The Prime Minister assured the CBI at its annual dinner that `the days of old tax and spend' are over but made clear there were areas where Britain needed more public investment.
"It will be money for modernisation, whether in schools, hospitals or any other investment. Investment comes at the price of reform. There will be tough choices to be made. We have made them this year. We will make them again," he said.
He also singled out public transport including London Underground, which has pounds 7bn allocated to be invested over 15 years, financed with private partnerships. "We are reviewing how we regulate and improve the railways. In particular, we are seeing how road, rail, bus and air can best be combined," he said.
"The Government's forthcoming white paper on transport strategy - the first for a generation - will address these critical issues in a practical way."
Mr Blair told businessmen: "It is the easiest thing in the world of politics to promise to spend more public money. But nothing will ever push me into breaking the firm economic rules we have applied. I regard being prudent on public finance and money as a necessary badge of respectability for New Labour and I intend to keep wearing it."
He said his talk of a third way between old-style intervention of the old left and the laissez faire of the new right, was not "a soggy compromise in the middle". It was about education, infrastructure, promoting investment, and helping businesses through new technology, not about a prices policy, state subsidies and heavy regulation.
As a priority, he said Britain had to "raise our game" with higher productivity through higher skills. "Our productivity is now way behind our main competitors," he said. British workers produced 20 per cent less than their German counterparts, 40 per cent less than workers in America. "That's a big gap - a gap we have got to close," said Mr Blair.
Promising an end to boom and bust, he said it had been hard since giving the Bank of England independence. Interest rates were 1.25 per cent higher than when Labour took office, but it was necessary to squeeze out inflation which was going towards four per cent.
"I sympathise too with the plight of manufacturing seeing the pound rise to over Dm3. It has now dropped back. But I also say we should not always want a lower pound to compete. Again stability is the key."