moderated. It can't be remedied. It has to be stood up to.

And, of course, they will use any issue that is a matter of dissent within our democracy. But we should lay bare the almost-devilish logic behind such manipulation.

If it is the plight of the Palestinians that drives them, why, every time it looks as if Israel and Palestine are making progress, does the same ideology perpetrate an outrage that turns hope back into despair?

If it is Afghanistan that motivates them, why blow up innocent Afghans on their way to their first ever election?

If it is Iraq that motivates them, why is the same ideology killing Iraqis by terror in defiance of an elected Iraqi government?

What was September 11 2001 the reprisal for?

Why even after the first Madrid bomb and the election of a new Spanish government, were they planning another atrocity when caught?

Why if it is the cause of Muslims that concerns them, do they kill so many with such callous indifference?

We must pull this up by its roots. Within Britain, we must join up with our Muslims community to take on the extremists. Worldwide we should confront it everywhere it exists.

Next week I and other party leaders will meet key members of the Muslim community.

Out of it I hope we can get agreed action to take this common fight forward.

I want also to work with other nations to promote the true face of Islam world-wide.

Round the world, there are conferences already being held, numerous inter-faith dialogues in place but we need to bring all of these activities together and give them focus.

We must be clear about how we win this struggle. We should take what security measures we can.

But let us not kid ourselves. In the end, it is by the power of argument, debate, true religious faith and true legitimate politics that we will defeat this threat.

That means not just arguing against their terrorism but their politics and their perversion of religious faith.

It means exposing as the rubbish it is, the propaganda about America and its allies wanting to punish Muslims or eradicate Islam.

It means championing our values of freedom, tolerance and respect for others.

It means explaining why the suppression of women and the disdain for democracy are wrong.

The idea that elected governments are the preserve of those of any other faith or culture is insulting and wrong.

Muslims believe in democracy just as much as any other faith and given the chance, show it.

We must step up the urgency of our efforts. Here and abroad the times the terrorists have succeeded are all too well known.

Less known are the times they have been foiled. The human life destroyed we can see. The billions of dollars every nation now spends is huge and growing. And they kill without limit.

They murdered over 50 innocent people last week. But it could have been over 500. And had it been, they would have rejoiced.

The spirit of our age is one in which the prejudices of the past are put behind us, where our diversity is our strength. It is this which is under attack.

Moderates are not moderate through weakness but through strength. Now is the time to show it in defence of our common values.

One feature of last week's terrible events was the performance of our public services. They were magnificent.

We can be very proud of our public servants. In the second part of my speech, I want to focus on public services - the change programme currently under way and how we improve it.

Our passion for public service is fundamental to our politics. Public services bind a nation together.

The NHS principle - healthcare according to need not ability to pay – retains today its enduring appeal.

The idea of young people able to get on whatever their class, race or creed, created our state education system.

These values are the most powerful motor force in politics: a sense of justice, of compassion and an essential and decent instinct that we are here, not just to exist in this world but to make it better for those that come after us.

It is these values that inspired 19th century philanthropy and then the 20th century welfare state.

Yet just as the 1945 Labour government understood the limits of philanthropy as a route to social justice, so today we look for new ways to old objectives.

Social justice is not static. It was a revolution in justice 60 years ago for people to have access to basic healthcare and schooling. Not so today.

The reason I care about change in public services is because I care about public services.

And I get angry when I see the system accept failure.

Because the victims of failure are never the middle class, the well off, those with the connections.

It is the vulnerable, the ones at the bottom of the heap, the ones struggling not to get on but to get by.

Every child in a poor performing school is an affront to social justice. Every patient treated badly, not because of a mistake but because of the system, is a scandal demanding remedy. Every old person afraid, a rebuke to our sense of solidarity.

And if it is a system that is keeping people back, the system should change. Not to change it is to say we care more about the system than the people. That is totally unacceptable.

And, of course, the reforms must be the right ones, the changes able to achieve their purpose.

But far too often people claim a change is a breach of principle whereas in reality, they're not protecting a principle but a practice and often an outdated one at that.

The good news is that there are real examples of progress, driven by our willingness to overcome resistance to change but also by the willingness, indeed enthusiasm of many public servants to let their own creativity and innovation loose.

This is a time to push forward, faster and on all fronts: open up the system, break down its monoliths, put the parent and pupil and patient and law-abiding citizen at the centre of it. We have made great progress.

Let us learn the lessons of it not so as to rest on present achievements but to take them to a new and higher level in the future.

It is now very apparent just how difficult were the problems of the public services we inherited in 1997.

NHS waiting lists had risen 400,000. All major professional training places had been cut. The hospital building programme had ground to a halt.

Funding per pupil in schools had been cut. The school building infrastructure was crumbling.

We were way behind other countries in computer and IT. Student funding in universities had declined by over a third.

In the criminal justice system - perhaps in the worst shape of all - the number of offences brought to justice had fallen by a third, there was no common IT system at all, trials were often ineffective and it was a system built on an edifice of rising crime and ASB that seemed to be demoralising police and public alike without hope of action.

But in a sense it was worse than the bare statistics reveal.

The systems in each area were also hopelessly outdated.

Partly because of the lack of investment but as much because of a lack of ambition within and for the services, there was a sense that the service was there, delivered to the consumer of it without much regard to their needs and preferences.

You got what you were given. Sometimes good, sometimes not. And if not, not a lot you could do about it.

In other words, lack of investment masked what was in reality a much more profound problem than funding alone.

It was a failure to modernise, to go back to the first principles of public services and ask what their purpose and values are; and then apply them not to the post-war years but to the early 21st century.

In every other walk of life, the position of the consumer had been revolutionised. As their demands changed and became more individualised, so producers of goods and services were forced to customise, to adapt and be flexible, to accommodate them.

The danger in unreformed public services is clear.

The whole basis of the 20th century settlement in public services and the welfare state was that we were in it together; the services were universal. To make sure this happened, the NHS and state schools were free at the point of use. So wealth was no barrier to participation.

It was and is a fine vision.

But in the 21st century it is not enough.

Universal services won't survive simply by the state or provider insisting that they remain universal in the sense of being free.

They have to be services with the standards and quality today's users and citizens expect.

If not, whatever the state decides, the citizen will decide otherwise.

Those that can afford to do so will opt out. In reality this is precisely what the previous Conservative government were content to have happen.

Their vision was of the inevitability of the two-tier services, basic ones for those without the necessary wealth, excellent ones for those with it.

The consequence of this is not simply the breach of a deeply held political principle. It is felt in the lives of people.

Education is and should remain the number 1 priority of the government because without it, there is no hope of creating a society where merit not inherited wealth determines success.

True we have halved the number of failing schools. In London no borough averages below 40 per cent good GCSEs. There used to be many under 25 per cent.

True, we have raised primary school results to 75 per cent up from just over 50 per cent when we came to power. But our education system still fails far too many.

And we know a great school is not just about a great new school building.

In the NHS, all waiting lists are down, as are deaths from cancer and heart disease.

There is, as one professional in the NHS put it to me, a quiet revolution going on.

But diagnostic waits in parts of the country are still unaccountably long and though waiting lists are down by well over 300,000, there are still 800,000 in-patients on them.

In each part of the criminal justice system, all the main indicators are turning round, but let's be frank: from a very low base.

The investment has been crucial and remember: we can be proud that we are the only government anywhere in the world of a comparable size increasing public spending on health and education by a proportion of national income, every year, year on year.

But, eight years in, there is a body of empirical evidence to draw on. The conclusion of it is plain: money alone doesn't do it.

It is where money has been combined with modernisation of systems, working practices and incentives that the best results have come.

The literacy and numeracy strategy achieved the quantum leap in primary schools.

Specialist schools out-perform traditional comprehensives, and City Academies and foundation schools, in time, will out-perform both, often taking over schools where fewer than 20 per cent of children were getting five good GCSEs.

It is choice that has cut cardiac waiting times to a maximum of 3 months and saved lives.

It is the mix of public and private and voluntary sectors now servicing the NHS that is seeing dramatic cuts in waiting for cataracts and routine elective surgery.

It is where GP practices are changing the skill set of their professionals, doctors performing some surgery, nurses with old demarcations broken down, new disciplines like physiotherapy imaginatively employed, that the patient is experiencing the service they are entitled to expect.

And it is where we have gripped the law in areas like anti-social behaviour and transformed it, that at long last, police and communities see the prospect of fighting back.

None of this happens unless the system change is in place. In our first period of office, necessarily, we had to rely almost exclusively on central command, targets and guidance to lever up results and standards.

But this was to allow time to introduce change that would become self-sustaining.

That change ultimately depends on the user having the power to drive change in the service; to be able to say: I'm not accepting what I'm given, if it isn't good enough.

That in turn depends on there being other choices available.

Now for the well-off, that exists. They have choice. They can go private and pay.

Our ambition has to be to construct a system in which that choice is exercised within the provision provided free at the point of use.

And I know people say: what we want is a good local school, a good local hospital or GP.

Correct. But what if they aren't good? Then the consumer of the service must be able to go elsewhere; and the provider must know they are able to.

All these reforms are, in the final analysis, simply means to an end. The end is not choice. The end is quality services irrespective of wealth.

The end is opportunity to make the most of your ability whatever your start in life. The end is utterly progressive in its values.

But the only progressive means are those that deliver the progressive ends.

The truth is we still have far too many barriers holding back the creativity and innovation of our public services.

Why shouldn't good schools be able to expand as a matter of right? Why shouldn't new providers of schooling enter the system, provided they meet the requirements of national standards?

Extended schools and flexible school days, greater flexibility in how staff are taken on and employed, letting successful schools get on with it and concentrating on those that are failing or coasting in mediocrity: are all vital areas of reforms we need to drive forward faster and further.

Likewise, in NHS provision, we are introducing payment by results; new providers; practice-based commissioning; and a new electronic patient record.

All of it will allow patient choice to develop rapidly. By 2008 the whole waiting time - door of GP to door of operating theatre is to be a maximum of 18 weeks.

But still patients find GP lists in certain areas closed; restrictions on pharmacies and nurse prescribing; a lack of imagination in services for chronic disease management or child birth that treats the patient as someone incapable of being in charge of their own choices.

And, as for the criminal justice system, and policing in our communities, we know what a huge distance there is to go before the law-abiding citizen is really at the heart of the system.

If this were not enough, we have wholly new services like universal childcare and Sure Start set to be rolled out.

So it is a massive programme of change on which we are embarked, shaped by the five year plans produced this time last year and set out in greater detail than ever before in the manifesto.

We have a white paper on education in the autumn, as well as one on further NHS reform, and a green paper on welfare reform.

There will be an additional paper on the whole 'respect' agenda, including on anti-social behaviour and school discipline.

In each area, we want your input. The national policy forum was incredibly important in making our manifesto the most ambitious we produced.

This is a moment of renewal, as we begin a third term, and it is essential the party are involved in every aspect of it.

We have made some great changes in our country. Just recently the Olympics and G8 provided further evidence of this country's strength and determination. We look forward to the future with confidence.

Our manifesto was the outcome of a strong partnership between the party in government and the party in the country.

It is a manifesto which aimed higher in widening opportunity and tackling insecurity than any Labour manifesto before.

It is also a manifesto more radical than ever before in its message of modernisation and reform.

Ambitious in our goals, clear sighted and bold in our means – this is when we as a party are at our best.

It is what has brought us three election victories and the immense progress of the last eight years and it will be the same vision and determination that will make this third term our best term yet."

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