Iain Duncan Smith has told Britain's bosses that failing public services lead to soaring tax and care bills for business.

"Failing and unreformed public services cost you money. They cost you money in the extra taxes the government imposes on you to pay for them. And they add to your costs when you have to pick up the bills for their failure. It is happening now," he said.

In his first speech to the CBI since becoming Tory leader Duncan Smith continued the Conservative focus on public service delivery in his bid to wrest the political initiative from Tony Blair on a key electoral issue.

Focusing on the need for sweeping reform to the country's public services and attacking Labour's ideological attachment to state provision, Duncan Smith claimed that employee absenteeism due to sickness costs business £10.7 billion or 192,000 working days, transport problems cost £5 billion, and failing schools compel employers to organise literacy classes for their staff.

"We need to reject the dogma that insists on services always being delivered by a monopoly state provider. We need to run our services in the interests of those who use them instead of providing favours for the vested interests that pay the political bills," he claimed. "And we need, where appropriate, to include the best of British enterprise and innovation that is found in the private and voluntary sector."

Attacking Labour's flagship policy to give private companise a greater role in the delivery of public services, the Tory leader asked: "After the Railtrack debacle how many of you would want to deal with a government that expects you to take all the risks, but is prepared to dump on you the minute anything goes wrong?"

Taking up the Tory theme of looking to Europe for example, Duncan Smith attacked Labour's dependency on taxation to fund the public sector. "We will never pay for public services by pursuing a policy that taxes and regulates businesses out of existence.

"We can continue down the same road of taxing ever more heavily in order to plough ever more money to pay for unreformed services. Or we can combine a low tax, wealth-creating economy with genuine public service reform," he said.

Just as Margaret Thatcher "freed up" business in the 1980s it was time to learn from European models of public sector funding with an emphasis on insurance and private sector delivery, he argued. "Our European neighbours have been prepared to learn from Britain about the need for low taxes, flexible markets and privatisation. It is time, when it comes to running public services, Britain has the self-confidence to learn from Europe."

"There are those who say that we can only have European levels of healthcare, education standards or transport if we have European levels of tax. They are missing the point. It is European countries such as France and Germany that are reducing taxes, while Britain has been putting them up," he said.

Public sector reform was necessary and Labour's failure to ditch a "policy that taxes and regulates businesses out of existence" jeopardised the future of the UK's economy, the Conservative leader said. "We will have a situation in which sclerosis in the unreformed public services will ultimately lead to sclerosis in the economy as a whole."

Continuing his efforts to personalise the issue, Duncan Smith highlighted a case in his constituency of a man waiting for a heart by-pass operation: "[He] started by working five days a week, gradually it went down until after a year he was working a half day, one day a week. Yet as he put it to me: 'my employers still have to bear the cost of not having me around'."

The Conservative leader also spoke of his own "commuter hell" journeys into Westminster during a long hot, and sticky summer on London's underground.

"As one who has used the Tube endlessly to get to work, my abiding memory of last summer is not just the endless delays that make people late, but the cramped and sweaty carriages that mean when you eventually arrive, it takes half an hour before you are in a fit state to think of work," he said.

Rounding on Labour's policy on the European single currency, Duncan Smith attacked the "good cop, bad cop... peekaboo politics being played by the government on the euro".

"It is all part of a game. Whenever they want to appear warm about the euro, we see the prime minister, or Peter Mandelson or Peter Hain. When they want to appear sceptical we see Gordon Brown or Jack Straw," he said.

"The result of this game is to produce the worst of all worlds. It is destabilising to industry that wants to plan ahead with a degree of certainty. And it clearly exposes the so-called five economic tests as totally bogus. We all know that they have nothing to do with economics and everything to do with politics."