Gordon Brown, described by his colleague, David Blunkett, as "education's Chancellor" lived up to his name as he announced the money to help raise standards in schools, repair buildings and provide work for the long-term unemployed and young people.
He took #163;1 billion from reserves for raising standards in the classroom and allocated #163;1.3 billion from the #163;4.8 billion raised by windfall tax for a one-off payment over five years for school repairs.
The Welfare to Work programme is to be funded entirely from windfall tax.
Graham Lane, education chair of the Local Government Association, the organisation representing councils throughout England and Wales, said: "Millions of children are winners. This is an investment in their futures and class size should not have to rise."
Doug McAvoy, general secretary of the National Union of Teachers, said: "The relief Mr Brown has given education will be welcomed across the country. I trust it indicates the Government's future approach. "
But analysis by economists shows more than half of the #163;1 billion is likely to be spent on teachers' pay. Chris Trinder, chief economist of the Chartered Institute of Public Finance and Accountancy said pay rises of 4.5 per cent would cost #163;540 million. He said it would also be at the discretion of councils whether they spend the #163;1 billion on education.
Local authorities are now studying the finer details of the Budget and Mr Blunkett's statement in the House of Commons yesterday, but were told capping would stay for at least another year.
David Whitbread. head of education at the LGA, said it would not be clear how good a deal the Budget was for education until the November local government settlement. He said: "The #163;1.3 billion set aside for school repairs will not make a major contribution to tackling the #163;3.3 billion repairs backlog."
Mr Blunkett has urged the School Teachers' Review Body to heed the Chancellor's warning of restraint in public sector pay settlements - "so this additional money can make a real contribution to raising standards".
He nodded in agreement as the Chancellor used his Budget speech to say education was the key to economic success. Mr Brown said: "We cannot run a first-rate economy on the basis of a second-rate education. In general, economic success tomorrow will depend on investing in our schools. At the present rate of progress many of our children are educated for the 21st century in classrooms built in the 19th century. There are 1 million children being educated in classes built before the First World War."
Mr Brown said schools would be encouraged to take part in public-private partnerships in order to renovate school buildings. Schools will be able to submit plans to make repairs and buy computers and other equipment to provide bright modern classrooms.
The heart of the Budget was the Chancellor's Welfare to Work plans. The windfall tax will provide #163;3.5 billion to be spent on getting long-term unemployed into training and work and offer opportunities for lone parents and the disabled.
Young people aged 18 to 25 who have been unemployed for more than six months will be offered employment, voluntary work or education and training.
As part of the new deal there will also be a national child care strategy.Voluntary organisations will be encouraged to train young people as carers and child-care assistants. "We believe that over a five-year period as many as 50,000 young people can be trained as child-care assistants," he said.
Roy Jobson, education director of Manchester and chair of the Association of Chief Education Officers, said: "Overall it's a good budget for education. It is better than I expected. Everybody expected the Welfare to Work, and you shouldn't discount the value of that to education and the potential of raising the morale of young people. It is tremendous news for those who have to cope with 15-year-olds who see no hope and only despair."
* #163;3.5 billion from windfall tax for Welfare to Work
* #163;1 billion from reserves to help schools raise standards
* #163;1.3 billion from windfall tax for school repairs and equipment
* Of this: #163;200 million to help support lone parents
* #163;75 a week subsidy to firms to employ long-term unemployed
* #163;5 million for University of Industry
* #163;200 million for training the disabled
* Lottery money for homework clubs
* Individual learning accounts
* Young people aged 18 to 25 unemployed for more than six months given a step on jobs ladders with employers, the voluntary sector or education and training
* Young people to be trained as child carers
* Relaxation of rule which says people studying for more than 16 hours a week will lose benefit