Chancellor clashes with Milburn over hospital plan

Gordon Brown has clashed with Alan Milburn over the Health Secretary's plan to create a network of prestige hospitals free of Whitehall control.

The Chancellor supports the idea of foundation hospitals in principle, but is threatening to block a plan by Mr Milburn to turn them into not-for-profit companies which could raise money without counting it as public spending.

Mr Brown fears that such a move would relax the Government's financial discipline and encourage other ministers to come up with plans for spending that is "off the balance sheet".

Mr Milburn argues that turning the prestige hospitals into "public interest companies" would mirror the Government's decision to set up Network Rail, the successor to Railtrack. But Mr Brown insists that rail is "completely different" because the industry is privately owned.

The Health Secretary, who has previously crossed swords with Mr Brown over NHS spending, has irritated the Chancellor by giving a frank interview suggesting that Mr Brown opposes the proposed foundation hospitals.

Asked by New Statesman magazine whether the Treasury was sceptical, Mr Milburn replied: "Maybe." He added: "I know from the discussions I've had with the Prime Minister that he thinks NHS foundation hospitals are an important part of the jigsaw that's being assembled for a different style of health service."

In another apparent dig at the Chancellor, Mr Milburn said: "What people can't say is that we must accompany investment with reform, and then, when the tough choices are faced on reform, say 'Oh no, we're not going down that route.' ... Our only danger as a government now, with big increases in funding going into education and health in particular, is that we are not as bold on the reform as we are on the investment."

Mr Brown believes that the Milburn interview unfairly represents his position, because he supports devolving resources and "freedom to the frontline" for hospitals that perform well.

Allies of the Chancellor insist the differences with Mr Milburn are not about the principle of the scheme but about the funding arrangements proposed by the Health Secretary.

Because hospitals receive all their revenue from taxpayers and are underwritten by the state, Mr Brown believes their budgets must count as public spending. To allow them to borrow "off the balance sheet" would be "a ramp for additional public spending" and would weaken financial discipline, Mr Brown argues.

The Chancellor's camp says he supports radical reform of public services, but that spending must be controlled while it is carried out.

The Health Secretary wants to allow hospitals which achieve "three stars" for their performance to win foundation status. But he will have to resolve his differences with Mr Brown for the scheme to go ahead.

Tensions over the foundation hospitals have also emerged inside Downing Street. Mr Blair has rejected the advice of Adair Turner, the former director general of the Confederation of British Industry and a member of the Number 10 "blue skies" strategy unit, who says the plan should be delayed until the capacity of the NHS is built up.