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NHS Trust Debts

Volume 457: debated on Tuesday 6 March 2007

Motion made, and Question proposed, That the sitting be now adjourned.—[Steve McCabe.]

Thank you, Mrs. Humble, and good morning. It is a pleasure to serve under your chairmanship—for the first time, I think.

NHS trust deficits have exercised me for a long time; I have a local interest in them, as will quickly become abundantly clear. I had intended in this debate to focus principally not on where the deficits came from, but on what we should do now that we have them. There are a variety of accounts of where the deficits have come from. The Health Committee identified issues of central Government policy and local financial management—a whole range of factors that have led to the deficits. However, we are where we are, and my key concern is that trusts should know where we are going.

Normally, I am pleased when a public sector body in my constituency tops a league table. However, I regret that my local NHS trust—North Bristol NHS Trust—is at the top of a league table in which I should rather we did not feature at all. As at 31 March 2005—I am using figures cited by the Audit Commission in its June 2006 report—North Bristol NHS Trust features right at the top of the league table of NHS trusts with the largest cumulative deficits. I do not know whether the Minister will be able to give us the figures for March 2006; I have cited the latest cumulative deficit figures, based on audited NHS accounts, that I was able to obtain. However, I strongly suspect that North Bristol’s premier position in the league table will not have radically altered since the end of March 2005.

Three of the league table’s top 10 trusts are local to my constituency. It is an interesting point that, when we think about NHS finances, it is in many ways sensible to think about what is known in the jargon as the local health economy, rather than about an individual NHS trust. So although the top spot went to the North Bristol NHS Trust, the Royal United Hospital NHS Trust at Bath came in at No. 4 and the trust in the centre of Bristol—United Bristol Healthcare NHS Trust—came in at No. 10.

I want to focus briefly on the North Bristol trust, describing where its deficits came from and raising questions with the Minister on where that trust is going. That is really why I sought this debate. Then I should like to reflect more widely on the fact that such situations are not unique to my local trust; there are wider issues on which I am sure the respective Front Benchers will want to comment and on which I should like to make observations of my own.

By way of background, North Bristol NHS Trust managed to accumulate a deficit of £52 million by 2003-04. I fully accept that local financial control had failed; there is no question about that. I remember one member of the board telling me how the finance director used to present the financial reports. Nobody really understood them, but he was a convincing sort of chap, and if he said that things were all right, they probably were. Clearly, in an era of a £70 billion or £80 billion national health service, we cannot begin to operate on that basis. I fully accept that the issue was particularly one of local control. Indeed, the then chairman and then chief executive are no longer in post—nor is the finance director, I believe. My comments about that period do not at all relate to the trust’s present management.

Accountants were called in to investigate how the situation had got so out of hand. Early warning signs might have been registered much sooner before the huge £52 million deficit had been accumulated. That money was not written off, but added to what is known in the jargon as the public dividend capital of the trust. I shall come back to that. However, once that deficit had been run up, it was not going to be removed overnight. A recovery plan was put in place, but in each of the succeeding years, deficits—falling deficits, but deficits none the less—carried on. During the succeeding years to 2005-06, a further £48 million was added to the deficit; £48 million more than the trust’s income was spent. Clearly, that money had to be loaned, or provided to the trust, from elsewhere in the NHS.

Add the £52 million and the £48 million and we get an uncomfortably round figure of £100 million. The Department of Health used that figure in a letter to North Bristol NHS Trust that turned down its application for foundation status. The Department said that that was in part due to the £100 million debt. Indeed, the local south-west strategic health authority, NHS South West, opposed North Bristol NHS Trust’s bid for foundation status, partly—principally, I think—because of uncertainty about that £100 million debt.

Interestingly, when one talks to the trust, one finds a rather different perspective. Although the letter from the Department of Health talked about a debt of £100 million, the trust denies that it has a debt or deficit at all. Semantics and the arcane niceties of NHS finances are involved in all that, but it is worth understanding how the Department of Health can think that there is a deficit or debt of £100 million and the trust can think that there is not one at all.

The story is in two parts: the £52 million deficit run up in the years to 2003-04 was added, as I say, to the public dividend capital of the trust. I had not realised, until I spoke to representatives of the trust, that that was not the trust’s only public dividend capital. It has several hundred million pounds of public dividend capital. I have tried to get to the bottom of the issue, and it appears that a kind of fairly low-interest mortgage, a sort of long-term loan, is involved, a little bit akin to Treasury debt or gilts or bonds, except that—this is the crunch—nobody knows whether that £52 million will have to be repaid.

My understanding of the trust’s position is that it is happy and able to continue servicing that public dividend capital—paying the Treasury, I assume, the interest, repayments or whatever label that money goes under. Paying the debt on that £52 million of public dividend capital is sustainable; what is not sustainable is paying back that £52 million, plus the £48 million. Paying back £100 million—getting on for a third of the trust’s entire annual income—is not sustainable in my view.

It would be exceptionally helpful if the Minister could say anything about the status of that £52 million. I believe that the Government are thinking about it and that some sort of announcement may be imminent. If the Minister made an announcement to the House in the first instance, rather than our having to read about it first in the columns of the local newspapers, that would be particularly welcome.

There is the £52 million of deficit; then there is the £48 million, which, as I said, is the further deficit run up during the recovery period. No one blames the hospital for the fact that it could not turn a huge deficit around overnight. It did what happens whenever a trust is in deficit: it did more day-case surgery, got people out quicker and cut down on the use of agency nurses. Many such things are not at all exceptionable.

Interestingly, the trust was failing, back in those days, lamentably to cut its agency spend. It had huge buying power in the regional health economy as a buyer-in of agency nursing services and was paying over the odds for them. Owing to poor management of resources, it was using too many agency and temporary staff at a very high premium. In a sense, the financial crisis that it was clearly in prompted a more efficient way of working, and that is entirely proper. As much as anybody else in this Chamber, I want to see NHS resources well spent; when changes are about greater efficiency, I applaud and support them.

Again, however, the status of that £48 million bail-out over three years to 2005-06 is not clear. Incidentally and for the record, my understanding is that North Bristol NHS Trust will receive no bail-out of any description for the current financial year; its current expectation is that its income will exceed its expenditure without any bail-out from the rest of the NHS. That is a salute to the work done by the hard-working staff—and also, although I am not always their greatest fan, to that of the trust’s management for getting it into ongoing financial balance.

Somebody had to mention resource accounting and budgeting in the debate, and I suppose it ought to be me. Part of the problem that I have been describing is that, once a trust is in a downward spiral, it is very difficult to get out of it. I shall quote a sentence from the June 2006 joint Audit Commission and National Audit Office report:

“Experience indicates that once an NHS body incurs a significant deficit, it becomes increasingly difficult to return to financial balance, particularly where management’s attention is focused on resultant short-term pressures rather than longer-term financial balance.”

That is part of the problem. If a trust spends more than its income, the deficit is knocked off its income for the following year, so that if it has a structural deficit in year one, it will have a double structural deficit in year two. Unless it can get things under control, that double deficit is deducted from the income in year three, and so the downward spiral continues.

I think that the Government recognise—the Audit Commission certainly does—that although resource accounting and budgeting have some merits at a national accounts level, it is not working for the NHS. That would seem to be the view of the chief executive of the NHS, who was quoted in The Guardian in December 2006 as saying that the NHS accounting system was “unsustainable and inconsistent”. He said that the way in which resource accounting and budgeting

“is applied to NHS trusts, although providing a strong disincentive to overspend, will become increasingly unsustainable as we move forward with the programme of reform.”

In a sense, even the chief executive of the NHS and the Audit Commission—balanced, sane voices—are saying that something has to change and that something has to give.

So what do we do about the £100 million debt? Hundreds of local people have signed an online petition on my website for some of the debt to be written off. In a sense, one would imagine that that is a no-brainer—an MP asks local people whether they want their hospital trust debts written off, and one would think that people would just say, “Yes please, it’s free money”. However, some of my constituents did not respond in that way, such was the problem with the financial management at the trust. Some contacted me and said that they wanted the debt written off only if the trust could prove that it had its financial house in order. That is my view, too.

We cannot simply write a blank cheque for trusts that have got into a complete mess. One of the conditions for any financial assistance needs to be a requirement that good money is not merely being poured after bad and that financial discipline has been restored. I believe that to be the case at North Bristol NHS Trust. It has its financial house in order subject to one caveat, which I shall come on to. That condition is met, but I want to stress that we are not simply rewarding failure in any sense.

That brings us on to a slightly wider question that would apply to all the deficit trusts. There is a paradox. If a trust gets in to a mess, do we let it sink or do we bail it out? If we bail out trusts that are in a mess, are we rewarding failure? If the money used to bail out failing and struggling trusts is taken from trusts that are doing well, have made a surplus and have managed well, is that penalising and disincentivising success? I would be the first to recognise the trade-off that is at work. There is not a free lunch, although there are issues about incentives.

My view is that we do not need to take an extreme position. At one extreme we could say, “The trust is in a mess; it needs bailing out; give us some cash”, and at the other we could say, as Ministers are fond of saying, “Trusts need to learn to live within their means—no bail-outs, no help, period.” Somewhere between those two extremes lies common sense and sanity. It has to, because some of the trusts will never recover from their debts. I want to quote from the Select Committee on Health’s first report of the 2006-07 Session. It states:

“While the NHS may be in overall surplus by the end of March 2007, not all trusts will be in surplus by then”—

this is the key point—

“and it is unlikely that trusts with the biggest deficits will be able to repay their accumulated deficits in 5 years.”

Obviously, that is a significant period because it covers the statutory requirement to achieve financial balance. The report continues:

“It is important that as a first step they achieve ‘in-year balance’.”

That is what North Bristol NHS Trust has done. The report then states:

“Where there is no realistic chance of recovering the deficit over the 3- to 5-year period without severely affecting services, consideration should be given to allowing a longer period to pay off historic deficits.”

The Select Committee, with a Labour majority, is saying that in respect of a subset of trusts—perhaps a small number—for which things have gone too far for the normal rules to be applied. I believe that North Bristol NHS Trust falls into that category.

To stick with the example of the North Bristol NHS Trust, why is all this particularly important? As the Minister will know, the trust applied for foundation status, which the Government want every trust to have by the end of next year. It was turned down because of the uncertainty about the debt. I find that puzzling. As I understand it, the status of the whole £100 million is uncertain: the status of the £52 million public dividend capital is uncertain, as we do not know whether it is time-limited or indefinite—infinite, as it were—and the status of the £48 million is uncertain, because we do not know what will happen to that. Much of the debt was accumulated some four years ago, so why do not we know? That is one of my key questions to the Minister.

In the NAO and Audit Commission league table that I cited, there is a column for cumulative deficit as at March 2005, one for the number of years of cumulative deficit—at that point, North Bristol NHS Trust had four years in that column—and a final column for the anticipated year of recovery. For five of the 10 trusts in the list, that final column does not give a date, but says, “To be agreed”. Nearly a year on from the publication of the report in June of last year, that date is still to be agreed. The trust was encouraged to make an application for foundation trust status, not knowing whether it will have to pay off the £100 million deficit, how much of it will have to be paid off and over what time.

Let us imagine someone who applies for a mortgage and explains that they might or might not have to pay back a third of their income. The mortgage company might well be a little reluctant to take that person on. They would want a bit more clarity. That is the problem. How have the Government allowed North Bristol NHS Trust to be left in limbo for so long, without an answer about how much of the debt must be repaid, on what terms and in what form? I hope that the Minister can answer that question.

As the Minister announced last Monday or Tuesday, North Bristol NHS Trust is about to embark on a private finance initiative worth some £350 million. The investment is welcome—the way in which it is funded is not, and neither is the place where it is going, but apart from that, it is fine. However, that £350 million will incur a substantial liability for decades to come, with creditors who will be near, if not at, the front of the queue. How will that work? Would a private finance company be willing to build a hospital for North Bristol NHS Trust, anticipating a future stream of revenue from the trust, if it does not know whether the trust has a £100 million hole in its balance sheet? I hope the Minister will say that all that will be resolved soon, but until it is, the process cannot move forward.

Although I would like to see the new hospital somewhere else, we are in limbo in terms of the money that is being spent on modernising our local NHS, because the PFI cannot go any further without certainty about the debt. There is a linked issue, because we all know that servicing PFI debts can place a severe burden on some trusts. My hon. Friend the Member for North Norfolk (Norman Lamb), who speaks for our party on such matters, has constituency experience of the sometimes adverse impact of PFI projects on NHS trust finances. How can a trust budget for the coming years, with all the uncertainties that every other trust has to deal with, as well as a PFI commitment that will not go away, a debt that the trust will have to service for decades to come and uncertainty about debt servicing costs?

We are just a few weeks from the start of a new financial year. I have no doubt that North Bristol NHS Trust has already planned its finances for 2007-08, but has it done so with or without knowledge of what the Government will decide about the repayment of any or all of the £100 million? My impression from the trust is that it does not know. There might have been nods and winks, and conversations that I have not been privy to, but as far as information in the public domain is concerned, we do not know. For example, what if it had to pay back a 10th of the deficit next year? That does not sound much; it is £10 million. Let us imagine what it would be like for a body to discover two weeks into the financial year that it had to find £10 million. That would be crazy, but it is absolutely typical of the way in which NHS finances are managed. Indeed, it is something of a privilege to find out about financial change in the NHS before the year starts; it is normal to find out halfway through.

I hope that the Minister can assure us that, whatever decision he comes to about the repayment of any or all of the money, the trust will be given plenty of forewarning and not be expected to make substantial repayments early and in a way that would affect front-line patient care. In a sense, that brings us to an important facet of the issue. Ultimately, it is not about an accounting or technical matter, but about the impact that deficits have on the effective functioning of the NHS. I wish to discuss why deficits matter so much, again drawing on the excellent report of the Audit Commission and NAO, which highlighted four important reasons why deficits matter.

The first reason is the impact of cost-cutting on service delivery. The Minister will say that we are treating more people, that we are hitting the targets and that waiting times are coming down, and so on. There is a lot of truth in that, but anything that does not have a target attached to it is affected by cost-cutting. Anything that does not involve a performance indicator or that is not monitored in respect of targets gets cut.

There are things that trusts can do to deal with cost-cutting. For example, the introduction of minimum waiting times—treating people later than is necessary—happens because trusts are trying to make ends meet, and that affects front-line patient care. I fully accept that it does not take us back to the extraordinary waiting times of 10 years ago, but it is clear that trusts that are trying to make ends meet sometimes make short-term decisions that may not be optimal for the long term. That is one of the worries that the Audit Commission and the NAO rightly highlight.

Some trusts make ends meet in the short term by doing entirely short-termist things that have a damaging long-term impact. For example, in the past—I believe that the rules have changed now—capital investment was deferred, to the long-term detriment of the trust, and funds were switched into trying to make the revenue budget add up.

Again, I urge the Minister to ensure that any schedule of repayment that is announced for the North Bristol trust will allow its long-term stability to be preserved. It must be able to make decisions based on the long term, not just on desperately scrabbling around to try to make the budget add up by the end of Wednesday fortnight.

Obviously, the fundamental concern is the impact of cost-cutting on service delivery, but the second is cash shortages, from which the North Bristol trust has suffered. Even towards the end of last year—a year in which the trust was on the brink of financial balance—it had to borrow money to pay its bills. That seems a ridiculous situation.

Cash shortages can have serious effects. The NAO provides a case study of the Queen Elizabeth Hospital NHS Trust, which was struggling financially in 2005-06. Some of the things that it considered withholding were tax and national insurance payments on behalf of its staff, payments to PFI partners and general payments to creditors. Each of those would have had a worrying consequence. In the end, the trust was bailed out through a sort of emergency cash brokerage. But imagine what could have happened. Non-payment of PFI partners would increase the cost to everybody in the NHS for future PFI projects. If people who are involved in PFI projects in the health service were to realise that cash-strapped trusts might default on or delay payment, it would be more expensive to do things through PFI. There is a cost implication.

What if trusts were to delay paying bills from private suppliers and small businesses? They are doing that. The public sector is supposed to set standards in prompt payment, but NHS trusts are some of the worst for paying bills, and that of course leads to a premium. If I want to do business with an NHS trust, I will build into my price the cost of a delay in payment. The cash crisis has a consequence. Should Revenue and Customs—the general taxpayer—have to wait for NHS employees’ national insurance payments because trusts are broke? Short-term cash shortages have real impacts, and too many trusts are facing them.

The third thing that the NAO and Audit Commission report highlights is how management resources are diverted. The chances are that the finance director, not the clinical director, will get the most attention in a trust with a cumulative deficit of £100 million, and that is a real worry. That is not to say that there is not first-rate clinical care at the North Bristol trust. In many cases, there is such care, but it is human nature that managers wrestling with such a debt without knowing when it has to be repaid will devote much of their energy to trying to save money, and will make short-term economies that, inevitably, will be at the expense of a focus on patient care.

The last concern highlighted by the NAO is about future foundation status, to which I referred earlier. How will trusts with accumulated deficits ever become foundation trusts? It is clear that there is a different regime, as foundation trusts can fail, although I believe that the failure mechanism is not yet well worked out. Could the Minister clarify whether his timetable for making all NHS trusts foundation trusts is still on track? Does he still expect that to happen by the end of 2008? I cannot see how the North Bristol trust, with an accumulated deficit of £100 million, can become a foundation trust without a write-off of some of the debt, and a clear and affordable repayment schedule—even coupled with the PFI liability that it is about to take on. Are we on for 2008, and how is that compatible with wider Government policy? The issue is local and specific, but the effects of deficits are also more general.

I mentioned that the North Bristol trust does not believe that it actually has any debts at all, as they do not formally appear on the balance sheet in the normal way. I mentioned the private dividend capital, but I would like some clarification on the other slice, the £48 million. The way that the North Bristol trust tells the story is that in any year that it was bailed out—it does not use those words, but that is obviously what happened—there was a freestanding transaction and no clear reciprocal obligation arising from it. There was never a deadline for paying back money that was handed over. That situation, which increases the uncertainty that trusts face, is not clear to me.

If the North Bristol trust, as well as simply breaking even were to start to make surpluses, and if a hypothetical neighbouring trust that had no historic deficit were also to start to make surpluses, would there be, in effect, a North Bristol trust tax to match the North Bristol trust subsidy? I do not want to be hysterical about this, but I hope that the Minister will respond on that specific point. In other words, if two identical trusts next door to each other—one with an accumulated deficit, one without—both make a small surplus, will they be equally required to put money into the national pot to deal with deficit trusts, or will the North Bristol trust have more of a handicap because of the help that it received in the past? Will there be more of a penalty on financial recovery if a trust has historic deficits?

How will that work with foundation status? Presumably, once a trust is a foundation trust, it can dispose of surpluses as it sees fit. Perhaps the Minister will say that that will be resolved before the trust becomes a foundation trust, but if the time scale is the end of 2008, the North Bristol trust will not be able to pay the money back. It may never be able to do so, but certainly not by the end of 2008. Some deficit must be carried forward into a trust’s existence as a foundation trust, so how will that work? Will there be a first claim on surpluses, if a trust makes them? It would be helpful if the Minister could clarify that.

To draw the threads together, there have been improvements in the NHS. I supported the extra investment, which was entirely welcome. But one of the things that has bedevilled the NHS in recent years has been financial uncertainty and in-year changes—I believe that some primary care trusts have been top-sliced three times within a year—and now acute trusts are expected to plan for new hospitals and a new generation but still do not really know where they stand.

As I said, the issue does not affect North Bristol NHS Trust only. In the piece in The Guardian that I referred to earlier, the chief executive of the NHS “did not dispute”—I am not quite sure what that means—reports that

“at least a dozen trusts were in an irrecoverable financial predicament.”

I am aware of the statutory duty to break even. The letter from the Department to the North Bristol trust said that the trust was in breach of its statutory duty to break even because it had failed to recover within five years.

I would not want to be reported as saying that the chief executive of North Bristol NHS Trust should be clapped in irons and dragged away to Horfield prison, but what does breaching a statutory duty mean? If it is statutory, if a law has been broken, what should happen? I am not clear that the statutory duty has any force. The letter spoke of a breach of statutory duty, but life appears to be going on pretty much as before. Will the Minister clarify what force it has? Four of the 10 trusts mentioned in the league table had, at that point, four years of cumulative deficit, so several of them are on course to breach their statutory duty.

At one level, we could have spent the entire debate talking about the deficits in NHS trusts in any given year, but my focus has been on accumulated deficits. It is my perception that those deficits are like millstones around the necks of those trusts and their hardworking staff, North Bristol NHS Trust being the exemplar. I am sure that the Minister will properly pay credit to the people who work at North Bristol NHS Trust, who do an outstanding job.

Inevitably, Members of Parliament are contacted when things go wrong, but I receive a good flow of information from people saying what a good experience they have had. Nothing that I have said this morning was designed to say anything other than that. Those people and the patients of the North Bristol trust need to know where they stand.

I draw those threads together. My first plea, for my constituents and my trust but also for trusts across the land, is for certainty. They need to know where they stand, and they need plenty of warning if they are going to have to repay some or all the money. My second plea is for those trusts that, in everyone’s words, are in an unrecoverable position as regards their historic deficits. The current position may be recovered, but the historic position is a millstone.

Action needs to be taken. I realise that it must be conditional on the trusts getting their financial houses in order—which the North Bristol trust has now done. The uncertainty has continued for far too long. I believe that the Government may be about to make a decision on the matter, which I would welcome; but in recognition of the achievements and the progress that has been made, I urge that the debt does not remain as a millstone. I would particularly value an assurance that the public dividend capital will be allowed to roll on indefinitely, because the most sustainable way to deal with the problem is to allow the trust to continue servicing the debt but without having to repay the capital.

I would be grateful for the Minister’s clarification on what future liabilities have been incurred by the North Bristol trust, either implicitly or explicitly, in respect of the help that it has had since the lump-sum bail out—in other words, when it was helped during the past three years. Is there now an expectation that the money will be paid back; or as the trust goes into surplus, will some or all of that money go into the pot for those parts of the NHS that are no longer in surplus?

It is a privilege to have had the opportunity to raise such an important issue in this Chamber, and I look forward to hearing the contributions of other hon. Members.

It is a pleasure, Mrs. Humble, to serve under your chairmanship for the first time. I congratulate my hon. Friend the Member for Northavon (Steve Webb) on securing this debate. The subject is clearly central when it comes to delivering good-quality health care, both now and in the years ahead.

Of all the points that my hon. Friend drew to our attention, one of the most important seems to be that health trusts are rightly expected to demonstrate clear financial discipline. We can only go forward if trusts delivering health services do so, but it is extremely difficult if they are operating in an uncertain financial climate—and the financial climate is provided by the Government.

My hon. Friend used as a case study his local North Bristol NHS Trust, which has a deficit of £100 million. He made interesting and important points about the public dividend capital of £52 million—the first part of the debt. The trust is able to make the repayments, but—this is one of the examples of uncertainty—it appears to be unsure whether it will ever have to repay the money. That is an impossible position for such an organisation, and not one that any private company would suffer.

That position reminds me of the problems of the Norfolk and Norwich University Hospital NHS Trust which were brought to my attention. Just before the start of the financial year, the trust received the full details of the financial package within which it would have to work during the coming financial year. When it came to managing its resources effectively, it said that it had heard about the package far too late. When planning for the year ahead, it was faced with an extremely challenging financial position and unexpectedly had to make cutbacks of several million pounds because the settlement was worse than expected.

On the current deficits of trusts around the country, the figures for the third quarter were published recently. The forecast gross deficit across the NHS for that quarter is £1.3 billion. The deficit at the end of the second quarter was £1.179 billion. The position has worsened, and those figures were higher than those for 2005-06. The commentary that accompanied the figures confirmed that 35 per cent. of organisations are in deficit—a high total. We keep hearing that we will secure a financial balance across the NHS, but the fact that 35 per cent. of organisations are in deficit is clearly a cause for concern. Again, that figure was up on the second quarter, when it was only 33 per cent.

The commentary also reported a sharp increase in the number of primary care trusts in deficit in the current financial year, when it is supposed that things were starting to be sorted out. Richard Douglas, who wrote the commentary—he is the Department of Health’s director of finance and investment—said that the problem remains a “cause for concern”.

I understand that the figures take account of top-slicing. I shall return to that, but it is clear that the process has plunged more trusts into deficit. Many feel a sense of grievance that they have managed to operate in surplus, but then an arbitrary decision is suddenly taken to slice off some of their funding. I appreciate that, in theory, the funding comes back later, but not all trusts believe that it will be refunded in full. They feel that their position has been made a lot more difficult.

I spoke over the weekend to the chairman of a primary care trust in an impoverished part of London. He explained that it gets extra funding because of the community that it serves but that it then suffers top-slicing, which takes away some money and makes its position more difficult. I accept that the Department said in its commentary that there was an expectation that £300 million of that top-slicing could be repaid. That is about a quarter of the total money taken from trusts, but it would still leave a gross deficit of a little over £1 billion.

The position is clearly different in various parts of the country. The Select Committee on Health considered where the deficits were occurring and their cause. It is hard to define any clear link, as there are many causes, and I shall return to that. In some parts of the country the position is very bleak. I come from the east of England, where the situation is extremely challenging and, most important, getting worse. There is no sense of improvement. I met the acting chief executive of the newly formed Norfolk primary care trust in October last year. Incidentally, she has now gone—forced out, it seems, by the strategic health authority. The Norfolk PCT talked about significantly reducing the deficit in this financial year and suggested that it could cut £9 million off the deficit and then clear the rest in the next financial year. The reality is that it is now forecasting a deficit, which, if anything, is slightly higher than that inherited when it took over at the beginning of October. No progress has been made with that at all.

London and the south-east continue to suffer substantial deficits within strategic health authority regions. London contains many deeply impoverished boroughs, and the anxiety that I hear when colleagues talk about the impact on local health services is disturbing. On individual trusts, the point that my hon. Friend has made is that some are clearly in an impossible position. Most people concede that it is impossible for trusts ever to clear the total deficit that they face. Trusts must carry the burden of deficits at the same time as a rapid pace of reform is imposed by the Government and must cope with substantial deficits and an imperative to clear those deficits in a tight time scale.

By implication, much of the Government’s rhetoric puts the blame for large historic deficits purely on the local trust organisations that face such deficits. As my hon. Friend mentioned, there has been a lack of financial discipline in the past—we all recognise that. Part of the problem is that many trusts have been starved of investment for so long that when the extra investment was suddenly made, it was difficult to handle such a significant and sudden inflow of additional resources. There has been much discussion of how money went into employing more staff. Trusts now find that they must cut back on staff and that that creates a boom-and-bust effect. Staff are brought in and then must be cut again because of the financial crisis faced by many trusts.

In his commentary, Richard Douglas refers to the

“previous overspending that they will need to address”.

His rhetoric points to responsibility simply resting with the local trusts concerned. However, in the Health Committee report published before Christmas, a far more complex picture emerges about how deficits have developed. It is harsh to suggest that there is a unique concentration of financial incompetence in the east of England. If that is really what the Government are saying, I certainly take offence, and I am sure that people working in the NHS in the east of England would too. As we know, the position is far more complex. The third quarter report acknowledges that

“there will remain a number of individual organisations with significant problems”.

On the complex pattern of how such deficits have built up, my hon. Friend discussed the rather pernicious effect of resource accounting and budgeting and the double deficit. The Health Committee highlighted how that could lead to a rapid worsening of accumulated deficit and create a downward spiral. The Committee’s conclusions were stark:

“As presently operating RAB is not a suitable accounting regime to use within the NHS.”

It could not be any clearer than that.

As my hon. Friend said, David Nicholson—chief executive of the NHS—used the phraseology “unsustainable and inconsistent” in relation to the principles of fair funding for hospitals. On the one hand, he accepted the logic of the Audit Commission’s proposal to exempt trusts from the resource accounting and budgeting regime. On the other hand, he said that no change was likely in the near future. While such a regime continues, the problems continue to stack up.

The Government’s response, published a fortnight ago, to the Health Committee’s report confirmed the view that the RAB accounting regime was becoming increasingly unsustainable. The response states:

“At this stage, it is not possible to commit to changing the RAB regime”.

Tantalisingly, the response goes on to say:

“the Department is looking seriously at the case for reversing the impact of past RAB deductions for NHS trusts for delivery of financial balance in 2006-07”—

this financial year—

“and at the future application of the RAB regime for NHS trusts.”

The Government are considering that issue, but, as my hon. Friend asked, will the Minister make an announcement today about the financial uncertainly that trusts face? Trusts still do not know whether ultimately the rules will change, even though they are required to behave in a way that will clear deficits and make tough, difficult decisions about local health services. What is the time scale for the review and when will the Government know whether a change will occur?

On other causes for the problems which go beyond RAB, the Health Committee referred to the funding formula. A funding formula from central Government will always lead to complaints that certain parts of the country are unfairly penalised compared with others. The Committee highlighted concerns that the formula had an unfair effect—for example, on rural areas. I do not know what the conclusions were, but there is clearly a continuing concern in the health service that resources are not fairly allocated from the centre. The Committee referred to the effect of Government policies in terms of the development and build-up of deficits—particularly the accident and emergency department four-hour target. I readily accept that the four-hour target has, in many cases, transformed how hospitals operate. When I recently visited the Norfolk and Norwich accident and emergency department, people were broadly positive about the effects of the target. However, the financial consequences for trusts already in some financial difficulty have been tough.

The Committee’s report refers specifically to poor management by the Department and the fact that it went over budget on the “Agenda for Change” and on the GP and consultant contracts. The Committee refers to the cost estimates as “hopelessly unrealistic”, which is a fairly damning indictment from an all-party Committee and highlighted poor local financial management, which is clearly part of the overall cause. The Committee specifically mentions the impact of private finance initiative schemes—as raised by my hon. Friend—and also refers to the impact of the independent sector treatment centres on finances.

My hon. Friend referred to a matter that relates to the Norfolk and Norwich University hospital. In that case, the local chief executives and chairs of the previous primary care trusts in Norfolk warned, at the time, that there would be substantial refinancing. They also warned that the costs of the hospital were excessive and had a damaging effect on the finances of local primary care trusts. That warning was given to the Government and I subsequently referred the issue to the National Audit Office, which confirmed in a parliamentary report that, through PFI, we were paying over the odds for the hospital, one of the earliest to pioneer PFI. That has had a damaging effect on the finances of the Norfolk health economy, but do the Government help? No, they do not. Norfolk PCT has a £47 million deficit, which it is expected to clear by the end of the next financial year. The people and patients of Norfolk will ultimately pay the price for those deficits unless the Government are prepared to consider how to resolve accumulated historic deficits.

On the impact of how the Government have tackled the debt problem, it is worth noting that substantial debt existed before the 2005 general election. However, then there was a different approach to how to deal with the problem. More time was given, which got trusts through the difficult period of the general election, but once we were through the election, the position started to change, and of course the Secretary of State gave the infamous commitment that by the end of this financial year the NHS “as a whole” would break even. That seems to me to have driven the policy—the political imperative to ensure at all costs that the NHS as a whole breaks even.

What has suffered? My hon. Friend the Member for Northavon referred to cash shortages and the perverse consequences of those, but in terms of the health services that have suffered, the Health Committee referred to soft targets, including voluntary organisations, often doing incredible work on a shoestring, which suddenly find that their funding has been cut. Soft targets also include hospital chaplaincies and mental health services. There is lots of evidence from around the country that critical mental health services have been cut. Another soft target is public health and, in particular, sexual health services. Money allocated to those services has been diverted to clear deficits.

There was reference to out-of-hours services. In Norfolk, when the contract goes out to tender this summer, there will be a reduced specification, and the out-of-hours service will decline. As we saw this week in the report relating to ambulance trusts, that has knock-on effects. It is the law of unintended consequences: the out-of hours service is reduced, suddenly more people are calling ambulances, at great cost, more people are admitted to A and E, and the overall cost to the NHS ends up increasing.

Large numbers of posts have been deleted. It is great to avoid the particular damage caused by compulsory redundancies. No one wants individuals to lose their jobs, but if posts are simply deleted when people retire or leave their employment, that is totally arbitrary in its effect. Some departments can be affected far more than others. Trusts have found the impact of lost posts very damaging.

Training budgets held by SHAs have been cut by, I think, £350 million. My hon. Friend referred to short-term measures having long-term damaging consequences. What is happening with training budgets is one such short-term measure. There is also the impact of top slicing, which I have mentioned. Management resources are diverted to try to cope with an endless financial crisis, rather than an attempt being made to deal properly and objectively with Government reforms.

I want to say a few words about the role of strategic health authorities. I have witnessed in the east of England that SHAs are in an incredibly powerful position. From what I hear off the record, they are dictating how PCTs clear their deficits. We have ended up losing the acting chief executive, we understand, because of pressure from the SHA. SHAs seem to operate entirely without public accountability. They operate in the shadows and are accountable only to the Secretary of State. That needs to be examined. There ought to be transparency in the operation of SHAs and the directions that they give to local health trusts.

What is to be done? We all accept that as we go forward, there should be strict financial disciplines. Simply to remove deficits or clear deficits without requiring trusts to demonstrate that they are achieving in-year financial balance and are likely to continue to do that into the future on a sustainable basis would be ludicrous. However, there are reports of turmoil from all over the country and massive opposition is building up, because people are, rightly, protective of their local health services. When some trusts are in such deep financial difficulty that objective reports from the outside recognise that they are in an impossible position when it comes to clearing those deficits, something has to be done.

I repeat my hon. Friend’s plea that, above all else, there has to be certainty and clarity so that trusts can demonstrate financial discipline. People cannot demonstrate financial discipline when they are operating in a vacuum in terms of what the Government expect from them. Therefore, will the Minister provide clarity about the review that is apparently under way and particularly about the impact of the RAB accounting regime, and can he give any reassurance to those trusts and those parts of the country that are currently seeing fairly savage cuts to their local health services?

I congratulate the hon. Member for Northavon (Steve Webb) on securing this important and timely debate. He obviously wanted the opportunity to return to the health portfolio.

In the time that is left to me after nearly an hour of a Lib Dem fest, I want to start by reiterating my and my party’s unequivocal support for all the wonderful work of the clinical and the non-clinical NHS staff. Too often as we lay bare the myriad incompetences of the Government, we hear the silly accusation that we are attacking NHS staff. It is terribly important that we place on the record the fact that we salute and applaud them for what they do. However, there are big issues of strategic direction, management and Government responsibility that we have to discuss without that being considered unfair or inappropriate.

The Labour Government have presided over the biggest deficit ever in our NHS. The Minister will no doubt talk about the extra investment, but as we approach conditions of famine following the feast, we have to examine the effect that the deficits are having on the overall confidence that many trusts and the public at large have in the Government’s ability to manage the crisis, which is of their own making.

Let me remind the Minister of the figures. In the last financial year—2005-06—NHS trusts had gross deficits of £1.312 billion. A third of acute trusts and PCTs were in deficit, and 42 organisations had deficits of more than £10 million—a huge increase on the two organisations with such a debt in the financial year 2003-04.

It would be wrong of the Minister to repeat his mantra that most of the debt is concentrated in a small number of trusts. It is true that in the last financial year, 11 per cent. of the 174 trusts in deficit accounted for 70 per cent. of the gross deficit, but the Minister’s protestations on that score have been misplaced and will be again if he repeats them today. First, the argument is irrelevant, as NHS organisations are, rightly, not profit-making organisations—that is, they cannot recoup the deficits of one year through what might be described as a bumper year the following year, if they are fortunate enough to have one. Secondly, and more importantly, the Labour Government’s system for solving the deficit crisis has impacted adversely on the finances of all trusts and, consequently, on front-line services to patients.

A rigid system has been put in place this year to try to recoup the deficit money. It looks as though the Government may have skimmed off enough money to deliver something approaching a net run rate balance by the end of the current financial year at the end of this month. However, the figures tell a different story. Labour has imposed draconian measures on the NHS. Patients, students and NHS staff—we have read this week about junior doctors, in particular—have borne the brunt of the Government’s financial management. That is unfairness of the highest order. We have seen about 20,000 job cuts—I hope that the Minister is listening; the phrase is “job cuts”—through vacancy freezing, post cutting, wastage and redundancies. Training budgets have been savaged—behaviour that is utterly short-sighted. The derisory pay settlements that the Government have put in place for this year are a naive attempt to claw back some cash, but no credibility, after the mess they made of renegotiating salaries with NHS staff.

The hon. Gentleman has referred to “derisory” pay settlements. Would he care to go on the record, then, with what the current Conservative policy is on public sector pay?

Much as I would like to be in the Minister’s post, I am not, and it is up to him to sort out the pay settlements. The real issue, given the previous, failed negotiations, which were carried out in a deeply incompetent way, is what the Government have had to do this year. This has been a very sorry tale in terms of motivating people. The accusation stands, and patient services have been cut as a result. As ever, however, the Minister has focused totally on taking the use of words such as “derisory”, which are intended to be suitably insulting and critical of the Government, to mean that an Opposition Member has suddenly made a spending commitment, but I have not, do not and will not make such commitments. That is the sort of silly banter that comes across the Chamber when we try to deal with serious issues such as the motivation of staff who are deeply committed to the NHS.

The Government have been deeply incompetent and allowed themselves to be rolled over by certain parties with whom they negotiated. This has been a long story of incompetence. Above all, patient services have been cut. I know for a fact that there have been cuts in the number of Parkinson’s disease nurses and podiatrists, and in many other services that are vital to people with particular conditions, such as diabetes. The Government’s short-sighted approach has resulted in a shortage of the very services that, through early intervention, help to keep people off the more expensive treatments in hospitals.

None the less, the Government have failed to solve the debt problems, despite unquestionably savage cuts and an increasingly expensive turnaround programme—getting up-to-date information on the cost of that programme is like trying to pull teeth, although that is probably more than dentists who have run out of units of dental activity can do at the moment. It is the gross, not the net deficit figures that display whether the situation is improving, and NHS trusts forecast a deficit of £1.318 billion in 2006-07, which is slightly larger than last year’s deficit. The debts of NHS hospital trusts have accumulated over the past three financial years. At the end of 2005-06, their accumulated debt was £1.1 billion, but by the end of this financial year, based on the month 9 forecast, it could be £1.7 billion. As the hon. Member for Northavon said, measures to bring NHS trusts back to a run-rate balance will not deal with that accumulated debt.

In part, that failure is a reflection of the Government’s inability to increase efficiency in the NHS. The Chancellor may spin the figures to the press, as he does, but he must surely recognise that successive Labour Health Secretaries have failed to deliver anything like the efficiencies that have been repeatedly promised at the Dispatch Box. Indeed, the Labour party has presided over an NHS in which, on the latest available figures, productivity has fallen by 1 per cent. for every year in which they have been in office. That is in somewhat stark contrast to the previous Government’s record.

The deficits in each trust lead to two problems. First, as has been rightly argued, resource accounting and budgeting means that hospitals that are affected are regarded as having pre-empted resources. Their income for the next year must therefore be reduced by an equivalent amount, which is treated as a first charge on that income. That is the double-counting of the deficit, which carries on to the balance sheet and the income and expenditure account. In business, however, people put a plan in place over a period of, say, three years to ensure that there is no attack on their core business, and so it should be here. The Audit Commission has recommended that RAB should be applied not to NHS trusts or NHS foundation trusts, but to PCTs, and we agree. When will Ministers respond positively to that recommendation? It was to be covered in the operating framework for 2007-08. Why was it not?

Secondly, as has been argued, accumulated deficits on the balance sheet prejudice the ability of NHS trusts to achieve the financial control and credit worthiness necessary for foundation trust status and to undertake borrowing for capital investment. It is therefore necessary to have a plan to determine how such historic debts can be dealt with.

Write-off is seductive, but wrong. It was interesting to listen to the hon. Member for Northavon go through his case, and many of the revelations that he and others have unearthed are quite shocking. I notice, however, that his website says that he will be

“pressing for a swift resolution to this issue, and for a serious write-off, conditional on assurances that NBT have now got their finances in order”.

We need to be careful about what we ask for, and I think that I heard the hon. Gentleman repeat that he is looking for an element of write-off. This is a tough question, but I think that write-off will send trusts entirely the wrong signal: it will tell them that, once again, they do not have to face up to deficits. Furthermore, write-off cannot be the priority for NHS resources.

One possible option, which must be explored—this has already been touched on—is that NHS trusts that have otherwise met all the requests for foundation trust status, especially in terms of having sound financial control and business planning, as well as no current deficit, should be enabled by the Government to convert historic debt into public dividend capital on their balance sheet—still paying a dividend, but not prejudicing their future status and capital investment. That could avoid the terrible damage that is being wreaked on trusts’ core business—the front-line services. I urge the Minister to say whether he is looking at that; I hope he is.

If such an approach were adopted, after having been fully explored, it could carry a powerful positive incentive. Trusts such as North Bristol—once a byword for financial deficits, but which has been turned around financially—could be given an opportunity. We need only compare the financial performance of foundation trusts with that of other NHS trusts. SHA performance management has clearly failed compared with Monitor.

I am interested in the hon. Gentleman’s point, but I think that he has drawn a dubious conclusion. If we select only those trusts that are financially well managed and whose finances are under control and call them foundation trusts, we will mysteriously discover that they are better at financial management than the trusts that we decided were not good at financial management. It is therefore a complete non sequitur to conclude that Monitor is better than the SHA.

No, that is being over-simplistic. Monitor has demonstrated that it can look at organisations’ conditions and financial health in a way that makes less of an imposition on the conduct of their core business and interferes less with it. So far, therefore, that is the better model.

What is certain is that the Secretary of State and her Ministers must be held to account for the deficits, the failure to solve the problem and, in particular, trying to mask that problem through savage cuts to front-line patient services. I hope, therefore, that the Minister will acknowledge that the disaster that has been created and perpetuated could be mitigated by ensuring that the Government at least think about RAB.

On the “Today” programme of 11 December 2006, the Secretary of State said that RAB

“is not causing the overspending”.

However, in evidence to the Health Committee inquiry on NHS deficits, on 21 November 2006, she said that

“whereas the application of RAB to hospital trusts might have been appropriate in the old days what we and the Audit Commission found was it was not consistently applied as between one region and another or one Trust and another. It is not consistent with payment by results and the new financial regime we are putting in place and it cannot be applied to foundation trusts. For all of those reasons we all agreed that it needed to be looked at.”

It is hardly surprising that NHS finances are in such a parlous state if the Secretary of State herself does not know what the system should be. In November last year, she vowed to take responsibility for solving the deficits. Therefore, I hope that the Minister will tell us whether he or any Labour Minister—particularly the Secretary of State—will take responsibility.

The fundamental point is to recognise that there cannot be simplistic write-offs. There must be a planned approach that does not simply cater arbitrarily to the Secretary of State’s convenience, but which is rather more focused on ensuring that the core business of delivering front-line patient services to, for instance, the constituents of the hon. Member for Northavon, is not affected. A proper business and financial plan must be put in place in recognition of the fact that the accumulated deficits must be paid back over time.

The proposal to look at that issue should be explored. The Opposition, who do not have the resources available to Ministers, have not been able to examine it, so it would be helpful if the Government said that they are genuinely considering the opportunity of exploring how public dividend capital and the dividends paid out of it could contribute to finding the solution.

I add my congratulations to those that have been offered to the hon. Member for Northavon (Steve Webb). It is good to have him back on health matters. Like the hon. Member for Eddisbury (Mr. O'Brien), I think that we have had a rare treat this morning, with the finest brains of the Liberal Democrats giving us their thoughts: Liberal Democrats and NHS finances—an enticing prospect.

The hon. Member for Northavon spent much of his speech describing the details pertaining to North Bristol NHS Trust, and I shall deal specifically with some of the questions that he raised about it, but I hope that he will permit me, given the ambit of the debate, to go more broadly and discuss some more general points about the treatment of debt in the NHS. I am pleased that my hon. Friend the Member for Bristol, North-West (Dr. Naysmith) has joined us, as he takes a close interest in the future of the trust and its plans.

We are 25 days away from the end of the financial year, and I readily accept that it has not been an easy financial year for parts of the NHS. All three hon. Members who have spoken have tempted me to pre-empt some of the decisions that the Government might take when reviewing the financial year. They will have to forgive me if I do not accept their invitation to do that, but I shall try to give a greater flavour of our thinking on those matters and share some of our thoughts about where that will lead us.

As the hon. Member for Northavon anticipated, it is right to set out some context for this debate about the treatment of debt in the NHS. The Government have injected unprecedented funding into the NHS and, in doing so, have improved the quality of patient care and access to health services beyond all recognition. NHS funding has doubled in the years between the Government’s first taking office and the current financial year, and it will effectively treble by the end of 2007-08—the financial year that is just about to begin. In fact, under our stewardship, the NHS has enjoyed the benefit of average annual real terms growth of 6.3 per cent., which is more than double the historic annual growth before 1997. Those figures should be put in context. Demands on the health service rise every year, but nevertheless the figures speak for themselves.

Perhaps I may answer just one of the comments of the hon. Member for Eddisbury: he said that the deficit at the end of the 2005-06 financial year represented the biggest in the history of the NHS. I think that those were his words. The audited year-end net deficit of £547 million needs to be set against the final accounts for 1996-97, when the deficit was £459 million. Granted, that was lower than last year’s deficit, but £547 million represented 0.7 per cent. of total NHS revenue spend. The 1996-97 deficit represented 1.5 per cent. of NHS total revenue spend. I am pretty confident in saying that that was a far larger percentage than had ever been seen in the NHS previously. The hon. Gentleman should reflect on that before handing out the lessons.

Every primary care trust received an above-inflation increase in funding in 2006-07 and will do so again next year. That is an average of 9.4 per cent. across the NHS. By far the majority of NHS organisations have also continued to deliver the high quality improvements to patient care that we have asked for, while remaining in financial balance or better. Moreover, we believe that allocating the vast majority of central NHS programme funds to strategic health authorities much earlier in the year, and thereby devolving significantly more control over funding to local decision making, has given the NHS much greater local flexibility to balance local needs and the delivery of national targets.

I want to say something about the announcement last week on the North Bristol PFI scheme. For the hon. Member for Northavon, that is a matter of some controversy, whereas my hon. Friend the Member for Bristol, North-West considers it a very welcome announcement. I picked up from the hon. Gentleman a kind of grudging pleasure that the decision was finally taken and that the trust could move forward. On that matter, and on finances, I accept his point that clarity is the important thing for that hospital trust at this time. It needs to know its future, where it is heading and how it can go from a cycle of difficult decisions into a cycle of improvement and clarity about the future. I accept that general point and I hope that we can begin to provide more of that certainty as the weeks go by.

I believe that the scheme that was put forward—a £347 million PFI for North Bristol NHS Trust—is exciting and financially viable, and I am led to believe that it will transform acute services in the area. I pay tribute to my hon. Friend the Member for Bristol, North-West for the persistence with which he pressed the case for the trust and the need for an announcement. In the end, I was happy to meet him and make that announcement for the benefit of the trust.

I hope that the hon. Member for Northavon will accept that, having regard to the management of finance in the long term, it makes more sense—although he may disagree about the location of the scheme—for the trust to benefit from modern facilities in which to provide health care, and that the facilities should not be spread over multiple sites. The arrangements will give the trust financial and running cost benefits in the long term, and there will also be the benefits that come from a larger, integrated clinical team sharing experience and knowledge. That is part of the background to the hon. Gentleman’s debate, but I shall come on to some of the questions that he asked me about the trust’s financial certainty. That is the other side of the equation, now that we have more clarity on the estates question.

We do not underestimate the very real financial and, in some cases, operational challenges faced by some organisations in 2006-07. The hon. Member for North Norfolk (Norman Lamb) referred to some of them. We have always been clear that the priority for this year would be to return the NHS to financial balance overall. For that reason, as the current year got under way, my right hon. Friend the Secretary of State for Health set out three clear financial objectives to be delivered by the NHS without compromising progress against public service agreement targets. Those objectives were to deliver net financial balance across the whole NHS by 31 March 2007; to see an improvement in the financial performance of all organisations that reported a deficit in 2005-06; and to achieve recurrent monthly run-rate balance across as many NHS organisations as possible by the end of the financial year.

The hon. Member for Eddisbury asked what we would take responsibility for: we will take responsibility for the delivery of those objectives, alongside the commitment that they will not lead to the breach of key public service agreement targets. I am confident that we shall be held to those promises, and the NHS is well placed to deliver on them.

As we reported in our third quarterly report on NHS finances, the NHS has made considerable progress in delivering against each of our key financial objectives, and remains on course to end the year in net financial balance. Taking account of the £450 million savings that strategic health authorities have identified by their continued good management of central NHS programme funds, the NHS overall recorded a forecast year-end surplus of some £13 million at the end of the third quarter of the year. That is a remarkable achievement and bears witness to the hard work of NHS staff across the country in seeking to deliver savings, increase the efficiency of working practices and reduce deficits.

I thank the hon. Member for Northavon for saying that he did not demur from the principle that people should be constantly challenged to provide more efficient and productive ways of working. The magnitude of the improvement is perhaps best understood by looking at the movement in net deficit in the past couple of years. It stood at £221 million at the end of 2004-05, and had increased to £547 million in the 2005-06 final accounts. If that trend had continued on a simple linear basis, we might have expected a net deficit of around £750 million by the end of the current year. Instead, the forecast surplus of £13 million at quarter three, coupled with our expectation at least to achieve financial balance by the end of the year, illustrates very clearly just what a significant improvement has been achieved and creates a platform of stability from which the NHS can move on.

We should consider organisations that were in deficit at the end of the last financial year in terms of their current in-year financial position, when the impact of deductions for prior overspending is ignored. There has been a significant improvement in those organisations. Our analysis shows that 82 per cent. of trusts and 69 per cent. of PCTs are forecasting an improved in-year position compared with 2005-06. Deficits continue to be concentrated in a small minority of organisations, with 50 per cent. of the gross deficit being attributable to just 5 per cent. of organisations. By far the majority of organisations are in balance or better, and continue to deliver quality services and improvements.

On achieving run-rate balance, I am pleased to say that a healthy majority of NHS organisations reported a positive monthly run-rate balance at quarter three. Indeed, our analysis indicates that only a small number of organisations— 17, to be precise—are not likely to achieve that objective by the end of March. It is right to pay tribute to the trust that serves the constituents of the hon. Member for Northavon and my hon. Friend the Member for Bristol, North-West, because it has made a clear and obvious improvement since its difficulties a few years ago and is now in run-rate balance, hence its wish to push on and achieve foundation trust status. There has been clear improvement, and I am sure that the hon. Gentleman and my hon. Friend will join me in welcoming that.

I agree with the Minister on that, but can he explain why the situation in the east of England appears to be moving in the other direction? The total deficit in the strategic health authority increased at the end of quarter three compared with quarter two, so all the disciplines that he is talking about appear not to be working there.

I shall answer that point in relation to the causes of deficits. As the hon. Gentleman said in his speech, the origins of deficit are not simple and one cannot pinpoint one factor, because they are complex. He also said that it is not good enough just to say that the quality of management is not good enough in a geographical area. That is true, but there has been a pattern of overspending in certain parts of the country that has been allowed to continue, rather than being tackled. That is part of the reason for what has happened this year—that nettle has been grasped.

The NHS financial system of old did not provide ready transparency on overspending. When people looked at the end-of-year accounts, they did not automatically see that there was a clear problem with overspending in a certain region. It did not become clear, as if by magic, where the problems were. The new financial regime is bringing much greater clarity about where the problems with overspending lie. One difficult point that we need to explain more is that the NHS is not the same in all parts of the country. The infrastructure is different in different parts of the country, and that needs to be considered when working out the causes of deficits.

I shall now answer some of the specific points that the hon. Member for Northavon raised. He asked about the trust’s situation regarding its private finance initiative and how the two could be married up, given that the big issue of debt must still be addressed, while progressing with the PFI. I confirm that the trust’s plans were assessed as being financially sound as part of the Government’s overall review, which considered the size of the scheme and whether it would meet future health needs. When we come to the final business case assessment and the final process, we will need to consider the financial position of the trust. Any such consideration will take the trust’s current financial position into account.

The hon. Gentleman asked about the force of the statutory duty to break even and what it means. When an organisation breaches a statutory duty to break even, the appointed auditors will issue a public interest report to the Secretary of State notifying her of the breach. The Department will work with the organisation, via the SHA, to put in place a plan to manage that financial position and to ensure that the organisation remains a viable public body. No penalties are imposed.

That brings me to the hon. Gentleman’s central question about what happens to the debt and what the position is going forward. North Bristol NHS Trust is one of a small number of organisations that present particular challenges to the Department regarding how to map a forward course, because their debts are significant. The hon. Gentleman used the figure £100 million, and we accept that the overall figure is in that region. He pre-empts the decision that will be taken about how to put that trust on a viable footing, but I assure him that his comments will be borne in mind.

I accept the hon. Gentleman’s points about the viability of services, about not requiring the trust to make unacceptable changes to them and about giving it sufficient time to plan, so that the impact of changes can be properly absorbed without threatening the viability of services. If he is asking me for a final conclusion about what is to be done, I am afraid that he pre-empts the discussion and decision.

Is the Minister considering the suggestion that the £52 million that was added to the public dividend capital might remain? Is that an option?

I shall answer that in relation to resource accounting and budgeting, which other hon. Members have mentioned. The hon. Gentleman said that there is no such thing as a free lunch, and that is absolutely true. Given the way in which the financial regime now operates, the NHS cannot allow a deficit to spring up in one part of the system and not seek to deal with its consequences. Under the RAB regime that the Department operates, under the Treasury, overspending in one part of the system has to be accounted for by underspending somewhere else, otherwise the Department overall incurs a problem. That is absolutely the way in which the Department is taking matters forward, as a principle.

Debts should lie where they are incurred, otherwise there will be unfairness to other parts of the country that are not experiencing the problems that the hon. Gentleman mentions. However, the position with a small number of trusts gives rise to special consideration of their financial position. We need to get them back to being viable and able to provide services sustainably. No final decisions have been taken within the Department. I shall not lay out a clear timetable for that, but this issue is being actively considered. As with the PFI situation, we intend to give clarity to the trust about its viability going forward, which we will do at the earliest opportunity. The hon. Gentleman must forgive me, but we are 25 days away from the end of the current financial year, and it is too early to pre-empt some of those decisions.

We accept the Audit Commission’s analysis on RAB and the rationale of its review. Overall, its application provides a strong disincentive for overspending, but it is becoming clear that it is increasingly unsustainable for NHS trusts. I cannot commit to a timetable for the implementation of the Audit Commission’s recommendations, partly because a resource buffer would have to be created to cover NHS overspending centrally. I do commit, however, to accepting the principle of what was put to us. We will bring forward further details soon.

There are other issues that I would like to cover, and I hope that the hon. Gentleman will accept my writing to him to tidy up those issues. This has been a good debate at a very important time for the NHS.