GORDON Brown cast aside New Labour's financial hair shirt yesterday and promised the biggest increases in spending on health and education in the country's history.

Labour MPs cheered as the Chancellor announced that public spending would rise by £57 billion over the next three years - with more than half going to hospitals and schools. In what amounted to a second Budget in four months, Mr Brown produced popular measures such as scrapping charges for eye tests for the elderly, more help with fuel bills and a guaranteed minimum income for poorer pensioners.

He also paved the way for the abolition of child benefit for 16- to 18-year-olds to finance a new allowance to encourage teenagers to stay on at school. The spending increases are bigger than leaks had suggested and confirmed that Mr Brown is planning big rises in the second half of the Parliament after sticking to Tory targets for the first two years.

He said the extra spending on health and education would amount to £40 billion by 2001. The figure was reached by aggregating the extra money spent in each of the next three years above the level for the current year. In cash terms the increases are less dramatic, around £3 billion a year for health and between £2.5 billion and £3 billion a year for education in England during the lifetime of this Parliament.

A fierce row broke out between the Tories and the Treasury over where the money was coming from and Mr Brown's claim that he was being more "prudent" than the previous government. The Tories accused him of a series of accounting fiddles and "spending his way into a recession".

Francis Maude, the shadow chancellor, was jeered by Labour when he described Mr Brown's Comprehensive Spending Review as "Robert Maxwell accounting". He said the Chancellor had been unable to control public spending and taxes would rise to fund his promises.

Labour MPs were delighted with the outcome of the review, described by Downing Street as the most significant statement since the party came to power. Many Labour backbenchers have become dismayed by Mr Brown's "Iron Chancellor" rhetoric and his determination to retain the spending totals he inherited.

The biggest cheer came when he announced that NHS spending would rise by £21 billion over three years. He said: "On the 50th anniversary of the NHS, this Government will now make the biggest ever investment in its future, giving the NHS for the first time for decades the long-term resources it needs."

The Tories later challenged the £21 billion figure, saying that it was actually £9 billion. But Health Department officials said the additional money meant that there would be no new NHS charges for the lifetime of this Parliament - and existing charges would rise only in line with inflation.

Education spending would rise by £3 billion next year, £6 billion in 2000 and £10 billion in 2001 - when Labour is likely to call an election. Labour has been embarrassed by its failure to meet "early pledges" to cut NHS waiting lists and class sizes for five- to seven-year-olds.

As a result, health and education receive the lion's share - more new money than the other 19 government departments combined. There will be more investment in public transport, law and order and overseas aid, the BBC World Service and housing renovation.

Over the next 10 days, ministers will announce details of the individual programmes starting today with David Blunkett, the Education and Employment Secretary. Mr Brown has effectively abolished Whitehall's annual spending round, which saw individual departments haggling with the Treasury for more money each summer. Yesterday's White Paper, Modern Public Services for Britain: Investing in Reform, serves notice that each department will have to reach a "public service agreement" with the Treasury requiring reform of services in return for more money.

Treasury officials rejected Tory accusations that the Chancellor's plans were based on over-optimistic assumptions of growth, inflation and unemployment - and were vulnerable to a threatened "hard landing" for the economy.

Before the election, Tony Blair and Mr Brown promised that they would increase spending on health and education only "as we get the welfare bills down". The White Paper, however, shows spending on welfare benefits rising from £100 billion this year to £108 billion in 2001-2.

The Treasury claimed that the rate of growth of social security spending would be lower than under the Tories. It also insisted that Mr Brown had made "cautious" assumptions about the level of growth and that projected budget surpluses gave some scope if there was an economic downturn.

There were signs yesterday that inflationary pressures had eased, with the underlying rate falling from 3.2 per cent to 2.8 per cent. That prompted speculation in the City that interest rates may have peaked at 7.5 per cent, resulting in a 142 points rise in the FTSE-100 Index, which closed at 6,100.2, close to its all-time high.

Officials said the Chancellor was able to plan for big increases because of tight controls during Labour's first two years in power; lower interest payments because of a reduction in government debt; and sales of surplus state assets.

Some Whitehall budgets are also being squeezed. But areas facing real-terms cuts include legal aid, defence, agriculture, Common Agricultural Policy spending, and EU payments.

Mr Brown confirmed that in order to ensure that money went to front-line services rather than excessive pay increases, the Government was "strengthening" the system of independent pay review boards for groups such as nurses, doctors and teachers. Their recommendations will have to take account of the inflation target of 2.5 per cent and the need to improve efficiency.