I am pleased to announce changes to the resource accounting and budgeting (RAB) regime for National Health Service trusts and the impact this will have on the financial position of affected NHS trusts in 2006-07. I am also announcing the allocation of the £450 million reserve to the NHS.

The NHS financial position has shown a massive improvement since last year. A deficit of £547 million has been transformed into a small surplus as reported on 20 February 2007 by the Department in the report “NHS Financial Performance Quarter Three 2006-07”, which is available in the Library.

This improved performance of the NHS overall means that we are now confident that we can move NHS trusts out of the RAB regime. This means that NHS trusts will no longer have their income reduced for overspends in the previous year.

This does not mean we are writing off the deficits of overspending NHS trusts, which will still need to generate surpluses to meet their statutory duty. What has been eliminated is the double effect of having both an income reduction and then having to generate a surplus.

This is in line with recommendations set out by the Audit Commission in their “Review of the NHS Financial Management and Accounting Regime” published in July 2006.

In line with these changes we are reversing income deductions imposed on NHS trusts in 2006-07 under the old RAB regime as a consequence of overspends in 2005-06. This totals £178 million and benefits 28 NHS trusts, as set out in table 1 below.

In support of this change, I am also pleased to announce that we can now allocate the £450 million contingency to the NHS. This is being allocated to strategic health authorities (SHAs) on a fair shares basis meaning that the most needy areas of the country will receive a larger share of the funding in line with our needs based resource allocation formula. Details of the allocation by SHA and the effect this has on the financial position of each SHA economy, as reported at quarter 3, is given in table 2 below.

The first call on this funding is to reverse the £178 million RAB deductions made to NHS trusts in 2006-07. The balance is available to begin to reverse the funding top sliced from primary care trusts PCT allocations to create SHA level reserves.

As a result of these and earlier reforms, the NHS now has a financial system that ensures fairness, transparency and responsibility. Organisations can now understand clearly their financial performance and the consequences and benefits of the management decisions they make. This gives us the firm basis to go forward and continue transforming the services we provide for patients by implementing policies such as 18 weeks.