The Trades Union Congress (TUC), which is holding its annual conference in Brighton, said the government should use money from the "swelling" public coffers to tackle under-funding in key areas.

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TUC General Secretary John Monks said: "Increased investment in transport, social housing and the regions will improve industrial efficiency.

"It will also begin to narrow our two-nation economy in which we are faced with a prosperous, full-employment suburban Britain, and a high unemployment, socially deprived Britain."

Gap 'not closing'

Union leaders said public spending should take priority over tax cuts in the run-up to the next election, due in May 2002 but already being tipped to be called early.

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The TUC welcomed moves by the government to increase spending on health and education, but said it was still not enough to close the gap with the rest of Europe.

European Commission forecasts indicate the UK will be at the bottom of the public investment table in 2000, the TUC said.

The TUC's own report said government investment fell to 1.5% of gross domestic product in 1998, from 5% 30 years ago.

The UK's public finances are currently very strong, boosted by a recovering economy, with higher tax revenue and lower benefit bills as unemployment remains low.

Hint at increase

Speaking at the TUC conference on Tuesday, Prime Minister Tony Blair hinted there may be an increase in public spending, but sounded a note of caution.

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He told the conference: "Our budget is moving into surplus.

"We can afford to spend wisely and sustain the spending.

"But I promise you: without the two tough years, without taking measures, some of which have been unpopular like petrol tax rises, to sort out the huge debt we inherited, we would never have achieved the position we are in today."