JEREMY PAXMAN:
Prime Minister do you understand why people think this country doesn't work properly?

TONY BLAIR:
I understand why people believe there are problems with parts of the public services, but I think we should get it in perspective.

JEREMY PAXMAN:
When you say, get it in perspective, you have had five years?

TONY BLAIR:
But let's just look at what is working extremely well. We have an economy that is now the fourth-largest economy in the world, inflation, interest rates, unemployment, the lowest they have been for forty years, we have got the best-ever primary school results the country has ever seen, massive investment in the health service. It is interesting, when I was in Germany on Sunday, doing a television programme there, the whole thesis of their programme was what a wonderful country Britain was, and why can't other countries be more like us. I'm not saying we don't have big problems, we do, we have huge challenges, but we would make a mistake as a country if we thought nothing worked.

JEREMY PAXMAN:
Do you believe people think the trains operate better than when you came to power?

TONY BLAIR:
No, I think people understand there are huge problems with the transport network. There again, I think it is quite important people realise part of the reason for. That it is not just under-investment for a long period of time, it is we have since 1997, 20% more rail passengers, 20% more people on the roads, and 20% more on the London Underground. You have a system coping with cumulative under-investment and a huge increase in usage.

JEREMY PAXMAN:
But your own Transport Secretary says it's got worse since you came to power?

TONY BLAIR:
He's pointing out the fact that when Hatfield occurred we realised there were huge problems with the fundamental infrastructure, that's why we have all the programmes for change and investment there. Again, I think it's important to realise that this will take time to put right, but the investment is there, it's set aside over a number of years.

JEREMY PAXMAN:
But you had every opportunity to get on with this the moment you came into office, you had to wait two-and-a-half years before we even saw a Transport Bill.

TONY BLAIR:
When we came into office we said two things, first of all we would keep to tight spending limits, because we had to get rid of the huge debt that we inherited. I was paying out more on the interest payments in national debt than was spending on the whole of the UK school system. So we had to keep very tight spending limits for two years, then, I didn't actually say at the time, education was our number one priority. The first bit of big investment went into education.

JEREMY PAXMAN:
You said before the 1997 election, "I want people to look at the condition of Britain after five years of a new Labour Government and say they have changed things for the better." In transport you accept you have not done that?

TONY BLAIR:
No, I accept that we have made certain changes and improvements and I accept the overall situation for the reasons I have given.

JEREMY PAXMAN:
Stephen Byers says the railways are worse now than when you came to office?

TONY BLAIR:
Well, as I say what is he is pointing out is, that post-Hatfield we had to put the whole system through a huge change programme, because we had to renew the track literally in every single part of the country.

JEREMY PAXMAN:
Peter Hain says they are the worst railways in Europe.

TONY BLAIR:
Look, I'm not sitting here telling you the transport system is great, that would be an absurd thing to say. What I am saying to you is, sure, you can look at transport and say that is one area where the Government has to do a lot more over the next few years, I agree with that. If you are talking about the condition of Britain overall, I think you would have to say this country is stronger economically, fairer and in terms of our education system, and increasingly in terms of our health system, improving.

JEREMY PAXMAN:
Specifically on railways, when you look at this latest accident, this tragedy at Potters Bar, when you have a situation where Railtrack are unable to discover who was looking after the bolts which secured the points, don't you think this fragmentation has to come to an end?

TONY BLAIR:
That's precisely the reason we took the measures we did and putting in place the Strategic Rail Authority, that helps with that programme of reducing the fragmentation. I should say to you about the particular incident, we don't yet know the full facts, we have an interim report from the Health and Safety Executive, we don't have the full report, it is unwise to speculate until we have it.

JEREMY PAXMAN:
We haven't even implemented the recommendations on from the Cullen Report on the contractors.

TONY BLAIR:
We are implementing them.

JEREMY PAXMAN:
They haven't been yet?

TONY BLAIR:
Sure, but you have to undertake this change in the industry at pace the industry can stand. Let's short cut it, I'm not sitting here telling you the railway system is as it should be, it's not. I'm totally open about that. I am saying to you in the public service reform change programme overall, there is a lot to be proud of, as well as acknowledging there are huge challenges.

JEREMY PAXMAN:
We will look at some of the other areas shortly, but to clear up this question of Railtrack, clearly the railways in this country are in a terrible state, you would obviously accept that. When John Armitt of Railtrack says he needs £6 billion, will you make it available to him?

TONY BLAIR:
We will make available what is promised under the transport plan.

JEREMY PAXMAN:
He says an extra £6 billion.

TONY BLAIR:
We have to see what money we can put forward for transport when we come to the Comprehensive Spending Review, we are pledged already to the ten-year plan. Let me just make one point to you, there was a huge problem as a result of privatisation. Everybody accepts now the fragmentation of the railway system ended up in a situation where there was just an insufficiency of co-ordination. We are putting that right, but it will take time to put that right.

JEREMY PAXMAN:
But Prime Minister, before the last election, John Prescott was talking about a publicly-owned and publicly-accountable railway system, you could have stuck with that, you chose not to.

TONY BLAIR:
It's true we chose not to re-nationalise the railway.

JEREMY PAXMAN:
Do you regret changing your mind?

TONY BLAIR:
We didn't change your mind, we made clear we weren't taking Railtrack back into public ownership. What we have now got is a situation where I think if we are able to get it out of administration in circumstances where it is operating as a commercial entity, but without the interests of the shareholders coming before the interests of the passengers, together with the changes we are making in the Strategic Rail Authority, and I think most people can see that working a lot better than before, I think we will make progress. There's no point in trying to pretend it isn't going to take a lot of time and money over many years.

JEREMY PAXMAN:
Do you honestly believe that Stephen Byers is the man to supervise that change?

TONY BLAIR:
Well, people attack him for all sorts of reasons, but if you look at the three key decisions that he has taken, I think they have been the right decisions. Railtrack couldn't go on as it is. He put new management into Railtrack, that actually is, I think, a lot more successful than the previous management. And, in respect of the Strategic Rail Authority, we have in Richard Bowker somebody who is making a decision. There are all decisions Steve took.

JEREMY PAXMAN:
He can't even control his own press office?

TONY BLAIR:
We can go back into all the ins and outs of what happened in the transport office. I think it is more important that is he is taking strategic decisions in the right way.

JEREMY PAXMAN:
So when he says he will be Transport Secretary by the time of the next election, you agree with that, do you?

TONY BLAIR:
I never comment on re-shuffles.

JEREMY PAXMAN:
He seems to think he will still be there.

TONY BLAIR:
Well, I never do, so. You can sit here and put the question any number of different ways, but I just don't.

JEREMY PAXMAN:
You have confidence in him?

TONY BLAIR:
Of course.

JEREMY PAXMAN:
Total confidence?

TONY BLAIR:
Yes, of course I do. The reason why I say to you that if people are being fair to him, they would judge him on the decisions he has made, in respect of those big decisions I think he has made the right ones.

JEREMY PAXMAN:
Let's look at another area of the public services. Why did it take you five years to wake up to the fact that the NHS needed a massive injection of cash?

TONY BLAIR:
We didn't. We put extra cash over and above the Conservative spending plans from the beginning.

JEREMY PAXMAN:
But Prime Minister, during your first term in office, you chose to cut income tax, the basic rate by 1 penny, that cost, 1p, that cost £5.5 billion. Do you have any idea how many hip replacements could have been funded by that?

TONY BLAIR:
You are forgetting we also took other measures, like, for example, abolishing MIRAS, it was important that people were compensated for those. In respect of the health service, in the Comprehensive Spending Review of the year 2000, we put a huge additional sum of money into the National Health Service. That¿s why now, if you look at the health service, virtually every one of the indicators on waiting times and lists is moving in the right direction.

JEREMY PAXMAN:
That was a choice you could have made, you could have spent that money on the health service, you chose to use it to cut taxes?

TONY BLAIR:
No, but as I say to you, if you look overall, it is not as if we have cut the burden of taxation every year. Some years it has been down, some years up on the previous years. However, we had to pursue a balanced approach, we actually did get substantial additional sums going into the health service. I want to make another point. Money alone will not cure the health service. Therefore, we wanted to make sure that we had in place a proper health service reform plan, which we articulated in July 2000. So any additional moneys we are putting in, with a big investment coming in now, would be properly used.

JEREMY PAXMAN:
I want to take you back to the critical decision that you made. After the election you said, in October, you didn't believe the public are any longer fooled by the notion of short-term tax cuts at the expense of long-term investment. Did you believe that before the election too?

TONY BLAIR:
No, which is why we made it a major part of our election campaign.

JEREMY PAXMAN:
This is a curious thing, because when we talked at the time of the last election, you said that you were not going to make any commitments about national insurance contributions, I said, "Wouldn't any reasonable person conclude that you were planning to raise national insurance?" and you said "No, they should not do that." Do you regret misleading people?

TONY BLAIR:
I didn't mislead you, I have actually read the transcript very carefully indeed. You were trying to get me to commit myself to ruling out national insurance increases, and I refused to do so. But at the time of the election we didn't have plans to increase national insurance or any other tax. What I said to you in the course of the interview, continually, was you will have to wait for the budget. That's exactly what happened.

JEREMY PAXMAN:
This was a decision not made before the election?

TONY BLAIR:
Of course it wasn't made before the election. What we had done back in the March, we had commissioned the Wanless report, on the National Health Service, that report then came out. The interim report in November, the full report in April, what that said is that this is the additional sum of money you need for the health service, in the future, because of all the pressures upon it. We came to the decision that the fairest and best way of doing that was through general taxation.

JEREMY PAXMAN:
Prime Minister, The word sophistry springs to mind.

TONY BLAIR:
I don't think it should, because what you were trying to get me to do during the course of the election interview was rule out national insurance, I refused to do so. If you remember, the very self same people who accused us of breaking the promise, were the very same people who prior to the election said they had made no promises on these things, they have only made promises on the basic and top rate of income tax. We can go through it forever and a day, but we did get more money into the health service. Where I take issue with your premise, we did get more money into the health service before the last election, we did it then through reductions in unemployment and reductions in interest payments on the debt. Now if we want, not just a substantial increase over the next two or three years, but over the next five or six or seven years, then we have to do it by raising this money out of general taxation. That is because the health service is the fairest way of getting decent health care to people on the basis of need, not ability to pay.

JEREMY PAXMAN:
You are honestly telling us that at the time of the general election you had not anticipated that that would be necessary?

TONY BLAIR:
No we hadn't worked out any plans at all. We said we would want to increase health service expenditure, but we didn't have the Wanless Report at the time of the election. I spend hours on television programmes saying to people the specific pledges I have made on tax are these, we are not making any others. In the transcript I say to you there are 240, 250 different tax reliefs or tax hikes and I'm not getting into the point of writing a budget now.

JEREMY PAXMAN:
By common consensus there is a crisis of confidence in politics, I wonder when you stand back and you look at how you have to justify what was or wasn't a commitment, do you understand why people say why can't you just be frank with us?

TONY BLAIR:
Because I was frank with you at the time. You asked me to rule it out, I wouldn't. Did I have plan in my back pocket for the Budget, I didn't, we didn't have the Wanless report and we didn't know how much money would be necessary or we didn't at that time any have idea whether growth in the economy might be strong enough to obviate the need for tax increases. The point you are making which is that I knew perfectly well at the time that I would raise national insurance is simply not right. We could have, for example, had it not been for the 11th of September, other expenditures we had to make and growth levels in the world economy been higher, we could have been in the situation where we didn't have to raise tax, but we came to the point in November where it was clear we needed substantial additional sums, and we weren't going to get that out of growth and would have to raise it through tax.

JEREMY PAXMAN:
And the Treasury hadn't told you that, the Health Secretary hadn't had conversations with you on that subject before the election?

TONY BLAIR:
No, because before the election we wouldn't have been in the position to say, we might have been in the same position as 2000, we were able to bring in 6% real terms increases for the health service.

JEREMY PAXMAN:
He should have told you shouldn't he?

TONY BLAIR:
No, for the reasons I have just given to you. You wouldn't have been able to know either the precise sums of money needed, or what the revenues that the Exchequer would have at the time. I actually don't believe that most people are in the position you say. I think what most people are saying to us is OK, we accept that, if you want to fund the health service, not just over the next three years but the next six or seven, we accept we will have to pay for more it, but make sure the money is used properly. I think that's what people are saying to me.

JEREMY PAXMAN:
Let's assume you are right and let's assume this massive injection of cash into the health service does cause a wholesale improvement. How will we judge you have succeeded, will there be no waiting lists?

TONY BLAIR:
No we have set out, we couldn't be clearer on this. We have set out a series of very clear specific targets. By 2005, there should be a maximum waiting time of six months. There are whole series of targets we have set and things likes cancer treatment and cardiac treatment, it's worth just saying to you, again people often put this to me as if nothing is happening in the health service. Talk to people inside the health service today, they will tell you there are big challenges but there are real improvements taking place.

JEREMY PAXMAN:
You are planning to devolve the spending of money in the health service to primary care trusts, you say about 75% of the NHS budget. But there are so many restrictions on what doctors can do that effectively not all of that money, or very little of that money will be devolved. What proportion of the money do you think?

TONY BLAIR:
What do you mean by that exactly?

JEREMY PAXMAN:
They have to meet all the targets on, for example, heart disease and all the other, there are four main areas of prescription, how much of the NHS budget do you anticipate will be actually devolved for GPs to spend as they see fit?

TONY BLAIR:
This is a very important point. The reason I asked you that is that actually all of that, the 75% we are devolving is at their discretion. It is true, of course, that there are certain basic minimum standards that have to be met, but how they meet them will be up to them. Let me tell you some of the things that are happening in primary care, which is very exciting at the moment. In some cases doctors are now performing minor surgery, they are taking over the work of consultants. In some surgeries now, practice nurses are doing what was formerly done by GPs, other disciplines within the health service. There are those doing what could be performed by other specialisms, so the system works more efficiently. You are right to say they have to meet targets, but how they meet them will be at their discretion.

JEREMY PAXMAN:
But national service agreements agreements will not give them freedom to spend 75% of the NHS budget, John Hutton, your Health Minister, thought it might be 10%, he said he hoped it would be more than that?

TONY BLAIR:
You have to qualify that, they will have the whole of that budget devolved, it is true, in the same way, when a school budget is devolved, they have to meet certain requirements of the National Curriculum. They will have to meet certain key standards. For example, now, people with suspected cancer have to be referred to a cancer specialist within two weeks. By the end of the year the treatment has to then begin within two months. So, it's true there are those targets, but the point I'm making to you is the primary care trusts will have a very great deal of latitude and we need to make sure they do have that in how they meet those targets.

JEREMY PAXMAN:
Give as you rough indication of what proportion it might be?

TONY BLAIR:
I have said to you that the 75% is devolved.

JEREMY PAXMAN:
You have also conceded they have to meet all these national service agreements?

TONY BLAIR:
How they do that. You might as well say when you say they are devolving 90% of the school budget, they are not really devolved because of the National Curriculum. But how the school then decides it has to organise staff and pupils and buildings is up to it.

JEREMY PAXMAN:
Do you know how much money, what proportion of the NHS budget they will have to spend as they see fit?

TONY BLAIR:
I've just said, 75% is devolved, in so far is, what you're saying to me is once they have met all the targets how much discretionary money is left over?

JEREMY PAXMAN:
Exactly.

TONY BLAIR:
The point I'm making is you can't look at it simply like that because how they meet these targets...

JEREMY PAXMAN:
You can't give us a ball park figure?

TONY BLAIR:
I can't because it is not sensible to do that. That I have done two huge groups of PCTs over the past few weeks, talking to doctors, talking to PCT managers, the answer is, yes, they are very anxious to squeeze as much of the discretionary funding as they can. But there is no a fixed percentage that will be discretionary, that's the point I'm making. If you asked for a ball park figure, it wouldn't be an accurate one.

JEREMY PAXMAN:
Because you don't know.

TONY BLAIR:
Because for the reasons I'm giving you.

JEREMY PAXMAN:
If you do know, you could tell us.

TONY BLAIR:
I'm not accepting the premise. You are saying there is these targets, how they meet the targets is a specific allocated part of their budget. Wrong, that is not the case. They have 75% devolved to them, yes they have to meet those targets, but how they meet those targets is also up to them. So they may decide, for example, one PCT may decide to spend this money by employing physiotherapists to help them with particular problems they have with their patients, or they may, for example, decide that they will have GPs performing certain minor types of surgery. So you can't actually say all the money that is necessary to meet the targets is dedicated in some specific way. It doesn't work like that.

JEREMY PAXMAN:
Can we talk a little bit about crime, do you recognise these words. Friday night is made impossible for people, old people afraid to live in their own home, never mind out in the streets, young people often intimidated by other young people. These things are wholly unacceptable. That was you speaking in 1993. Which part of that description isn't even more true now?

TONY BLAIR:
There is a huge problem, which is why we are tackling it.

JEREMY PAXMAN:
When you said street crime would have been dealt with by September, what do you really mean?

TONY BLAIR:
I didn't say that, I said street crime would have been under control in London by the end of September. What I mean by that is instead of the trend being upwards it is downwards. I didn't say we would eliminate all street crime, that would be a tall order.

JEREMY PAXMAN:
Eliminating a rise is not the same as bringing it under control.

TONY BLAIR:
I think it is, if the trend is down not up.

JEREMY PAXMAN:
So all you meant was that it wouldn't be increasing?

TONY BLAIR:
No, I mean more than that. Look, at the moment, in fact not actually at the moment, because as a result of what the Metropolitan Police are doing, they are actually managing to get street crime down. But it's been a huge problem, this, there's been an explosion just in these past couple of years, in particular the street robberies. It is often committed by groups of young people, some of the young people are 12-16 years old, it is a particular phenomena, not limited to this country, in many other countries too. We have taken a whole series of measures and the aim is, by the end of September, not just in the Metropolitan Police area, but other areas as well, that instead of this being an escalating upward trend of street crime, it is going back down again.

JEREMY PAXMAN:
You think that is what people thought you meant when you said it would be under control, merely that it would be stopping rising?

TONY BLAIR:
I'm not saying it will be stopping rising, I'm saying it will be falling.

JEREMY PAXMAN:
What about drugs, your target on drugs was to cut class A drug use by 50% by 2008, instead we have seen an exponential rise. Heroin, cocaine, 400% in crack cocaine. Are you prepared to concede that policy has not worked?

TONY BLAIR:
I would certainly be prepared to concede that drugs policy, not just for this country, but for any modern country is not working in the way it should at the moment.

JEREMY PAXMAN:
But you came to power on tough on crime, tough on the causes of crime?

TONY BLAIR:
Crime has fallen since we came to power. In terms of what we have done on the causes of crime, you take youth unemployment, for example, we took 350,000 young people off benefit into work. There are only 4,500 long-term youth unemployed at the moment, the sure start programme, investment in education, the urban city regeneration programme. Overall, burglary, car crime, overall crime is down, what we have is a particular problem with this anti-social behaviour and street crime.

JEREMY PAXMAN:
You concede that the progress so far has not been adequate?

TONY BLAIR:
We have a lot more to do, I concede that without a shadow of a doubt.

JEREMY PAXMAN:
Are you having a wholesale re-think of your drugs policy?

TONY BLAIR:
No, but what we are doing is trying to make sure, in particular, that where people are engaged in crime, where they are persistent offenders that they get a choice, as quickly as we can, which is a choice either to take drug rehabilitation treatment or they are liable to go to custody, into prison. Already with these drug treatment testing orders, they have been very successful, about 5,500 to 6,000 of them. For example, there is a young man in Oxford that went on one of these drug treatment testing orders, vehicle crime in the city centre of Oxford was cut by 59% when he had the chance to go into residential rehabilitation rather than back out on the street again. I'm trying to look at now is to get to a situation where if somebody is up for bail and they are a persistent offender and they have a drug problem, then again it is made a measure of whether they should get bail or not as to whether they are prepared to accept drug treatment.

JEREMY PAXMAN:
You are not considering decriminalising any drugs?

TONY BLAIR:
No.

JEREMY PAXMAN:
Overall when you look at the question of public services, I think many people would say, in all fairness, in some areas of course things have got better, you have also conceded that in some areas they have not really got better and there is an awfully long way to go. How long is it going to take?

TONY BLAIR:
I think, if you are looking at the health service, we have a ten-year plan for that, I don't suppose the work is ever done. I think your summary is pretty fair in the sense that I would say that in education we have done a lot, now.

JEREMY PAXMAN:
Are you happy with the state of secondary education in this country?

TONY BLAIR:
Of course not. I doubt if you were to ask someone in 30, 40 years time, not me, I may say, they would say they are not satisfied. It is interesting that the BBC, I don't think you did that in the summaries on television, but on the website you did an analysis of Labour's pledges, 80% were met. All five on the pledge card have been met. Does that mean to say the world is perfect, no. I think this country is getting better. If you look at the economy, unemployment, education, health, it's not just better, it's also fairer. It is more just to have a health care system based on general taxation and need, not ability to pay. It is more just for the hundreds of thousands of young kids getting better education now than five years ago, that is social justice in action. I'm not going to sit here and pretend the whole world has changed in five years. I don't suppose everyone could have thought that. If I had said to you five years ago in our election interview that you would have a million-and-a-quarter more jobs, the lowest interest rates and inflation the country has had for 40 years, the best education results it has had ever in its history and the National Health Service moving in the right direction not the wrong direction, with young people finally given some chance of getting off those skivey schemes on the dole and back to work. If I made those promises then you would have told me I was crackers and couldn't deliver it, we have delivered that, we have a massive amount to do.

JEREMY PAXMAN:
Prime Minister, thank you.

This transcript was produced from the teletext subtitles that are generated live for Newsnight. It has been checked against the programme as broadcast, however Newsnight can accept no responsibility for any factual inaccuracies. We will be happy to correct serious errors.