Prime minister Tony Blair was yesterday due to announce a 'step change' in the government's modernisation of the NHS in the wake of chancellor Gordon Brown's decision to invest billions of pounds in the service.

Mr Brown announced on Tuesday that the NHS would receive the£300m from a 5 per cent increase in tobacco tax already promised in his pre Budget review - and then pledged an additional£1. 7bn.

He also threw out the comprehensive spending review for the health service, the last year of which was due to start in April, and unveiled a four-year settlement giving the NHS above-inflation increases of 6. 1 per cent until 2003-04, taking spending to£68. 8bn .

The Treasury claimed in supporting documentation that this meant the percentage of GDP spent on health could increase to 7. 6 per cent by 200304. Prime minister Tony Blair recently announced an 'aspiration' to increase spend to European levels, taken by the government to be 8 per cent of GDP and most other commentators as 8. 9 per cent of GDP.

In a 50-minute Budget speech peppered with Mr Brown's favourite word, 'prudence', the chancellor said he had been 'prudent for a purpose'.

'This government is committed to an NHS true to the principles of its founders, ' he said, dismissing claims that a universal, tax-funded NHS could no longer be afforded. He added:

'One of the greatest challenges of this country can and will be met. '

Mr Blair and health secretary Alan Milburn were due to announce a package of measures to 'drive up performance' yesterday, which will be followed by a four-month consultation period.

The government's final plans will be published in July. But Mr Milburn made it clear that it is determined to see an end to long-standing variations in efficiency, performance and health outcomes.

'That is unfair to patients and taxpayers, ' said Mr Milburn. 'The rest must perform to the level of the best. '

Conservative leader William Hague 'unambiguously' welcomed new money for public services, but said the Opposition would be on the look-out for 'triple counting'.