Brown wins battle to limit private borrowing by hospitals

Gordon Brown will win a key victory today in his battle with Alan Milburn over plans for the creation of foundation hospitals, Government sources have claimed.

Last night it emerged that the Chancellor had convinced Downing Street that hospitals could only borrow within departmental spending limits set for the Department of Health.

The Prime Minister will meet Mr Milburn, the Secretary of State for Health, and Mr Brown today for their first tri-partite meeting since the row over the proposals – which will give the best NHS trusts some freedom from Whitehall control – erupted this summer.

But Downing Street is keen for Mr Milburn not to emerge damaged from the row and will suggest a compromise wording to stress the greater independence for the new type of hospital. Mr Milburn has argued for the right of institutions to borrow outside Treasury spending restrictions, claiming that autonomy means allowing a "prudential borrowing regime" and relaxing central control.

With Mr Blair claiming last week that he wanted to be "bold" on reform of public services, Mr Milburn's allies stress that foundation hospitals offer a test of Labour's radicalism.

The Treasury is worried that hospitals that get into financial trouble would have to be bailed out by the taxpayer. The Chancellor's allies point out that he has no problem with devolving responsibility to front-line services. But they say he fears that allowing the freedom to borrow on the money markets would set a precedent for other services that could lead to the charge of "privatisation".

"They will remain on-balance sheet." said one source. The Government will have to step in if an NHS hospital runs into financial trouble."

It is claimed that Mr Milburn will be allowed to specify other freedoms that the foundation hospitals can have and can work out details of the policy.