The Prime Minister has given his backing to Gordon Brown by saying he favours raising billions in extra spending for the National Health Service from general taxation. In an exclusive interview with The Independent on Sunday Mr Blair underscores the historic repositioning of New Labour as a party that is willing to raise taxes to pay for better public services.

But he insists that it does not mean the death of New Labour. Instead, he makes clear, it is the next logical phase for the Government.

In a wide-ranging interview he goes out of his way to support his Chancellor over the strategy for higher taxes which sparked renewed reports of tensions between the two men.

This is the first time Mr Blair has spoken so emphatically about the need to raise taxes. He said: "We believe the best way to do it is through general taxation." Asked whether it was now "New Labour RIP", he said: "No – I cannot tell you the number of times people have written the story – New Labour has turned into old Labour. New Labour was never the Conservative Party. It is a modernised Labour Party."

Saying that the move was part of his modernising agenda, he insisted that increased funding would be accompanied by reform. "This idea that we have gone for an old-style tax and spend without reform is nonsense. Simply putting money into an unreformed system is not the answer."

In another significant development, Mr Blair backed away from his commitment – repeated in the Commons on Wednesday – to raise UK spending to the European average by 2005. Mr Brown was visibly irritated by his remarks in the Commons because it appeared to tie the Chancellor's hands and fuelled speculation he is planning to increase general taxation by the equivalent of 6p on the standard rate of income tax.

"I am not deciding spending levels now," Mr Blair said, making it clear he was talking generally. "I am saying in broad terms what I said previously. We have in broad terms to match other European countries."

Significantly, Mr Blair distanced himself from his former spin-doctor, Peter Mandelson, by refusing to endorse his suggestion that "social insurance" paid by employers and employees might augment general taxation to raise money for the NHS. He also refused to back the idea of a new tax earmarked solely for health. The notion had been floated by Alan Milburn, the Health Secretary. Mr Blair, however, is understood not to be shutting the door on the idea.

He also indicated that an extra £1bn for the NHS to be allocated this week by Mr Milburn will be used to cut waiting times for operations. Mr Milburn will also buy more treatment for NHS patients in private hospitals.

In the interview, the Prime Minister also expressed the view that there would be a second phase in the war against terrorism. Asked whether Iraq would be the next target, Mr Blair said: "There is a second phase to this but people shouldn't rush to conclusions about what that is. There is nothing that can happen without consultation and consideration by our allies.I can tell you it will be done in a very deliberative and considered way."

* An ICM poll in today's News of the World suggests that public support for higher taxation to fund public services is waning. A total of 54 per cent backed higher taxes for the NHS, compared with 79 per cent in 1999.