The Mandelson Affair: The Cabinet Reshuffle - Modernisers cement New Labour agenda

TONY BLAIR reaffirmed his authority over his Cabinet yesterday with the promotion of the moderniser, Stephen Byers, to the post of Secretary of State for Trade and Industry.

It was a clear signal that the Prime Minister wants Mr Byers to continue with the policy direction taken by Peter Mandelson over the semi-privatisation of the Post Office and trade union recognition.

Mr Mandelson angered Gordon Brown, the Chancellor, by refusing to fully privatise the Post Office, opting instead for greater commercial freedom within the public sector.

Geoffrey Robinson is expected to be replaced as Paymaster General by Geoff Hoon, Lord Irvine's ministerial spokesman in the House of Commons. The Lord Chancellor was said to be resisting the pressure to allow his junior minister to be moved by Mr Blair, but was expected to be overruled.

Mr Hoon, a well-liked minister and a lawyer, was pencilled in for the post last July, but was kept in his position as Commons spokesman for the Lord Chancellor's department after a successful rearguard action by Mr Brown to stop Mr Robinson being sacked. "There are few people who can get on with Lord Irvine like Geoff Hoon, and he doesn't want to lose him, but it looks like he will be overruled," said a Whitehall source.

Alan Milburn, the Minister of State for Health, was promoted into the Cabinet by Mr Blair to replace Mr Byers as Chief Secretary to the Treasury.

Mr Milburn, 40, is regarded as hard-headed and a Brown supporter - which may have cost him the Cabinet promotion last July - but he regards himself as much a moderniser as Mr Byers, who is a close friend.

There was speculation last night in Whitehall that Mr Blair will replace Mr Milburn as health minister with John Denham, the minister of social security, a Blairite who did much of the spade work on the reform of pensions before Frank Field resigned last July from the task of "thinking the unthinkable". Since then, Mr Denham has won his spurs as the number two to Alistair Darling, the Social Security Secretary.

Mr Milburn will be able to mark a double celebration tomorrow. Christmas Day is also the second birthday of his second son, Danny. He has another son, Joe, aged seven, with his partner, Ruth Briel. Mr Milburn takes his parental responsibilities seriously. He has been seen pushing a pram to his office and at party conferences.

He stayed up all night writing the White Paper on health reforms to be introduced in April, and the only way he could stay awake was to play rap and soul music, loudly, in his office, causing a few raised eyebrows.

Mr Milburn is expected to give his successor a hard grilling over the finances at the Department of Health. "He thought he was over-generous towards the GPs," said a friend last night. Mr Milburn made his mark as shrewd questioner on the Public Accounts Committee after winning his Darlington seat in 1992 and his skills at probing public finances will be well used in the Treasury.

The promotion of Mr Byers to the DTI was the latest stage in a political career that can justly be described as "meteoric", making him tipped as a future leadership candidate.

The MP for Tyneside North reached the Cabinet this summer, just six years after entering Parliament, to become Chief Secretary to the Treasury.

A former law lecturer and leader of North Tyneside Council, his grasp of policy, media savvy and ability to rise effortlessly without making too many enemies has led some to compare him with Mr Blair.

He has inherited a controversial compromise over trade union recognition. Mr Mandelson upset the unions, who fear the forthcoming Fairness at Work legislation will give too much power to an arbitration body to decide which employers should concede trade union recognition. Mr Byers is likely to face a Commons rebellion by Labour MPs over the detail on the Bill. The TUC last night said it looked forward to working with Mr Byers. "Next year promises to be an historic year for trade unions with the Fairness at Work Bill due in January and with the new opportunities for social partnership," a statement said.

Despite his Blairite credentials, the 45-year-old MP can, and frequently does, claim that his background proves that he is not some Millbank clone obsessed with the metropolis. His first taste of politics came in the North East, where he was one of the "young bloods" who fought off both right-wingers and militants to lead North Tyneside council. "That put steel in my back-bone," he said later.