The new lead screws will reduce the backlash. The DRO will essentially eliminate the concern about backlash. My old mill/drill has .047" backlash on the x and .053" backlash on the y but I am able to do precision milling because of the the DRO. Good mechanical condition is always desirable and if I had the budget, I would do both but given an either or option I would pick the DRO first.

The DRO does more than provide precise positioning information. Firstly, it removes the need to count turns when traversing large distances. Secondly, the use of subdatum coordinates allows you to move to coordinate x, y and set a subdatum to zero and conveniently mill a slot centered on that coordinate point. I also use that feature to make non-standard holes.

If I need to make a hole, say .506" in diameter, I would move to the center of the hole and set a subdatum to zero. Then I would drill a a 31/64" hole and follow with a 1/2" end mill. Then I move .003" plus and minus, first in x and then in y. Finally, I will move to .002, .002, then .002, -.002, followed by -.002, -.002 and -.002, -.002 (this is approximately .707 x .003 and clears material on the 45º diagonals.) I could do this without a DRO as well but the calculations plus keeping track of any backlash would make it a nightmare.

Finally, a DRO will permit you to cut arcs, use bolt circles, and drill hole patterns on a diagonal. Cutting arcs by DRO is a real pain and will move the CNC mill up on your want list but it does enable you to do something that would be difficult otherwise. The operations could be done without the DRO, using a spreadsheet or CAD program to perform the coordinate calculations but again IMO, it would be a nightmare.