Brown's adviser admits private sector role in health and education has limits

Fresh tension between Tony Blair and Gordon Brown over public service reform resurfaced last night when the Chancellor's closest adviser acknowledged there must be a "limit" to the role played by the private sector in the provision of health and education.

In a rare public intervention, Ed Balls, the chief economic adviser to the Treasury, said there were "grave risks" to the public service ethos if the use of private sector finance or discipline was taken too far.

His remarks are sure to be seen as a shot across the bows of Downing Street amid fears among Labour MPs that Mr Blair is set to approve top-up fees for élite universities, a plan bitterly opposed by Mr Brown.

They also underline the extent of the antipathy in the Treasury to moves by Alan Milburn, the Health Secretary, to give new NHS "foundation hospitals" freedom to borrow outside Whitehall control. During the row, which was resolved by Mr Blair last month, Mr Brown's allies said the plans would go too far in using private sector principles for a state-funded service like the NHS.

Although the Treasury insisted last night that there were no differences with Mr Blair, the Prime Minister is sure to be confronted with the remarks when he holds his fifth personal press conference in Downing Street today.

Mr Balls said in a newspaper interview: "We have to have the confidence to accept that there is a limit to how far you can apply market principles. The NHS and our public services depend upon an ethic of public service and a commitment to the services. In an area like health or education, if you go down that marketising route, you run grave risks with that ethic of public service."

His comments will be welcomed by MPs and trade unions opposed to the extension of the role of the private sector into public service provision.

Meanwhile, Labour backbenchers' worries about the moves on health and education were highlighted yesterday when Frank Dobson, the former Health Secretary, launched a savage attack on the Government's "elitism".

Proposals for university top-up fees would make it even harder for students from less affluent families to gain places in prestigious institutions, Mr Dobson told BBC Radio 4's The World This Weekend. "In terms of secondary schools and attitudes to universities and now, sadly, in terms of foundation hospitals, the Government does appear to be drifting towards the elitist option when it's got to make some choices," he said.

Margaret Hodge, the Higher Education minister, rejected the claims, saying the Government wanted to create an "appropriate balance".She insisted the Government would stick to its pledge ruling out top-up fees during this parliament.